Entrepreneurs in Massachusetts (and across the US) have a few options when selecting the legal structure of their business. The three most common options are a sole proprietorshipA business owned and managed by one person who has no separate legal distinction or employer identification number. They may have employees or a brand name but they use their own individual tax identification. More, a limited liability company (LLC), and an S corporation (S-corp). Each legal structure has its advantages and disadvantages, and it is important for solopreneurs to carefully consider their options before making a decision. 

In this article, we’ll provide a simple overview of the differences between these three legal structures for business owners in Massachusetts.

Sole Proprietorship

A sole proprietorshipA business owned and managed by one person who has no separate legal distinction or employer identification number. They may have employees or a brand name but they use their own individual tax identification. More is the simplest form of business structure and is typically used by individuals who are starting a business on their own. It is easy to set up and has minimal ongoing administrative requirements. However, it also exposes the owner’s personal assets to business liabilities, which means that creditors can come after the owner’s personal assets in the event of a lawsuit or other legal action.

According to the Small Business Administration, self–employed individuals at their own unincorporated firms earned a median income of $31,723.

Limited Liability Company or Partnership (LLC or LLP)

An LLC or LLP is a hybrid legal structure that combines the liability protection of a corporation with the tax benefits of a partnership. They are different but both provide personal liability protection for the owner’s personal assets. They’re also relatively easy to set up and maintain, making them a popular choice for many solopreneurs.

According to the SBA, LLCs accounted for 18% of all businesses in Massachusetts in 2019.

S Corporation (S-Corp) in Massachusetts

An S-corp is a type of corporation that allows the business income to pass through to the owners’ personal tax returns, similar to an LLC. However, an S-corp is subject to more strict legal requirements, such as maintaining corporate minutes and holding annual meetings. It also limits the number and type of shareholders the business can have.

According to BoostSuite, self-employed individuals running incorporated businesses have an average median income of $65,000, which is $33,000 more than those with unincorporated businesses.

Comparison of Legal Structures

When comparing the three legal structures, it is important to also consider factors such as liability protection, tax implications, and administrative requirements.

Liability protection: Both LLCs and S-corps provide personal liability protection for the owner’s personal assets. However, sole proprietorships do not, which can be a significant risk factor for solopreneurs.

Tax implications: Sole proprietorships and LLCs both allow business income to be reported on the owner’s personal tax return. S-corps also do this, but they are subject to more strict tax requirements and may require the assistance of a tax professional.

Administrative requirements: Sole proprietorships have minimal administrative requirements. LLCs and S-corps, on the other hand, are subject to more strict legal requirements, such as maintaining corporate records and holding annual meetings.

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The information included in this article is subject to change at any time and should not be used as legal or professional advice of any kind.

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