Baby boomers form businesses as a
mean to secure freedom, flexibility and income long into the “traditional”
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