The American entrepreneurial and go-getter spirit leads many people to want to own and operate their own business. Whether it is providing a service or a product, many hours are spent on determining the target audience, logos, websites, and more. Yet when it comes to figuring out the business’ legal entity, things can sometimes grind to a halt.
Should the business be an LLC? A corporation? The company’s legal entity is important because it affects everything from the amount of paperwork required to how taxes are paid as well as personal liability.
There is no one entity that is best. Your goals and whether you have partners are leading considerations in determining which is best for your company. You don’t need a brick-and-mortar office or storefront to form a legal business.
At Percy Law Group, our attorneys have comprehensive experience in all aspects of business law. We can analyze the specifics of the company to help determine the most advantageous legal entity for your business.
In broad general terms, below are common legal entities and their pros and cons.
Limited Liability Company (LLC)
A limited liability company is seen more and more often today. This structure can involve one or more people. Because Massachusetts (and many other states) allow for a single-member LLC, some sole proprietors have changed their structure to an LLC because the latter provides liability protection from creditors. Obviously, this is a big advantage to an LLC. A disadvantage is that an LLC must be registered with the state and pay a filing fee. An LLC may have to pay into Massachusetts’s unemployment insurance program and other taxes.
Sole Proprietorship
A sole proprietorship is operated by one person. This individual assumes all liability for their business, legally and financially. The structure is simple, with the business not filing a separate tax return. Instead, income and losses are reported through the owner’s personal income taxes. The owner also has complete control over business operations. Those are all big pluses. On the flip side, personal assets will be at risk should the business go under. Sole proprietorships also generally cannot attract investors.
Partnerships (General and Limited)
As the name applies, this structure is for at least two individuals who work together. A legal agreement should be drafted that specifies the percentage ownership of each person, management rights, and other details. In a general partnership, the business is shared equally. Each person is also personally liable for legal and financial obligations. In a limited partnership, one partner has majority control. The majority partner assumes the liability. An advantage of a partnership is that both partners report their shared income or losses on their individual tax returns. The business does not submit a separate tax return. Personal liability is a disadvantage.
Corporations
Corporations have their own legal rights, separate from their owners. A corporation can sell ownership rights through stocks. This structure can own and sell property, too. Because this business is separate, the owners and stockholders are not personally responsible for legal or financial claims against the company. Unlike the previously discussed entities, a corporation must file its own tax return and requires extensive recordkeeping.
There are several types of corporations: C corporations (generally larger businesses), S corporations (usually small businesses), and B corporations (businesses that make a positive impact on society). Closed, open, and nonprofit corporations are also potential fits, depending on the business mission and operations.
Changing an Existing Legal Structure
Once you have created your business under a specific legal structure, you are still able to make a change later. Businesses evolve. You may take on a partner or expand your offerings. The entity that worked when you began may not be the right fit over time.
Rely on Percy Law Group to review your business and determine whether a change would be beneficial. If a different legal structure makes sense, we can help throughout the transition process.
If you are considering starting a business, begin on solid legal footing. Schedule a free initial consultation by calling (508) 206-9900 or submitting our online form.