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LLC or Inc? Choosing the best business entity for your startup in Massachusetts

The decision to set up as an LLC or corporation is vital. So, take your time and weigh your options carefully.

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Choosing a business structure is one of the most critical decisions you’ll make for your startup. That’s because it will directly affect how much you’ll pay taxes, your level of personal liability, and even your ability to raise money. That said, you have several choices, with Entrepreneur listing sole proprietorship, partnership, corporation, S corporation, and limited liability company (LLC) as among the most common. Of these five, corporation and LLC have emerged as two of the best options, mainly because both protect owners from liability.

A corporation is a business structure in which business owners create a distinct legal entity authorized to act on their behalf. A Limited Liability Company (LLC), on the other hand, is a combination of sole proprietorship, partnership, and corporation, making it the least complex structure of all. That said, both are worth a deeper look, as either of the two might just be the structure your business needs to succeed.

Set up procedure

As our very own Chris Smith outlined previously, just getting a business started is both time- and effort-consuming. Expect additional work in creating either a corporation or a LLC, though the procedure for the latter is simpler and more streamlined. A guide to forming an LLC in Massachusetts by ZenBusiness shows that you’ll need to follow only 5 simple steps. These are: Come up with a unique name, appoint an agent (who will receive paperwork on your behalf), file a Massachusetts Certificate of Organization, write an operating agreement (optional but encouraged), and apply for an Employer ID Number from the IRS.

Creating a corporation isn’t exactly that much more complex, although it does have more steps. The Balance notes that after coming up with a business name and address, you’ll next have to choose in which state you’ll incorporate, choose a corporation type (i.e., S corporation or C corporation), identify the board of directors, create the Articles of Incorporation and company by-laws, and choose the stock type you will issue in the future. You’ll then need to get your certificate of incorporation from the state’s corporate filing office before you can ask a lawyer or third-party service to file the actual incorporation.

Liability protection

Corporations and LLCs are popular because they minimize business owners’ liability from debts and lawsuits, in turn insulating their personal assets. Both will adequately protect you and your business partners, as long as you maintain the so-called corporate veil. This simply means keeping your startup’s operations distinct from your activities as owners, and its liabilities separate from yours. For example, you cannot use company assets for your personal needs, or operate it using funds from your own checking account. Both are grounds to lift or pierce the corporate veil, at which point your protection from liability can be lifted too. But if you can separate the personal from the professional, either an LLC or corporation will give the liability protection you need.

Costs and management structure

There are costs involved either way. The formation fee of a corporation in Massachusetts is $275, with an annual report fee of $125. In contrast, the formation fee of an LLC is $500, with an annual report fee of $500. But while it’s more expensive to create and maintain an LLC, its management structure is less rigid as opposed to a corporation. With the former, all members can take part in the decision-making, and can collectively make or amend rules and operational procedures when needed. With the latter, a board of directors is in charge of operations, and there’s a strict set of rules contained in the Articles of Incorporation.

Taxes

In a comparison of LLCs and corporations, legal counsel John Edwards explains how the IRS doesn’t consider an LLC as a separate entity to be taxed. Instead, an LLC is taxed like a sole proprietorship, in which the members themselves will have to pay their own taxes based on the LLC’s profits (in effect passing the tax from the business to the owner). This translates to more income as you avoid double taxation — a drawback of corporations.

In contrast, the IRS views corporations as something separate from its owners. This results in double taxation, where taxes are paid twice on the same income. That’s because the corporation’s profits will be taxed (as it is one legal, taxable entity), and so will the income of every shareholder (who constitute an altogether different entity that is taxable). As a result, everyone’s earnings can potentially be reduced.

Post-formation compliance

Both LLCs and corporations must meet certain obligations to maintain good standing and keep operating. Notably, LLCs and corporations need to submit their annual reports (a report containing information about the company, including its name and address, and the names and addresses of the registered agent and the managing officials). Both also need to pay franchise taxes (the state’s fee allowing a company to do business) and keep a registered agent and office. In either structure, failure to comply with these obligations could result in fines, or worse, dissolution

The decision to set up as an LLC or corporation is vital. So, take your time and weigh your options carefully. Consider seeking legal counsel too, so you can understand better the nuances of each structure.

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