If you’re planning to start a business, your chosen structure affects your legal rights, liabilities, and tax responsibilities. Each business entity type has its own rules, advantages, and disadvantages. This guide will help you understand the differences and choose the right structure for your goals.
Partnership Agreements
A partnership is a contractual agreement between two or more people to run a business as co-owners. Partnerships have “pass-through” taxation, meaning the IRS taxes the individual partners on their share of business profits rather than taxing the business itself. There are three forms of partnerships:
- General partnerships (GPs): This is the simplest partnership. In a GP, every partner has authority in daily operations. All partners have unlimited liability, meaning the law can hold them responsible for business debts. They share profits and losses. Partners share legal liability for one another’s actions as co-owners.
- Limited partnerships (LPs): LPs have two types of partners — general and limited. A general partner has authority in daily operations and faces unlimited liability. A limited partner is not involved in managing operations but invests money. They enjoy limited liability, meaning their personal assets are usually safe from claims against the business.
- Limited liability partnerships (LLPs): All partners in LLPs enjoy limited liability and share authority in daily operations.
To form an LP or LLP in Massachusetts, you need to file paperwork with the Secretary of State. This is not necessary for a GP, but you should still have a formal partnership agreement to protect each partner’s rights and clarify policies and procedures.
Limited Liability Companies
A limited liability company (LLC) is a flexible form of ownership in which one or more members own the company with limited liability. The LLC’s flexibility applies to:
- Taxation: The IRS can tax your LLC as a corporate entity if you file Form 8832 with the IRS. Otherwise, taxation passes through the entity to the individual owners based on their share of profits.
- Owner arrangements: Members can all own and control equal shares of the LLC or agree to an arrangement with differing responsibilities and profit allocations.
To form an LLC in Massachusetts, you must file a Certificate of Organization with the Secretary of the Commonwealth Corporations Division. You should also have an operating agreement detailing the business’s ownership and management arrangements. For example, it should specify who has managing authority, how the LLC will use its assets, and how members will allocate profits.
Corporations
Corporations are business entities with limited liability for owners. There are two main types of corporations:
- C corporations: C corporations are the default. The “C” comes from these corporations following the tax rules in IRS Code Subchapter C. This means the business pays corporate income tax.
- S corporations: S corporations follow the tax rules in IRS Code Subchapter S. This means they elect for the IRS to tax individual owners for their share of business profits rather than taxing the corporation itself.
Corporations have similarities to LLCs and LLPs but can benefit from raising capital by issuing shares to investors. Starting a corporation in Massachusetts has more extensive legal requirements like adopting bylaws, electing officers, and filing articles of incorporation.
Business Trusts
A business trust is an agreement in which one or more people own a business, but a trustee manages it and distributes its profits on behalf of the owners. If you plan to run your business alone, you can be both a beneficiary of the profits and the sole trustee managing the business.
You can choose from three types of business trusts:
- Grantor trust: As the grantor and trustee, you create the trust, transfer business interests into it, and control distributions from it. As the grantor, you must pay tax on income from the trust.
- Simple trust: The trust must continue to hold the principal business value you placed into it but distribute all earnings to beneficiaries. Beneficiaries must pay tax on these distributions. Since all earnings must go to beneficiaries, the trust may not make charitable donations.
- Complex trust: This trust may accumulate income without having to distribute all of it to beneficiaries. Complex trusts may make distributions other than income and may make charitable donations. Both complex and simple trusts must file tax returns and may deduct certain expenses.
You may set up any of these trusts as a revocable or irrevocable trust. As the grantor, you may change the terms of a revocable trust or even revoke the entire trust and reclaim control of its business assets. This is not possible with irrevocable trusts.
Joint Venture Agreements
A joint venture is an agreement between two or more parties to collaborate on a single project for profit. The parties could be individuals or businesses. If you’re considering a business project involving another party but don’t want to form an ongoing entity together, a joint venture agreement could be right for you.
These agreements are very flexible. The parties must come to a written or oral venture agreement about their intentions. This agreement should include:
- The extent of the project
- What each party will contribute
- Each party’s duties and degree of control over the project
- How parties will share profits or losses
Why Trust Calabrese Law Associates for Business Formation Law?
Calabrese Law Associates is an award-winning law firm in the Greater Boston area. Our awards include several “Best Business Lawyers in Boston” achievements. Customer testimonials and reviews note our team’s expertise, skill, and professionalism. With over half a century of collective legal experience, our Massachusetts business formation attorneys are proficient in every area of business startup law, including:
- Business formation choices and their legal implications
- Registration, licensing, and permits in Massachusetts
- Tax implications of business structures and IRS filing requirements
- Business contracts and articles of organization
Our business planning attorneys stay current with Massachusetts business formation and maintenance regulations. Our team also has considerable practical experience in drawing up business contracts, filing paperwork with the state, and representing businesses in litigation when necessary.
Contact Calabrese Law Associates for Business Formation Attorneys
Your business formation choices will impact your legal options, liabilities, and taxes throughout your enterprise’s life span. It’s worth having a knowledgeable advisor in your corner. Whether you need advice on the right structure or are ready to take the next steps, having an experienced business formation attorney by your side will give you peace of mind.
Calabrese Law Associates provides industry-leading legal services to help you form your business in Massachusetts. Contact us for a free consultation about all your business formation needs today.
This publication and its contents are not to be construed as legal advice nor a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.
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