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Should you form a LLC or corporation?

On Behalf of | May 16, 2023 | Business & Commercial Litigation, Business Formation

There are at least three ways that a business can be structured in Massachusetts. Choosing the right type of business structure can help you mold and solidify your vision for your business, so it’s a good idea to understand what’s available.

Limited liability company

One choice when forming a company is creating a limited liability company, often called LLC. You must file a Certificate of Organization with the Secretary of the Commonwealth in Massachusetts. LLCs offer greater flexibility with the Internal Revenue Service because you can choose to as a sole proprietorship, a partnership or a corporation. All excess profits flow through to the company’s owner, but so are the losses. Owners must pay Social Security and Medicare taxes.

S corporations

When an S corporation is created, profits and losses pass through to its owners, who must pay taxes on that money at their income bracket. These companies can be sold without triggering adverse tax consequences. At the same time, owners cannot be held personally responsible for the company’s debts. An S corporation may be more credible to potential clients depending on the industry. S corporations are limited to one type of stock, so they must pay the same dividend to everyone.

C corporations

A C corporation must pay the IRS based on its profits or losses. They are taxed at a higher rate than individuals. Stakeholders can choose to leave the earnings with the company or pay them out as dividends to shareholders. Furthermore, C corporations can opt to create multiple classes of stock and pay dividends differently to each one. It is often easier to get operating capital as a board of directors manages these companies.

There are advantages and disadvantages to each type of entity, so it’s helpful to understand how each could benefit your business.