Types of available corporate entities in the Commonwealth of Massachusetts:
- Sole Proprietor or Doing Business As (DBA): Perhaps the most basic and quickest way to begin working as a “company” is as a sole proprietor and establishing a DBA Company Name. Unfortunately, under this company structure there is no limited liability and the owner is responsible for business debts and liabilities.
- Partnership: This choice generally only makes sense if you are carrying on your business for profit. There are some adverse liability consequences of this choice, but this form lets you order your group affairs contractually and generally involves less up-front, out-of-pocket cost and hassle than the limited liability entities below. In addition, this form can be advantageous for tax reasons because it allows for pass-through tax treatment (that is, there is generally no entity-level taxation).
- Limited Liability Company (LLC) & Limited Liability Partnership (LLP): Both entities offer limited liability for the debts and obligations of the company, with somewhat fewer operating formalities than corporations. LLCs and LLPs are also advantageous because they combine the potential tax benefits of a partnership with the limited liability of a corporation. That said, they generally involve more up-front, out-of-pocket cost and hassle than getting started as and running a sole proprietorship or partnership.
- Corporation: Most large, publicly traded companies that are “household names” are corporations. This form of business has the benefit of limited liability, but forming and operating a corporation involves costly and burdensome filing and record-keeping requirements and observation of “corporate formalities.” Forming a corporation can also have potentially adverse tax consequences because the corporation is taxed on its income at the entity level and the shareholders are also taxed on any dividends that are distributed, this is called double taxation. Corporations however enable the entity to have shareholders who are generally not liable for any business liabilities above the possible risk to the value of their shares. As a result, corporations allow for relatively low risk for investors.
- Nonprofit Organization: Those who operate a nonprofit corporation enjoy limited liability for the debts and obligations of the organization, and the organization is not subject to income tax on the federal and (usually) the state level. There are important restrictions involved in operating a nonprofit, however, including limits on the purposes of the organization’s activities, a ban on personal benefit from those activities, and restrictions on political and lobbying activities, and the process of filing for tax-exempt status can be time consuming in contrast to the obligations imposed on other business forms discussed above. Also, keep in mind that a nonprofit has no owner(s) in the ordinary sense, and therefore creating one involves relinquishing control. In addition, nonprofits have strict dissolution requirements, they cannot pay dividends, and employees can only receive reasonable salaries. Nevertheless, this may be a good option for members of a collaborative venture that does not aim at making a profit, who want increased legal certainty about their status, and to enjoy limited liability and tax benefits.