The legal structure of your business has legal and financial implications. It can determine your accountability and liability in the face of company or partnership disagreements. Entrepreneurs looking to start a business should know about the available business entities.
The types of business entities
Some business entities are easier to set-up then others. Here is a brief overview of the different business entities in Massachusetts:
- Sole proprietorship: The simplest of all business entities, a sole proprietorship has one individual as the business’s sole owner. Registering your business with the state is unnecessary, so you do not need to create bylaws or formal documents. You and the business are one, the way your business taxes go through your personal tax returns.
- General partnership (GP): GP is much like a sole proprietorship. The only difference is the company has more than one owner. You and your partner(s) operate and own the company. Therefore, everyone is equally liable for profits and losses. The problem with a GP is that you and your partner have no protection from each other’s negligence or business misconduct. Bigger clients may also not take your company seriously.
- Limited partnership (LP): LP is the registered version of a GP, which legitimizes the business façade. It involves two kinds of partners. General partners are the owners of the business, and limited partners are the silent investors of the business. Entrepreneurs typically use it to grow capital without spending their own.
- C corporation: When starting a corporation, you form an independent business entity that legally separates the company from the owners. The shareholders are the company’s owners, the board of directors manages the company, and officers oversee day-to-day operations. Corporations come with a host of regulations and tax guidelines, but it eliminates a person’s own name from the debts and liabilities of the corporation. It also protects the interests of shareholders and the board of directors through bylaws and corporate tax deductions.
- S corporation: It like a C corporation in that it limits the personal liability of shareholders. However, it acts as a pass-through entity where the company no longer needs to pay corporate tax returns. Instead, the profits, credit, losses and expenditures go through each shareholder’s personal tax return.
- Limited liability company (LLC): LLCs are business entities that combine the elements of the others. They offer the personal liability protection that corporations offer, but their structure is more like a sole proprietorship or partnership.
The structures vary in the extent of the authority of the owners and their exposure to liability. Taxes also are less complex with simpler business entities likes sole proprietorship and partnerships.
What is best for your business?
Before you decide on the foundation of your business, think about how big you want it to be. Envision about what you want to achieve with this business. The dreams you have for your company will allow you to choose the materials you need to start building.
