S-Corporation vs. C Corporation

New business ventures are often faced with several critical questions and decisions when creating a new business. The first step is to determine the the nature of the Massachusetts corporate entity that they desire to operate (i.e., corporation, limited liability company, etc.). This decision depends on several factors including the type of business (services or products), the contemplated ownership structure, tax considerations and potential financing opportunities.

If a new business owner decides against forming a Massachusetts Limited Liability Company, and determines that forming a Massachusetts Corporation is the most advantageous entity, the next important step is to determine whether the entity will be taxed as a C-corporation or S-corporation. The “S” and “C” Corporation designations refer to different sub-chapters of the Internal Revenue Code (Federal tax laws), and are more particularly described below.

C-Corporations

A corporate entity will be taxed as a C-Corporation by default unless it makes an election to be taxed as an S-corporation.  A C-Corporation is subject to double taxation, once at the entity level and then again on the shareholder level, when dividends (profit distributions) are paid out to the shareholders. Funds that are earned in a C-Corporation can be retained within the entity rather than being passed through (and taxed) to shareholders, and the corporation can also carry losses Therefore, as opposed to an S-corporation, money that is earned in the C-corporation will be retained within the company rather than passing through to the individual shareholders. Additional benefits include the ability to hold initial public offerings (IPOs), carry back of losses up to three years and less limitations on the type of shareholders.

S-Corporations

S-corporation status is the most common election made by small businesses. However, the small business must meet several requirements, including the entity must have only “allowable” shareholders, less than 100 shareholders and there may be only one class of stock. In other words, the number of Massachusetts Corporation shareholders will be limited and all will have the same voting rights and distributions.

S-Corporations are treated as a “pass-through” entity, similar to a Massachusetts Limited Liability Company (LLC). In other words, the company will not be taxed at the entity level, and will only be taxed at the shareholder level. Each shareholder will then be responsible for paying their own taxes on their share of income derived from the corporation.

If you are forming a new entity and creating a new business, please contact one of our Lynnfield based business attorneys at 781-463-6063.

The Value of Outside General Counsel for Your Business

One of the many values of our business lawyers is that we help ensure that you are positioned to effectively resolve issues that arise in the lifecycle of a business. It is important for business owners and entrepreneurs to carefully consider the value of advice of a business attorney rather than exercise financial restraint when making important decisions that often significantly affect the success of a business. Rather than risk the serious consequences of decisions made without the consultation of a business attorney it is suggested that business owners conduct a careful cost/benefit analysis into whether one should hire a lawyer. Consulting with an attorney at the onset is similar to insurance: your decision help’s you mitigate risk and minimize loss when potentially disastrous events occur.

Business and Entity Formation

A business attorney can help you select the right type of business entity to meet your objectives and needs.  There are several entity choices available in Massachusetts: Corporations (both C-Corporations and S-Corporations), Limited Liability Companies (LLC), Partnerships (Limited Partnerships and Limited Liability Partnerships), as well as other specific entity types for professionals, charitable purposes, and other highly specialized business. Selection of the proper entity type will establish a foundation for sustainable long term growth, investment return, limited liability for parties, favorable taxation, dealing with external issues and pressures, and other matters. 

Contracts / Negotiation

An attorney knowledgeable on business law in Massachusetts can make sure that your rights and interest are protected.  It is critical that the contract provisions that deal with particular issues and contingencies are not only fair, but also align with your interests in any given transaction.  An attorney specialized in these areas can consult and assist in contract negotiation and work on the “fine tuning” of contractual terms. The type of contracts that a business attorney might review includes employee agreements, commercial leases, equipment purchase agreements, buy-sell agreements, licenses, and bank-investor financing documents.

Intellectual Property

It is essential for a business owner to consider their intellectual property rights. This can manifest itself in trademarks, service marks, copyrights, and patents.  Intellectual property can also include other types not specified in Federal statute, including issues such as trade secrets and formulas, customer lists, methods and processes. You should consider protecting your intellectual property from competition as well as protecting it internally from employees, partners and other shareholders. A competent business attorney can help you navigate legal protections available to protect what makes your business unique. 

Asset/Stock, Interest Sales and Mergers and Acquisitions

During a businesses lifetime, the owner(s) will want to expand the business or take advantage of an exit opportunity.  A business attorney can help you craft and implement a strategy for the sale of the shares or membership interests to an outside organization, or to your own employees or other shareholders, or members.  An acquisition will allow shareholders to exit the business by converting their interest in the entity to cash or another option(s). If you find yourself at the beginning of these discussions with a potential buyer it is critical that you consult a business lawyer such as ourselves at 781-463-6063. 

Becoming Partners? Draft and Sign Partnership Agreement First

In general, a partnership can be created when two or more persons, or entities, or a mixture of both, agree and cooperate to provide a product or service in the Massachusetts commercial marketplace. Typically, partners will share the profits and losses of the partnership, and contribute labor resources, intellectual property, business infrastructure, real estate or other intangibles to the partnerships. A partnership does not require a formal agreement or registration as a formal entity with the Massachusetts Secretary of State, Corporations Division.

If partners do not sign a partnership or operating agreement, then Massachusetts state statute will control the operation, management and issue resolution for the partnership. Massachusetts law concerning partnership can serve a a default set of rules unless partners adopt a specific written agreement.. For example, Massachusetts General Law ch. 108 will govern partnerships, ch. 109 will govern Limited Partnerships, and ch. 156D will govern Limited Liability Companies (LLCs). In other words, if you do not adopt a partnership agreement for your business then state law will decide the outcome of any issues that may arise during operations.

It is, therefore, important that you work with a business attorney to draft a comprehensive and robust partnership agreement. This agreement will protect both partners’ interests, rights, and contain a set of operating rules for the partnership. This agreement is also very useful is resolving or setting up a formal process should a dispute arise between the partners. If partners do wind up in litigation, a Court or Arbitrator will always look to the partnership or operating agreement first before deciding any issues.

If you are interested in speaking with a Boston / Lynnfield business lawyer, we can be reached at 781-463-6063.

Personal Guaranties: Don't Overestimate the Simplicity of this Instrument

Commercial lenders and landlords are more often looking to borrowers and tenants to sign personal guaranties. A personal guaranty is a legal and binding promise to pay the debt of another person or entity should that person or entity default on the primary obligation. In other words, the individual who signs the personal guaranty will be liable for the debt and payments obligations as if he or she signed the promissory note or lease him/herself.  If you are considering signing a personal guaranty, you should consult one of our Lynnfield corporate attorneys or real estate attorneys to advise you on the various risks and benefits associated with the guaranty.

Guaranties are typically not included in a promissory note or lease agreement itself. Guaranties are contained in separate documents, as notes and leases alone are typically insufficient to create a binding obligation. There are numerous valid defenses to guaranties, which means that if you ever have to enforce a guaranty by commencing litigation against a guarantor, a skilled attorney will be able to uncover flaws that support legal defenses to the guaranty. This means that if the guaranty is not properly (and near perfectly) drafted, then a guarantor may have the opportunity to demonstrate that the guaranty is unenforcable and avoid payment of the debt. If you have questions and concerns about drafting or reviewing a guaranty for enforcability, please contact one of our business - corporate attorneys for a free consultation in Boston or at our Lynnfield office.

Just like mortgages and security agreements (that secure personal property) a personal guaranty serves as collateral so as to secure a loan. Here, the collateral is a promise by a third party to repay the debt should the primary debt obligor default on the promissory note. A personal guaranty drafted by an experienced Massachusetts corporate lawyer can provide strong protection for the financial interests of a lender. However, the viability of a personal guaranty depends on the financial condition and asset holdings of the guarantor. If, for example, the guarantor becomes insolvent or has no assets to satisfy a potential judgment on the promissory note then then collection on the guaranty becomes unrealistic and a lender will end up spending legal fees on a debt that will never be repaid. Therefore, it is important for a lender to perform due diligence on any guarantor prior to entering into this type of contract. 

In Massachusetts Courts, the enforcement of personal guaranties is a common theme of lawsuits on promissory notes. The guaranties are almost always contested by any guarantor with something to lose. Therefore, a pre-printed or template form will cause the lender and note holder to assume a substantial amount of risk that the guaranty will be found unenforcable. If you have questions abut personal guaranties for any loan transaction, please contact one of our business lawyers who advise clients in Eastern Massachusetts on these types of transactions.  NORTHSHORE LEGAL may be reached for a free consultation at 781-463-6063.