Welcome to this video on the Types of Business Organization in Massachusetts, presented by
StartingYourBusiness.com.
This video is a part of our series of videos on starting a business in Massachusetts.
Choosing the way your business is legally organized and structured is a fundamental
step of starting a business and one to start thinking about early because it impacts the
process of naming the business, applying for licenses and permits, and how the business
is taxed.
The business organization is the legal framework of an entity that is engaged in commercial
activity.
There are four primary types of business organization that a small business owner will choose from
which include the sole proprietorship, partnership, corporation or LLC.
Each entity has its own set of pros and cons and each has some considerations that may
make one better than another for you and your business.
The considerations include the cost of forming the entity, liability protection, ability
to get investment, tax burden, administrative requirements and the complexity of formation.
It can be a little overwhelming and confusing to pick the perfect entity for your business,
but keep in mind, that the entity you choose today does not have to be a forever decision
as you can change to a different entity later on.
The first entity that we will cover is also the most simple, which is the sole proprietorship.
The sole proprietorship is basically an individual who decides to go into business for themselves.
There is no separate legal entity as the business is tied to an individual, making the business
and the individual the same legally.
Since there is no state filing for the sole proprietorship, a major pro for this entity
is that it is easy, fast and inexpensive to form.
There is no sharing ownership, which means there is no board of directors or shareholders
to be responsible to and the taxation is relatively simple as the profits or losses flow to the
owner's personal tax return.
While there are several upsides to the sole proprietorship there are several downsides
and the biggest is unlimited liability and here's why.
Since the business and the owner are considered the same legally, should the business get
sued, the owner's personal assets are potentially at risk.
The risk of being a sole proprietorship really goes up if the owner has significant personal
assets or has employees who could cause the business to get sued.
There is also limited access to capital.
This just means that unlike the partnership, corporation or LLC, there aren't other people
that you can have invest in the business.
Last, the sole proprietorship has a limited life, so if the owner passes away or decides
to get out of business, that business essentially ceases to exist.
This isn't a major concern for many businesses, but if there are contracts or licenses that
the business relies on, the sole proprietorship may not be the best choice.
Forming a sole proprietorship is pretty simple.
Since there is no official state filing, you can decide to go into business right away
as a sole proprietorship and be in business.
We will cover other details for starting a sole proprietorship in later videos and at
StartingYourBusiness.com that may have to be done like registering a business name and
applying for licenses and tax numbers.
The next entity is the partnership, which is a business owned by two or more individuals.
The partnership is very similar to the sole proprietorship in that there is no legal entity
and the owners have unlimited liability.
The good things about the partnership are that it is easy, fast and inexpensive to set
up with no filing or fees with the state.
There are also more people involved which means there is more talent and funds to put
into the business.
Like the sole proprietorship there are significant downsides with the primary one being unlimited
liability, but this time, if one partner makes a bad business decision, every other partner's
personal assets are at risk, making the partnership riskier than the sole proprietorship.
Another partnership con includes sharing of control.
Since partnerships are usually informal and very little is in writing, disagreements can
occur that can be devastating to the business.
A partnership can also be difficult to get out of, should the remaining partner not be
willing to buy out the departing partner.
Just like the sole proprietorship there is no official filing for a partnership with
the state.
We will cover some of the other possible requirements that a new partnership may need to do in later
videos and at StartingYourBusiness.com.
The corporation is the third of the four business entities and is completely different from
the sole proprietorship or partnership because now we have a legal entity that is separate
from the owners.
While the corporation sounds like it is something for a large business, it is really just a
filing with the Massachusetts Secretary of State.
Corporations can be owned by a single owner or multiple owners.
The corporation has several pros and the most important pro is that a corporation is a distinct
legal entity and the owner's personal assets are separate from the business assets.
This is useful because if the business is sued, the owner's personal assets are typically
safe.
There may be some tax benefits but the main reason for forming a corporation or LLC for
that matter is the liability protection.
Another pro is that the corporation has unlimited life which could be useful in situations where
there are key contracts or licenses that would benefit from continuity between owners.
The corporation can also sell shares of the business and raise money from investors instead
of relying only on debt like a sole proprietorship or partnership.
There are a few downsides of the corporation which include the cost of formation and increased
administration.
The corporation costs $275 to form in Massachusetts for up to 275,000 shares to file the Articles
of Organization in Massachusetts.
In addition, there are a number of administrative duties such as an initial board of directors
meeting, shareholders meeting, taking minutes at the meeting, issuing stock certificates
and writing the bylaws.
There are three ways to form a corporation in Massachusetts.
One, you can do it yourself.
On the Massachusetts Secretary of State's website, you will fill out and file the Articles
of Organization.
Since there are a number of administrative duties that need to be done right, if you
plan to do it yourself, be sure to do your research before filing.
Second you can hire online companies that specialize with forming business entities.
Startingyourbusiness.com has a list of companies that provide this service.
What's nice with these services is that in addition to making sure all of the legalities
of forming the corporation are covered they also send alerts whenever reports are due,
so you have one less thing to try and remember.
The one-time fees for these services usually start around $50-$150 plus the state fees.
Last you can hire an attorney.
This is going to be the most personalized service, but also the costliest.
You will want to go this route if you want to work one-on-one with someone to form the
corporation.
Expect to spend a minimum of $500-$1,000, plus state fees for a simple corporation.
The last entity that we will talk about is the Limited Liability Company or LLC.
Just like the corporation, the LLC is a legal entity that is separate from its owners and
is a filing with the Massachusetts Secretary of State's office.
LLCs can be owned by a single owner or multiple owners.
The LLC costs $500 to file the Certificate of Organization with the Secretary of State.
The LLC shares all of the pros of the corporation like being a separate legal entity, unlimited
life, and raising investment capital, but with the LLC, you don't have to hold meetings,
take minutes, and so on, making the LLC much easier to run than the corporation.
Besides the cost of filing the LLC another potential downside is that every state has
its own set of LLC laws so if you have a Massachusetts LLC physically doing business in another state,
the LLC may not be the best entity for your business.
The process of forming a LLC in Massachusetts is similar to forming a corporation.
You can do it yourself by filing Certificate of Organization or you can get guidance from
a professional to make sure it's done right.
Check StartingYourBusiness.com for more details and a list of formation companies.
There is a lot to think about before deciding on the right legal entity that best fits your
personal situation and business needs, so be sure to do some research before jumping
in.
At startingyourbusiness.com, we provide a free printable comparison guide with some
of the pros and cons of each entity to help you compare them all.
If you liked this video on the Types of Business Organization in Massachusetts, be sure to
watch the others in the starting a business in Massachusetts series.
Starting a business can be difficult, but you don't have to do it on your own.
The StartingYourBusiness.com site has lots of information to help get your business started
and we have experienced business advisors ready to answer your questions at no cost.
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