Where do I start?
Beyond the most obvious aspects of starting a business in Massachusetts which include, picking a name that is unique to your business and deciding what type of industry you want to operate in, you will need to decide what type of business structure you wish to use. There are many aspects of choosing a business structure for you startup, such as:
How big do I think my business is going to get?
Could I go public at some point in the future?
Is it just me operating the business, or might I want future partners?
Is one type of business structure better than the other for tax purposes?
Before we get into the fine details, let’s take a look at some of the types of business structures that exist in Massachusetts.
Sole Proprietorship
For a single business owner who registered with the Secretary of State in Massachusetts as a corporation or LLC or partnership or some other structure, the business is known as a sole proprietorship. Sole proprietorships do not have to file taxes separately under their business name, for tax purposes the income attributable to the sole proprietorship is considered the same as income of the owner. Sole proprietorships are, if you will, the most natural form of company in Massachusetts. Natural because you, as a single owner, do not need to do anything other than work and generate money from that work to be considered a sole proprietor. A sole proprietor conducting business in Massachusetts is automatically seen, in the eyes of the law, as a sole proprietorship unless other formal documents have been filed to indicate otherwise.
The Problem with a Sole Proprietorship
Liability Protection, that is, the lack of it is the number one issue with operating a business in Massachusetts as a sole partnership. What do I mean when I refer to liability protection? Here, I am speaking of the fact that a Massachusetts court would, if your business were sued when operating as a Sole Proprietorship, assume that the business and you are one and the same person. Practically, this means that any money that you have in a business account (even if you have a separate business operating account) will be viewed the same as if that money were in a personal checking or savings account. If you were successfully sued by a client or vendor, not only are any funds under the business name, but also any funds in your own name, potentially your home and other personal property, will all be lumped together to satisfy a court’s judgment against your business.
The Problem with a Partnership
In Massachusetts, when two or more people go into business together to generate a profit, they form a partnership. While this not may not matter much to the people involved in the business if they do not know the law, it will matter a great deal to a court (and to the owners of the Massachusetts business) should the company operating as a partnership receive a judgment by a court against it. Please note that two or more people working together to generate a profit are seen as a partnership in Massachusetts, even if the people involved do not formally call themselves a partnership.
The Problem with a Partnership
Like a sole proprietorship, owners of a partnership take on massive personal liability. This is because, under Massachusetts law, the owners are viewed as jointly and severally liable for any negligence or debt that occurs as a result of business operations. Practically, this means that if a plaintiff is able to receive a judgment against your business any partner could have to pay the entire amount of the judgment, and each partner is liable for that amount. So, for example, Partner A could have to pay the entire amount, and then end up having to pursue Partner B in court to get repaid half of the money that Partner B should have paid for the judgment in the first place.
The important take away from the lack of liability protection is a partnership or sole proprietorship is that these horrible examples need not occur. The best liability protection for a business is simply a matter of choosing one of the identified structures for businesses in Massachusetts, filing the necessary paperwork, and then following the rules associated with that business structure.
Limited Partnership
Massachusetts the limited partnership is an option for Massachusetts business owners who wish to operate as a partnership, but want a business structure that at least offers some liability protection to specific partners. The way this structure works is that one partner acts as the heavy (the general partner), that is, shoulders the vast majority of the responsibility. In turn, the person shouldering the responsibility usually receives higher rewards, a greater share of the profits, for example. But, in this type of partnership, unlike a true partnership, the general partner has 100% liability for actions performed by the business. The limited partners, however, have limited liability because they are not personally liable for actions taken by the company, the general partner is.
Limited Liability Partnership
Unlike a limited partnership which contains a general partner plus any number of limited partners, a limited liability partnership does not contain a general partner, only limited partners. Here each partner has management rights and duties and each is not personally liable for the actions taken by other partners or by the company. Keep in mind the cardinal rule in law, however, that no matter what structure is being used ‘no person can escape their own negligence.’ Still, the limited liability partnership is similar in many respects to the LLC, because the limited partnership shoulders the lion’s share of liability.
Corporations or Being Incorporated in Massachusetts
A Massachusetts corporation is a group of people or companies that have filed with the Secretary of State’s office in Massachusetts as a corporation. This is a very formal structure which requires a little bit of a learning curve to understand how to operate and keep the structure legitimate. The common pitfalls that people who incorporate in Massachusetts sometimes encounter can be avoided by simply understanding the nature of a corporation, and each person’s duties within the corporation
A corporation, although more complex of a structure than other types of business structures, provides much more long-term flexibility and growth potential than other structures. And, a corporation certainly offers a greater deal of liability protection if the individuals involved understand how to operate within that corporate structure. If members of a corporation stay within the lines, although not impervious to attack and liability, they are granted a large amount of protection because assets of the corporation take the hit when a lawsuit is won by a vendor, employee, or client. In most cases, owners of a corporation will not have their personal assets touched by a lawsuit because the corporation itself acts as a shield to such an event.
Limited Liability Companies
LLC’s are nice because these business structures avoid most of the paperwork headaches of a corporation, and LLC offer liability protection that sole proprietorships and partnerships do not. This is because, like a corporation in Massachusetts, an LLC is seen as a stand-alone structure where the assets in the LLC are separated from those of the owners or members of the LLC.
Manager Managed LLC in Massachusetts
Another benefit of an LLC is that, in Massachusetts, the LLC can be member managed or manager managed. Owners or business partners may wish to choose a manager managed LLC when they don’t want to be involved in the day-to-day operations of the business. When this is the case, owners can simply elect a manager and give that manager authority to conduct business as decided in the Operating Agreement.
Member Managed LLC in Massachusetts
An LLC in Massachusetts can also be a member managed LLC. Member managed LLC’s are structures so that each owner of the LLC acts as a member and is granted authority under an operating agreement to exercise certain rights and privileges. LLC’s also have interesting tax advantages which I would refer to an accountant for greater detail. Thankfully, the manner in which you choose to be taxed does not expose you to greater liability. For example, if being taxed as a sole proprietorship is an available option, just because you made this choice does not mean that you will lose the liability protection offered by the LLC. The same theory applies, although under a different tax classification, to corporations.
Why You Need an Attorney in Massachusetts to Start a Business?
Attorneys are trained to spot and manage risk. Additionally, attorneys with experience in business and business formation in Massachusetts can steer you away from common pitfalls that might occur in the formation of the business. Further, the surprising thing about hiring an attorney to help you start your business in Massachusetts is that it need not be an insurmountable cost. Depending on the type of corporation, the number of contracts or agreement involved, and the number of owners involved, the range of working with an attorney during the start up phase can be from $800 to $2000. For most simple LLC startups and even some incorporation work you can expect to be charged under $1000.
What Should You Get for your Money?
A good attorney will provide you with a corporate book or corporate kit which contains all of the documentation for your corporation. If starting an LLC, you should receive some similar formal-looking binder that will contain all of the information necessary for your LLC. You should also receive a thorough explanation of the options available to you in any Operating Agreement, Shareholders Agreement, Bylaws, or any other document. You should not receive boilerplate material limiting your choices or be pushed off without explanation. A good attorney will ensure that you understand your options in any business structure chosen.
The money you spend at the beginning of your business venture will pay dividends in the future, as you will be less likely to face severe financial penalties. An attorney can work piecemeal developing policies and procedures, contracts, and other documents for your business or can be hired in a maintenance role to oversee specific aspects of your business such as annual filings, updates to policy and procedure, contract drafting and review, in many more benefits.
DISCLAIMER:
The information provided in the pages and posts of this website are for general informational purposes only. The information presented on this site is not legal advice, and no attorney-client relationship is formed by the use of this site.
