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Law Office Karen A. McSherry

Karen A. McSherry

Attorney at Law

e-Newsletter

Volume 1

as seen in

Women's Business Boston, August 2007

Welcome to our first Newsletter

The New Age of Retirement

Corporation, Partnership or LLC – which one is right for me?

Baby boomers form businesses as a mean to secure freedom, flexibility and income long into the “traditional” retirement years.
Baby boomers today are not retiring in the traditional sense of the word. Starting a new trend, many members of this generation are retiring from one job only to enter a new phase in their lives: that of small business owner. Able to have their cake and eat it too, this generation wants more freedom than what corporate America provides, while still making valuable contributions to society and building wealth well into their 60’s and 70’s. With both time and capital to invest, they are leaving the corporate world to chase the dreams of their youth by starting their own business.

However, being the boss comes with certain, important responsibilities, and the first one is deciding what type of entity to create for your company. When forming a business, there are several options available, each with their own pros and cons. Anyone looking to start a business should meet with an attorney to review, consider and discuss their options, as they relate to their particular situation, before making any decisions.

Sole Proprietorship – A sole proprietorship is by far the easiest form of entity because there is no entity: you are the business. All of the income and losses pass through to the business owner, who needs to file a schedule C on their income tax return. However, this option is not usually recommended because all of the liability falls on the owner as well, making their personal and business assets accessible to creditors.

Corporation – If liability protection is a concern, then incorporating is a good option. A corporation is a separate legal entity, apart from the owners. The owners own stock in the company, and only the assets of the company are available to creditors. Also, since a corporation has continuity of existence, the business can continue on, even after the owner passes away.

Corporations are obviously more complex than a sole proprietorship. They must be formed under state law and require annual filings with the state, along with other legal formalities. There are two types of corporations: C-corps and S-corps.

• C-corporations are taxed separately on their income before it is passed onto the shareholders as dividends. This form of double taxation is why most small business owners opt for S-corporation status.
• S-corporations are taxed like a partnership. The income passes through to the shareholders and they report it on their income tax returns. The reason why large, publicly traded companies do not operate as S-corps is because S-corps have restrictions on the number of shareholders and the ownership of the shares.

General Partnerships – These are defined as an association of two or more people who carry on as co-owners of business for profit. General Partnerships are similar to sole proprietorships in that there is unlimited liability for the partners, and the income passes through to the partners. Due to the unlimited liability aspect, many investors opt for Limited Partnerships.

Limited Partnerships – This option offers the partners liability that is limited to their investment. However, the trade-off is that they cannot be involved in the day-to-day operations and management of the business. There must be one general partner with unlimited liability. Most limited partnerships use a corporation as the general partner in order to limit individual liability.

The LLC (Limited Liability Company) – This is the relatively new kid on the block. It combines the limited liability of a corporation with the tax benefits and ease of formation of a partnership. An LLC has members, and single member LLCs are allowed. The $500 annual state filing fee makes the LLC the most expensive entity to form, but it’s the easiest to maintain in regards to legal formalities.

Most of these entities have many of the same set-up requirements, such as: reserving a name, securing a Federal ID number, preparation and filing of articles of organization, by-laws preparation, meeting requirements, etc. In addition, there are various maintenance items that are required. For instance, an annual meeting must be held, minutes prepared and financial documents maintained, and in some cases, filed with the state.

If you’re thinking of starting a business, you need the guidance of an attorney you trust to guide you through the process. If you don’t prepare properly, you may be forfeiting the reasons you incorporated in the first place.

The Law Office of Karen A. McSherry in North Easton, MA is committed to providing legal services and solutions to clients in the areas of Estate Planning and Administration, Nursing Home Planning and Business and Tax Planning. Attorney McSherry has more than 20 years experience, having earned her Masters of Law in Taxation (LLM) at the Boston University School of Law, her JD from the University of Notre Dame Law School and her B.A. in Public Administration from Stonehill College. As an active member of the Massachusetts Chapter of the National Association of Elder Law Attorneys (NAELA), Attorney McSherry stays current on the latest changes in legal issues affecting elders. For more information on forming a company or any legal issues, please call Karen at 508-238-3333. For more information on the Law Office of Karen A. McSherry, , go to www.kmcsherrylaw.com.