Starting a business can be both invigorating and exhausting all at the same time. To work for yourself offers great freedom, and of course great responsibility. Naturally then, it is wise to stop and set a proper foundation appropriate for the unique needs of your enterprise. While this should by no means be treated as an exhaustive list, (there is no such thing), below we have highlighted some factors every startup should consider if they haven’t yet:
Do not take general advice as a substitute for legal advice to be used in your specific situation. The reason that the State of Massachusetts allows for so many different kinds of business entities is so that businesses can choose the entity that best serves their needs. The only way you will make an informed choice is by consulting a qualified Massachusetts business law attorney.
1) What type of entity should I form?
Entities available to the Massachusetts business include a single proprietorship, a general partnership, and more intensive structures like limited partnerships, limited liability companies (LLC) and varied forms of corporations. Whether or not a business should consider going beyond the basic proprietorship or partnership depends primarily on a cost benefit analysis of risk, control, formalities (statutory requirements) and tax liability. The LLC and S Corp. both strike a very attractive balance between these factors and have consequently become the entity of choice for many different kinds of business. But whether to form an Inc or LLC is a subject for a different article.
2) What are the formalities of a business entity?
In terms of what is necessary for filing with the State of Massachusetts, the requirements will range from none to several along the scale of sole proprietorship to LLC to corporation. In an LLC, the basic filing requirements will be 1) Articles of Organization, 2) At least one member, and 3) An operating agreement containing provisions for management, distribution of profit/loss, assignment of interests and other details. A more specific description of the elements in an LLC operating agreement is here. The State of Massachusetts also requires a filing fee, as well as an annual report filed each year.
3) What are the liability implications of my entity choice?
In the case of a sole proprietor or general partnership, all owners are personally liable for any debts and obligations of the business. By contrast, a valid LLC or corporation that satisfies all formalities and capitalization requirements will protect its owners from personal liability, leaving only their investment in the company at risk of loss.
4) Capitalization – How much money do I need to start a business?
The real question here is, “How much money should be necessary to achieve the company’s initial goals?” There is no fixed amount of money required, but beyond achieving your objectives there is also the question of risk. An underinsured and/or undercapitalized company may expose its members to personal liability even if it is a limited liability entity. For example, the member/owners of a delivery service LLC could lose their personal assets from a vehicle accident if they hire a driver without insuring him, or without placing sufficient assets in the company.
5) The Multiple Entity – When an LLC isn’t enough.
Certain situations may call for a business formation that is more complex than a basic LLC, due to the unique nature of a business operation. Reasons why an LLC might be combined with a corporation, an LLP or a trust include specific needs for control of the entity, multiple assets exposed to varying degrees of risk, and unique capitalization or investment structures.
Read part 2 of How Do I Start a Business in Massachusetts?
