TOOMEY LEGAL

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Business Formation / Incorporation

The process of starting a new business can be a stressful one, filled with new obligations, responsibilities, expenses and decisions. To add to the stress, there are many choices involved in simply setting up the legal entity through which the business will be conducted. Today, Massachusetts offers a variety of business vehicles with different tax, investment and liability implications. Some of these business forms require greater initial funding or fees than others, and some require more paperwork and filings than others, but your business should choose its form not by these minor factors, but by reflection on the balance between taxation, investment and saleability, and liability concerns. Not all forms of business organization are available to all types of business. The information that follows provides a very general introduction to each of the most common forms of business organization in the Commonwealth. This information is not legal advice, but Toomey Legal is happy to provide legal and business planning advice, as well as business formation services to our clients.

Sole Proprietorship
 
A sole proprietorship is a person engaged in business for himself or herself. The sole proprietor can hire employees to carry out the business but retains the profits and assumes the losses of the business himself or herself.
 
General Partnership
 
A general partnership is an association of two or more persons who function as co-owners a business for profit. G.L. c. 108A, § 6. Partners in a general partnership are liable for partnership obligations to the full extent of their personal as well as business assets. Partners must be persons with the legal capacity to act as partners. It is important to understand that a general partnership can be formed orally by agreement of the parties or by a course of conduct, and that a formal, written partnership agreement is not required. For tax purposes, a partnership is not taxed as a separate entity but passes through tax items to its partners.
 
Limited Partnership
 
A limited partnership is a partnership formed by two or more persons having the capacity to act as partners and has as its members at least one general partner and one limited partner. A general partner has the same liabilities as a partner in a general partnership. A limited partner is a partner whose liability for partnership obligations is limited to the sum of his or her capital contribution to the partnership, plus certain distributions made by the partnership to the limited partner. To preserve limited liability, a limited partner may not participate in the control or management of the partnership's business. A limited partnership is a creature of statute, G.L. c. 109, and is not formed unless the statutory requirements for organization are satisfied. Failure to observe the appropriate formalities may result instead in the formation of a general partnership with general liability for its participants. Like a general partnership, a limited partnership is a conduit for tax purposes.
 
Corporation
 
A corporation is a separate, incorporated legal entity organized under an enabling statute. Under Massachusetts law, a corporation formed for the purpose of carrying on a business for profit may be a business corporation organized under G.L. c. 156B or a professional corporation organized under G.L. c. 156A. Certain specialized corporations--like banks, insurance companies and utilities--are formed under other chapters of the General Laws. In addition, certain organizations that are formed for purposes other than the carrying on of a business for profit may be organized under G.L. c. 180. These entities include those established for civic, educational, charitable or religious purposes; social clubs; chambers of commerce or business leagues; and entities established for other enumerated purposes set forth in G.L. c. 180, § 4. Stockholders of a corporation enjoy limited liability and, with certain exceptions, are not liable for corporate obligations exceeding their investment.
 
For federal tax purposes, depending on its organizational structure and the nature of its stockholders, a corporation may be a C corporation, separately taxed on its own taxable income, or may elect to be treated as an S corporation. By electing S status, the stockholders of the S corporation effectively pass through the income, gains, losses, deductions and credits of the corporation and report them as their own on their individual tax returns.
 
Massachusetts Business Trust
 
A Massachusetts business trust is an unincorporated business association created by a trust instrument in which property is held and managed by a trustee or trustees for the benefit of the holders ("shareholders") of transferable shares that represent the shareholders' beneficial ownership in the trust estate. A Massachusetts business trust is a hybrid, sharing some of the characteristics of a corporation, a limited partnership and a trust. For example, interests in a Massachusetts business trust are evidenced by certificates that are like the shares of stock of a corporation and that are transferable in the same manner as stock certificates. The shareholders of a Massachusetts business trust, like the limited partners of a limited partnership, enjoy limited liability only so long as they do not participate in the management of the business. Finally, the instrument creating the Massachusetts business trust should generally be executed to conform to the law of trusts. With limited exceptions, a Massachusetts business trust is treated as a corporation for federal income tax purposes and can elect S status.
 
Limited Liability Companies
 
A limited liability company is a business structure organized under an enabling statute that offers both limited liability for participants and "pass through" treatment for tax purposes. In Massachusetts, limited liability companies are organized pursuant to G.L. c. 156C. For both federal and Massachusetts purposes, limited liability companies may elect to be taxed either as partnerships or as corporations. A limited liability company may be managed by its owners (member-managed) or may be managed by a manager (manager-managed), who may be a member or a non-owner. A limited liability company is formed by the filing of a certificate of organization with the Massachusetts Secretary of State. Although a written operating agreement governing the affairs of the limited liability company is not required, in most instances matters relating to control and economics should be incorporated into an operating agreement, for which the enabling statute authorizes great flexibility.
 
Limited Liability Partnerships
 
Limited liability partnerships are general partnerships that have elected, pursuant to G.L. c. 156C, § 45 et seq., to register as registered limited liability partnerships with the Massachusetts Secretary of State. The partners of a registered limited liability partnership are not personally liable--by way of indemnification, contribution, assessment or otherwise--for the debts, obligations and liabilities of the partnership ( G.L. c. 108A, § 15(2)), although the partners remain liable for their own negligence, wrongful acts, errors or omissions ( G.L. c. 108A, § 15(3)). Partners of a registered limited liability partnership engaged in the practice of a profession are liable to the same extent shareholders in a professional corporation are liable for their professional activities. G.L. c. 108A, § 15(4).