Should I Just Choose a Business Formation Myself?
Choosing the proper business entity designation can be a challenging decision. It is a decision that should not be taken lightly, as it can affect your business for years to come if done wrong.
One way to ensure you make the best decision for your business is to consult a business attorney. Business attorneys are familiar with business laws, are aware of current tax implications that each business formation must follow, and can offer professional guidance to determine which business entity is best for you.
What Are the Common Types of Company/Business Formation?
The common types of business or company formations in Massachusetts are a Limited Liability Company (sometimes called an LLC), a Sole Proprietorship, a Corporation, or an S-Corporation.
Massachusetts also recognizes other business entities: nonprofit organizations, Professional Limited Liability Companies, and Limited Partnerships.
Each business will have its specific purpose, goals, and scope. This makes determining which of the formations is best for your company a critical step to consider.
Each formation has set standards for how taxes are viewed, responsibilities for all parties, personal liability standards, costs, and more.
What is a Limited Liability Company?
A Limited Liability Company (LLC) is a business entity allowed by state statutes. In Massachusetts, an LLC can be formed as an unincorporated association and protects the owners or managers from extensive liability issues.
Members generally are not personally liable for obligations, debts, and liabilities. Due to this reason, a person operating the LLC would have protection from their personal assets being used to satisfy debts or tax issues that may arise in the LLC. Without this protection, if problems occur with the business, some personal assets may be in jeopardy of being utilized to cover debts, taxes owed, legal issues, and more.
What is a Sole Proprietorship?
A sole proprietorship is an unincorporated business with one owner who intends to pay personal income tax on the revenue gained from the company.
Sole proprietorships are appealing and popular amongst small business owners due to the level of government interaction in the business. A sole proprietor is typically in charge of handling their own business and adhering to laws and relies only limitedly on government guidance.
Sole proprietors can go on to expand into an LLC or a corporation as their business grows.
What is a Corporation?
A corporation is a legal entity that is separate from its owners. A corporation is viewed similarly to a person and can act as such by entering contracts, hiring employees, loaning and borrowing money, paying taxes, owning assets, and more.
A corporation is typically created when a group of shareholders pursue a common goal and share ownership of the company. For-profit corporations genuinely try to make a profit that goes back to the corporation’s shareholders. A non-profit has a similar structure but does not have the goal of creating a profit as its priority.
Meetings are typically held in corporations and run by the board of directors that the company votes into that role. Each board member is responsible for the duty of care for the corporation they are on the board for. However, their personal assets are safe from tax implications or legal resolutions relating to the company.
What is an S Corporation?
An S Corporation can be formed to give the business owners some unique tax benefits. The corporation is treated as a pass-through for taxes which can add up significantly in a short period of time. The corporation’s income, losses, and deductions reflect on the shareholder’s individual returns.
Generally speaking, shareholders of an S Corporation can not lose more money than they have invested. In most cases, their assets are also separated and protected from actions against the corporation.
S Corporations also have an advantage in recruiting as they can offer unique benefits that other companies cannot. This appeals to business owners who plan to grow and want to attract quality candidates.
What Do I Need to Consider When Choosing a Business Formation?
One of the main priorities to consider when reviewing your choices for business formation is your personal assets and the degree of risk that may be involved from potential liabilities from your business.
You can choose the level of protection that best suits you by having a solid grasp on the liabilities you may face and what that can mean for your livelihood, your home, and more.
Another important aspect is the tax implications each entity will have on your situation. For some, tax benefits are their main priority, and it is helpful to seek the help of an experienced business attorney to understand how taxes will affect you now and in the future concerning your business.
Do you want to attract potential investors? If your goal is to attract quality candidates for employment or investment purposes, this may also sway your decision for business formulation.
It can be challenging to grasp what options are best for you. Add to that the inability to see into the future and know what the best move for you right now may be. Rely on the experience and knowledge of a business attorney who can help you paint a picture that aligns with your goals and objectives and formulate your business based on those needs.