• To what extent are you and your family willing to be responsible for business debts and losses?
• To what extent is your family willing to accept the physical and psychological strains associated with business life?
• What impact would your death have on the business?
• How easy would it be to transfer your business, or your interest in the business, to your heirs should you die unexpectedly?
• If your personal goals or economic conditions change, how easy would it be to liquidate the business?
• How much information about you and your business are you willing to make publicly available?

Sole Proprietorship
The simplest business entity is called sole proprietorship. You are all by yourself; no other owners or partners are involved. Legally, you and the business are identical. There are both pluses and minuses to establishing a sole proprietorship.

Advantages

• A sole proprietorship involves the least amount of red tape. It is the least expensive arrangement to set up and needs the least amount of paperwork to get started. In many cases, all you need are determination, imagination and money.
• Sometimes you need to file an assumed name and get a license. Both of these formalities are very easy to take care of.
• You can make decisions quickly. There are almost no regulatory or reporting requirements.
• If you are the sole worker in the business, this form of entity allows you to avoid having to obtain and pay for worker compensation insurance.
• From a tax standpoint, you and the business are treated as a single entity. Business gains or losses are reported on your individual tax return. If you do have losses, they will offset income you have from other sources, like interest or salary from a part-time job.
• On the downside, health care and other fringe benefits for you as the sole employee of the business are not likely to be fully tax deductible.

Disadvantages

• The biggest disadvantage is that you have unlimited personal liability. Possible scenarios include:
• You start your retail business by spending $25,000 for space, ordering supplies and merchandise, and so on. Before you really get started there happens to be an environmental scandal in your neighborhood and your prospective customers leave. There has not been any substantial business income to pay the bills. Now you are personally stuck. Your creditors want cash, no returns. You have to sell to a liquidator at a big loss. Beyond your business, you may lose your personal bank account, your car, and maybe your home.
• Your employee is careless and has an accident with the delivery truck, seriously injuring someone. The victim sues for a million dollars. Your employee does not have a penny. Guess whose problem this is if there is not adequate insurance?
• Your death may automatically destroy your business. Decades of goodwill may be gone overnight if your spouse and children do not have your interests and abilities. If they inherited your ownership interest in a corporation or partnership, they would at least continue to enjoy financial benefits from your work.
• The business’ income is taxed when it is earned, whether or not you take the money out of the business. If this income makes you a candidate for a higher tax bracket and you need to withdraw the money to satisfy the tax collector, you lose the ability to retain the earnings in the business for expansion.
• As a sole proprietor you don't qualify for many of the tax advantages corporations get for fringe benefits, like health insurance and medical reimbursement plans.

General Partnership
If it is clear that you will not be alone in your venture, you must decide between a partnership and a corporation. Most states have adopted the Uniform Partnership Act. It defines a partnership as "an association of two or more persons to carry on as co-owners of a business for profit." While no legal contract is required, you would be wise to have one.

• In a partnership, each partner acts as the agent of all the other partners. Each one can bind the partnership. No matter whether a partner signs a $500 or a $500,000 contract on behalf of the partnership, you are personally liable. It does not matter whether or not you gave explicit prior consent.
• No one can join the partnership without the permission of all the other partners.
• Each partner is entitled to full information, regardless of subject, about the affairs of the partnership.
• The partners are bound by a fiduciary relationship. Each partner owes the other the highest possible duty of good faith, loyalty and fairness. The notion of conflict of interest becomes quite important. Neither you nor your partner can run a competing business as a sole proprietor without the consent of the other partners.
• Like a sole proprietorship, your personal assets are in jeopardy, in addition to any partnership assets.
• Death has a critical impact. Legally, a partnership dissolves upon the death or withdrawal of any partner.
• A partnership cannot take advantage of tax planning flexibility and fringe benefits offered by a corporation since they are effectively not deductible for the partners.
• It does not pay any income taxes. Profits or losses have to be reported, along with information that determines each partner’s share. Each partner is taxed on his or her share (along with income from other sources), whether or not the money was actually distributed during the year.
• Partnerships don't have to be 50-50 deals. For instance, you may have ten slices of the cake and leave just two or three for your partner. If you establish an agreement reflecting this, have a lawyer review it first. The law presumes equal shares

Limited Partnership
Under this agreement, you distinguish between general and limited partners as members of your enterprise. A general partner has the same liabilities as a partner in a general partnership. A limited partner is more like a stockholder. For him there is no unlimited personal liability. Obligations cover only up to the amount that was paid into the partnership as a capital contribution. In cases of insolvency, the amount that was received back from the partnership can also be reached.

While this may sound like a perfect solution, there is a catch. As a limited partner you cannot participate in the management of the business. If you do get involved in any way, you lose immunity from personal liability. The death or withdrawal of a limited partner has no impact on the survival of the partnership as a legal entity. Also, a limited partner faces no restriction if she wants to sell her partnership interest to somebody else. No consent by the other partners is necessary.

Before you decide to become somebody’s limited partner, you should consider that today the main tax advantage of a limited partnership is confined to the real estate area. For the most part, your choice in controlling or avoiding risk boils down to only one form of business, the corporation.

The Corporation
When the term corporation is used, you may think of the Fortune 500. A corporation is in many ways the ideal business form even if your business is tiny. Strictly speaking, however, there are differences between a public and a closed (closely held) corporation.

What we deal with here is the closely held corporation: an enterprise you own either yourself or with a few other people. We will assume that all the owners of the corporation are involved in the day-to-day management. No stock is sold to the general public.

• The cost of incorporating is much lower than most people think. It's likely that you will be all set for about $1,000 or less.
• The most important feature is that it is legally a separate entity from the individuals who own and operate it. For practical purposes, this means your personal liability is limited unless you have signed any personal guaranties.
• If you are in serious trouble, all you can lose is the money that you have invested in the company. As long as you have acted in a corporate function and have not used the business with the intent to defraud or trick creditors, you are safe. No nightmares involving your house, car or personal bank account. Even if some of your employees have been careless or negligent, there is no need for panic. If your company manages to get a loan which exceeds equity and it cannot be repaid, the bank has to write off some of its money. Those instances are rare. If a bank helps you over the hill, you most likely will have to co-sign or guarantee the loan with your personal assets. Even though you may own all the stock of the corporation and are its only employee, you and the corporation are still distinct.
• Legally, a corporation has an eternal existence. This means that even if the owner dies, the business does not. It does not matter who owns the stock. It’s very easy to transfer ownership. If this is done within your family, you might just want to include in your will that your shares will be taken over by your spouse, child or whomever you have in mind. If later on this becomes a burden for the heir, he or she can give away the shares or sell them.
• Corporate taxes should not be an enormous concern. The corporation must pay income taxes on its earnings. When you withdraw some or all of those earnings as dividends, you must include them in your individual tax return and pay taxes a second time. However, with some planning and advice from your lawyer or accountant, the double-tax issue can be minimized or completely eliminated.

"S" Corporation
Most small businesses can opt to be treated as an "S" corporation. This is a straight-forward and inexpensive procedure, requiring only one form (Form 2553) to be filed with the Internal Revenue Service. It must be signed by all stockholders.

• Other requirements are that you must opt for the "S" designation by March 15 of any tax year (which means that you are quite flexible and can switch back and forth); that your company has issued only one class of stock (such as common stock); and that there are no more than 35 stockholders. So when it's "your" corporation, you can get away with only one signature.
• Being the ruler of such a corporation means being free of any corporate income taxes. The corporation serves basically as a vehicle for establishing income (or losses). It only files an information return and the income or loss becomes part of your personal tax return.  What's the catch? There are cases when shareholders/owners may actually want to have their corporate income taxed separately. This is especially true during growth periods, when it is to the advantage of the corporation to retain some of its earnings for expansion purposes.
• The benefits or savings result from the fact that the tax rate on corporate earnings is lower than the tax rate on individual earnings. Had the owner declared the corporate profits on his personal tax form, not only would he have been taxed at a higher rate, he would not have had the advantage of using the money for personal purposes.
• Stockholders working for their company are considered employees. As an employee, you are eligible for insurance programs and similar fringe benefits.
• For the corporation, these fringe benefits turn into tax deductible expenses of doing business.

Thus, the financial effect for you should be clear: The company fully writes off those costs before paying taxes. As a sole proprietor or partner, you may be able to claim only a portion of your health care costs as tax exempt, if any.

As you probably see by now, this issue can be a rather complex one, especially when you are determined to use the sharpest pencil to maximize your profits. That's why you should have a very good lawyer and/or accountant help you.

Limited Liability Companies (LLCs)
Limited Liability Companies are now permitted in Massachusetts as in most other states. A Limited Liability Company is an entity created by statute which allows for protection against personal liability for the principals and, in many but not all cases, beneficial tax treatment.

• A Limited Liability Company is an unincorporated business organization which limits the liability of members to their contribution to the business and allows the members to actively participate in management of the company.
• A hybrid entity, a Limited Liability Company combines many of the advantages of both corporation and partnerships. It offers the flexibility and tax advantages associated with a partnership. At the same time, like a corporation, it is a legal entity which allows the members to participate in management without incurring personal liability.
• Unlike an "S" corporation, the number of members that may participate is not restricted, as long as there are at least two.
• A Limited Liability Company provides greater personal protection from liability than a general or limited partnership because none of the members of a Limited Liability Company is personally responsible for the debts and liabilities of the Limited Liability Company, even if they engage in management of the business. This makes the personal protection offered by a Limited Liability Company very similar to that offered by a corporation.
• The Limited Liability Company can, in many cases, be set up in such a way that it will offer partnership tax treatment rather than corporate tax treatment. Partnership tax treatment avoids taxation at the entity level.
• Limited Liability Companies may also provide that profits and losses will be shared in some proportion other than proportionally to the ownership interest.
• The Limited Liability Company is owned by members who may contribute capital or services to the organization in exchange for an interest in the business.
• A Limited Liability Company is formed by the execution of a certificate of organization and the filing of that certificate with the Secretary of State. The Certificate of Organization will contain the name of the Limited Liability Company, the address of its principal office, the name and address of each manager (if it has managers) and the name of all persons (at least one is required if there is no manager) authorized to execute documents.
• Although not required by statute, a Limited Liability Company should have an underlying operating agreement. This operating agreement does not need to be filed anywhere.
• Unless otherwise provided in the operating agreement, the death, insanity, resignation, expulsion, bankruptcy or dissolution of a member dissolves a Limited Liability Company and its affairs are wound up unless all of the remaining members agree to continue the business. Even upon dissolution, the Limited Liability Company continues to have legal existence until its affairs are wound up and a certificate of dissolution is filed with the Secretary of State.
• The cost to set up a Limited Liability Company is generally slightly higher than the cost to establish a corporation, with registration fees approximately $300.00 higher than for a corporation. After the initial year of registration, the annual report for a Limited Liability Company is $500.00, while a corporation has an annual report fee of $85.00 and a minimum annual tax of $456.00. As a result, after the initial establishment of the Limited Liability Company, the maintenance cost is comparable to that of a corporation.

Limited Liability Partnerships (LLPs)
Massachusetts law now permits Limited Liability Partnerships as do most other states. Limited Liability Partnerships can be a brand-new entity, or an existing partnership can become a Limited Liability Partnership. This is a statutory form of partnership. Therefore, it is governed by state statute. A Limited Liability Partnership is simply a partnership which, by virtue of registering with the Secretary of State, receives protection for all of the partners against personal liability for the debts and obligations chargeable to the partnership. This protection does not shield a partner from liability arising from his or her own negligence, wrongful act, error or omission.