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"Carrozza Law Office was instrumental in forming my new business. Jason has a wealth of knowledge and expertise that is not only valuable but vital in today's economy. I wouldn't work with anyone else." ~ N.P., Milford, MA |
"If you fail to incorporate, you better be prepared to personally litigate."
Starting a business is an exciting undertaking but it is filled with many traps for the unwary. How your business is set up and structured from the beginning will dictate whether your personal assets are protected from any business liabilities and the tax implications of any business income and expenses. Given these consequences, making the correct decision from the beginning is critical.
At Carrozza Law Office, P.C., we take the time to work with our business owners to truly understand the nature of their business, their plans for the future, and their risk tolerance as it relates to personal liability. In collaboration with other trusted professionals, such as their accountants and financial advisers, the correct decision is reached regarding the choice of business entity.
Aside from any potential tax advantages, the paramount benefit in forming a business entity designed for limited liability is to achieve personal protection for the business owner. To that end, the two most popular limited liability business entity choices include the corporation and limited liability company ("LLC").
Once these entities properly organized under the Commonwealth of Massachusetts, it is necessary to acknowledge the strict corporate formalities in order to maintain the sought after limited liability protection status. Carrozza Law Office, P.C. works with our business owners to ensure that those formalities are properly acknowledged and that the business entity is in compliance with the law.
The following provides a very brief outline of a sampling of different business formation choices:
The most basic, and the most common, business entity is the sole proprietorship. Simply by conducting business, a single person, known as the owner or sole proprietor, owns and operates the business entity. The sole proprietorship is not a separate legal entity; instead, the owner and business are one in the same. As such, the sole proprietorship provides no limited liability protection for the owner's personal assets. Many people engaged in business are sole proprietors since it is easy to set up with no formal filing requirement to establish the organization.
A sole proprietor may have to file some documents (such as permits, certificates, or licenses) with state agencies. For example, a sole proprietor in the Commonwealth of Massachusetts must file a fictitious name certificate ("DBA") registering the name with the Town Clerk. The sole proprietor may also be responsible for other filings such as sales and use applications and payroll taxes, if he has employees.
The owner manages and controls the proprietorship on his/her own; thus, no meetings or voting is required.
The sole proprietor has unlimited liability, including vicarious liability. The sole proprietor is solely responsible for all debts of the business and the owner's personal assets are available to satisfy any such liabilities.
A general partnership is also a simple form of business organization and is created when two or more people engage in business to make a profit. A major detractor of this form of business is the fact that it provides no limited liability protection for personal assets of any partner. A general partnership need not be in writing, although having an agreement in writing is advisable. Although general partnerships can informally be created, all states have statutes addressing the concerns of general partnerships; these statutes come into play when issues are not addressed in the partnership agreement or any other written instrument pertaining to the partnership.
General partnerships are generally used with a small group of persons who want to conduct simple business.
The partners share equally in the profit and losses of the general partnership. The partners also equally share in the management responsibility in the day-to-day affairs of the general partnership. Moreover, each partner has the power to act unilaterally on behalf of the partnership thereby binding all other partners. Each partner also has the ability to unilaterally terminate the partnership or cease business operations. The partnership agreement, if in existence, may place restraints on these general control concepts.
Partners are joint and severally liable for the obligations of the partnership. Thus, a partner is liable for any injury that another partner may cause while conducting work-related activities. Each partner is also liable for any contract issue involving the partnership, regardless of the partner's involvement in the matter.
Like the sole proprietorships, many general partnerships change business structure from a general partnership to a corporation or limited liability company (LLC) to better suit the needs of the business and protect the owner.
A corporation is a separate legal entity formed and operated in accordance with state law. As a separate legal entity, the corporation itself may sue, be sued, own property, make contracts in its own name, pay its own taxes, and have its own rights, responsibilities and liability. Basically, a corporation may conduct any legal business purpose unless restricted in the organizational documents. It is the most popular of business organizations and is the most complex.
"Shareholders" are the owners of a corporation. They elect the "Board of Directors" and must vote for or against any major changes in the basic organization of the corporation. In Massachusetts, actions without a "shareholder" meeting require unanimous written consent, and extraordinary actions require two-thirds vote.
A corporation's management and control is vested in the "Board of Directors" who are elected by the "shareholders" of the corporation. "Directors" generally make policy and major decisions regarding the corporation but do not individually represent the corporation in dealing with third persons. Rather, dealings with third persons are conducted through "officers" and employees of the corporation to whom authority is delegated by the "directors" of the corporation. There are instances when the "shareholders" are required to approve the Actions of the Board of Directors (e.g. amendment to the Articles of incorporation, sale of substantially all of the corporate assets, the merger or dissolution of the corporation, etc.).
Corporate "officers" are elected by the "Board of Directors" and are responsible for conducting the day-to-day operational activities of the corporation. Corporate "officers" usually consist of the following: President, Treasurer, and Secretary.
One of the benefits of establishing a corporation is that the "shareholders" are afforded limited liability; it is limited to the "shareholder's" capital contribution. Since the corporation is a separate entity, the corporation is not responsible for the debts of the "shareholders" or vice versa.
"Directors" and "officers" of the business corporation are only liable when they breach their fiduciary duties.
An LLC is a separate legal entity formed and operated in accordance with the law of the state in which the LLC is organized. LLC's are one of the new variations of business entity and are attractive to many new business owners because of the corporate attribute of limited liability for the owners, who are called "members", and flow through taxation.
The LLC is managed and controlled by its "members". Thus, the "managers" of an LLC can be all of its members, some of its members, managers (who are not owners) appointed by members, or some combination of managers and members. More complex LLC's have officers who manage the day-to-day affairs of the LLC, similar to those in a corporation.
"Members" and "managers" of an LLC have limited liability. "Members" may participate in the business activities without losing their limited liability.