Business Formation and Planning

Choosing the right business formation structure is the first important decision every successful Massachusetts business owner must make. Each business structure has its own advantages and disadvantages. The challenge for business owners is to decide which business formation structure works best for their business, small or large. For example, a partnership is an association of two or more persons to carry on, as co-owners, a business for profit. However, partnerships come in a variety of forms: General Partnership (GP), Limited Partnership (LP), and Limited Liability Partnerships (LLP), each of which share certain characteristics but also differ significantly in certain respects. The Limited Liability Company (LLC) structure is one that provides business owners (whether only a single owner or multiple owners) the protection of their person assets and the flexibility to expand the business. The Corporation structure is the most complicated of the business structures offered in Massachusetts but it provides the business owner(s) with the ability to raise capital investment in the business by selling shares of the business to investors (i.e. the shareholders). The details of each of these business formation structures, including any requirement to file paperwork with the Massachusetts Secretary of State’s Office in Boston, are outlined in the chart below.

  1. General Partnership (GP):
    • Formation
      • ONLY agreement of parties required / NO formation formalities
      • Written partnership agreement may specify rights and liabilities of parties for the conduct of the business and rights upon dissolution.
    • Liability
      • Debts of partnership treated as debts of the individual partners (partners have joint and several liability for partnership debts and co-partners torts.)
    • Management/Benefits:
      • Each partner is jointly entitled to manage the entity regardless of the amount of their contribution UNLESS there is an oral or written partnership agreement to the contrary.
      • No double taxation
      • Property may be held in the partnership name.
    • Sale/Transfer
      • Partners in a partnership CANNOT sell their interest to 3rd parties without the consent of all other partners.


  2. Limited Partnership (LP):
    • Formation:
      • Certificate of limited partnership must be filed secretary of state
        • Failure to properly file LP documents will result in the formation of General partnership.
      • Must maintain for public inspection:
        • The certificate
        • Any partnership agreements
        • Partnership tax returns
        • Names and address of ALL partnerships
      • MUST be at least one general partner and one limited partner.
    • Liability
      • General partners: Debts of partnership treated as debts of the individual General Partners (General partners have joint and several liability for partnership debts and co-partners torts.)
      • Limited partners: liability limited to his initial contribution to the partnership. (analogous to shareholders in a corp.)
    • Management / Benefits:
      • General partners: Each General partner is jointly entitled to manage the entity regardless of the amount of their contribution UNLESS there is an oral or written partnership agreement to the contrary.
      • Limited partners: may NOT participate in the operations of the partnership. (Limited partners who participate in business operations become general partners by operation of law — are subject to same liability as a general partner.)
      • No double taxation
      • Property may be held in the partnership name.
    • Sale/Transfer:
      • Partners in a partnership CANNOT sell their interest to 3rd parties consent of other partners


  3. Limited Liability Partnership (LLP):
    • Formation
      • Registration of the LLP must be filed with the secretary of state.
      • Failure to properly file LLP documents will result in the formation of a General partnership.
      • Must maintain for public inspection:
        • The certificate
        • Any partnership agreements
        • Partnership tax returns
        • Names and address of ALL partnerships
    • Liability
      • Provides all partners liability protection for all business claims against the partners. Partners are not individually liable for the partnership debts or liabilities.
      • Liability for the business claims is limited to the assets of the partnership.
    • Management/Benefits:
      • The LLP management decisions are made by a majority vote of the partners UNLESS there is an oral or written partnership agreement to the contrary)
      • No double taxation
      • Property may be held in the partnership name.
    • Sale/Transfer
      • Partners of the LLP CANNOT sell their interest to 3rd parties without the consent of all other partners.


  4. Limited liability company (LLC):
    • Formation
      • File articles of organization with the secretary of state.
      • Must indicate some event that will terminate the LLC in articles or operating agreement (operating agreement not required.)
    • Liability
      • Each member has limited liability for the LLC’s debts
    • Management/Benefits
      • Owners may control business BUT may delegate their control to a team of members
      • Each member is jointly entitled to manage the entity regardless of the amount of their contribution. (UNLESS oral or written agreement to the contrary)
      • No double taxation
      • Property may be held in the LLC name.
    • Sale/Transfer
      • LLC member’s interest is freely assignable.
        • Assignment transfers ONLY the right to receive profits and the obligation to share losses. (No consent needed)
        • ALL the LLC members must consent to the assignment of management rights.


  5. Corporation:
    • Formation
      • File articles of incorporation with the secretary of state (Forms a de jure corp.)
      • Pay required fee
      • Inc, corporate, limited, or company MUST be in the corporate name
      • FAILURE to properly file — may form (defacto corp. or corp. by estoppel)
        • Defacto corp. is an unregistered corporation “acting” like a registered corporation.
        • Corp. by estoppel is prohibited (or “estopped”) from denying that the business was a corp.
          • Under both doctrines, a person must be unaware of failure to form de jure corp. (good faith)
    • Liability
      • Generally, shareholders are not liable for debts of the corp.
        • Shareholders can file direct suit AGAINST the corp.
        • Shareholders can file derivate suit on corp.’s behalf.
    • Management/Benefits:
      • Management and control vested in the board of directors.
      • Corporation is a separate “legal entity” from its shareholders
      • Property may be held by the Corp.
      • More easily accommodates different ownership interests than a partnership.
      • CLOSED corporation: members of the board of directors typically own a majority interest in stock as well.
        • Few Shareholders
        • Stock not publically traded
        • Substantial shareholder involvement in management of corp.
    • Sales/Transfer
      • Shares are freely transferable.
    • Piercing the Corporate Veil:
      • Allows a court to disregard a corporate entity and hold individuals liable for corporate obligations.
        1. Alter ego: occurs where the corporation ignores corporate formalities.
          • E.g. Shareholders treat corporate assets as their own
        2. Inadequate capitalization: at the time of formation, there is not enough unencumbered capital to reasonably cover prospective liabilities.
        3. Avoidance of existing obligations, fraud, or evasion of statutory provisions: where piercing is necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing personal obligations.
      • Liability
        1. Only shareholders active in the operations of the business will be personally liable.
        2. Liability is joint and several.