You know your business better than anyone else: whether that be dog-walking, catering, or custom-made crocheted goods. But when it comes to giving your business the best legal footing, you may feel a little lost. In this article, we will review a few business structures available to Massachusetts entrepreneurs and small business owners. Each has its own benefits and drawbacks regarding registration procedure, tax structure, and personal liability.
A sole proprietorship is, in many ways, the default legal structure for a Massachusetts business. A sole proprietorship has, as the name would suggest, a single (“sole”) owner ( “proprietor”). The procedure for setting up a sole proprietorship in Massachusetts is simple and without too much paperwork:
The proprietor is considered self-employed. There is also no shield from personal liability provided by a sole proprietorship—in case of a lawsuit, all of one’s personal assets are at risk. Income from a sole proprietorship is taxed as individual income.
A partnership involves two or more business owners. Massachusetts recognizes three types of partnerships, each with its own specifications regarding liability and taxes:
- A general partnership (GP): This type of partnership provides no liability protection to the partners. Income from the partnership is distributed between the partners and taxed as a component of their individual income.
- A limited partnership (LP): There are two types of partner possible under a limited partnership: general and limited. A general partner assumes unlimited personal liability but has a much greater voice in the running of the business. In contrast, a limited partner is typically liable only for the value of their investment but has a similarly limited role in running the business.
- A limited liability partnership (LLP): In a limited liability partnership, all partners have equal say in the governance of the business. However, their personal liability because of losses by or legal action against the business or another partner is limited. Income from a limited liability partnership is shared equally between the partners and is taxed as their individual income.
Limited Liability Company (LLC)
A limited liability company exists, legally, somewhere between a partnership and a corporation. Like an LLP, an LLC limits the personal liability of members with regards to the business’s debts, obligations, and liabilities. Managing partners’ liability is generally limited to their financial contribution to the business. Unlike an LLP, in which governance and profits are shared equally, LLCs allow a flexibility of profit-sharing and governance structures, which will be spelled out in their operating agreements.
Unlike an LLP, an LLC may only have one member rather than several. This makes it an attractive incorporation option for an individual business owner who would otherwise have to operate as a sole proprietorship.
Taxes depend on the number of partners in an LLC. An LLC with one member is taxed as a sole proprietorship. An LLC with multiple partners is taxed as a general partnership.
Consult a Business Attorney Today
When considering the best option for setting up your small business in Massachusetts, you can’t afford to go it alone. Contact our office today to discuss your business’s unique needs.