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Articles


Business Formation Options
By Debra Leggett, Esquire

One of the first choices facing new entrepreneurs is whether to simply run the business as themselves, perhaps with a different business name (a d/b/a), or whether they should create the business as a free-standing legal entity. Ask any lawyer and the answer is likely to be a resounding recommendation to form a legal entity.

Legal business entities limit personal liability. A legal wall is constructed between the business assets and liabilities and those of the business owner(s). If the business is established and run properly, creditors can’t take the owner’s assets if the business has financial problems, nor can the business owner’s personal creditors seize business assets to repay debts (although creditors may seek to take the owner’s interest in the business).

The question is not whether to form a business entity – it is what type of entity is best for your business. The type of business, ownership, funding and future goals will determine the answer.

In Massachusetts, the most common types of business entities formed are limited liability companies and corporations. 

Corporation

For businesses that will work to raise significant funding from outside investors and/or become publicly traded on a stock exchange, the recommendation is often to form a corporation.  Corporations, as a general entity type, have been in use for as long as anyone can remember and therefore are the entity type people are historically used to working with and through.  Corporations (often formed in Delaware, a very “corporate friendly” state) are the entity type most familiar to investors and there is a well-developed body of law (particularly in Delaware) about how corporations work.  Typically, corporations will have layers of governance – stockholders, Board of Directors, officers – who may or may not be the same people at each layer but have different roles and responsibilities depending on what capacity the person is acting in (owner, director, officer).

Limited Liability Company

A limited liability companies is a newer entity form and is sometimes viewed as a hybrid between a partnership and a corporation.  The limited liability company is often the best choice for businesses with a single owner. In Massachusetts, the annual maintenance costs required of a single owner business entities are lowest for limited liability companies.[1]  They can also be the right choice for multiple owner businesses that are going to be run like a partnership because they can have fewer governance formalities, such as, no Board of Directors meetings or elections of officers.  Since limited liability companies have this hybrid quality between a partnership and a corporation, they also have great flexibility to accommodate complex ownership and/or governance arrangements that can mirror corporate governance structures and give greater flexibility in ownership structures.  Thus, if you have a unique business arrangement, it may be easier to accommodate through a limited liability company than a corporation.

Whether your business is anticipated to start and remain a single owner business or to become publicly traded, you should set it up and run it properly to ensure that you receive the broadest scope of limitation of liability protection afforded through entity formation.  Key to setting up and running a legal entity properly is to treat it separate from you individually.  Set up a separate bank account to receive business income and pay business expenses, make agreements in the entities legal name, and observe legal formalities, such as, formally approving the entities actions on an as needed (or annual) basis and appoint/re-appoint the managers, directors or officers as often as required by law or by the governance documents.  Your business attorney (even if not engaged to create the entity itself) is the best source to advise you on the practices you should follow to take full advantage of these protections. 

Attorney advertising. This article does not constitute legal advice.
© 2014 Englander, Leggett & Chicoine, P.C.


[1]  Prior to forming an entity thought should be given to, and appropriate advice obtained regarding, tax matters.  These issues can be equally important to choosing the best entity type.  They are beyond the scope of this article.