Starting a Business in Massachusetts

Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

Starting a business in Massachusetts is easy. In this lesson, we will go through the steps to business ownership in the commonwealth beginning with filing the business to licensing and even talk about tax implications.

Starting A Business In Massachusetts

Larry Smatters and his son Limpo wanted to start a lobster trapping company called Lobster-Rama. Since lobsters are abundant in Massachusetts, he decided that opening a lobster trapping business might be a good idea.

Larry moved the family to Boston and began drafting Lobster-Rama's business plan. A business plan is an outline of all of the strategies and activities they plan on doing over the next 3-5 years to develop and maintain a successful business. Part of the business plan includes the form of ownership.

Since Larry and Limpo are going into business together, they have a few extra steps to take before they can register their business.

Forms Of Business Ownership

The lobstermen have a few of choices when it comes to forming their business. They can go with a partnership. Since there are two of them, a partnership might work. A partnership is involves two or more parties entering into a business together. In a partnership, each partner is responsible for the actions of the other. Here are a few facts about partnerships:

  • Partnerships are easy to form
  • All partners have unlimited liability for debt and risks
  • Taxes are filed individually, and the business passes its profits and losses to the owners. Profits and losses are claimed on the owners' personal tax return.

Let's look at liability for a moment. Lobster trapping is a regulated business. Lobsters have to be of a certain size to be caught and sold on the market. If Limpo decides to slip a few smaller lobsters through and is caught, Larry and Limpo will both be held responsible for fines.

Worse yet, if Larry decides sell some not-so-fresh lobsters and people get sick, both partners can lose everything, even their homes, cars and personal assets. You see, in a partnership, liability is divided among the partners.

Taxes and debt are treated the same way. If the business racks up debt, the partners are liable for paying it. Taxes are filed as a business, but the income and losses are claimed on their personal taxes.

They could form a Limited Liability Partnership. Taxes for a limited liability partnership in Massachusetts work the same way as they do for a partnership, but there are rules in place that limit the liability of each partner should someone sue the company.

This sounds complicated, and quite frankly, it can be. This works well when one partner is not actively involved in the day-to-day operations or if the partner is only in the business as a short-term investor. The less involved partner would take less liability because he is not working the business.

Since the seafarers plan on working the lobster boat together, they may consider forming a corporation. Corporations are more complicated, but reduce liability to nearly zero.

Here are some details about operating a corporation in Massachusetts:

  • The corporation, not its owners, pays taxes on its profits
  • Corporations are taxed twice - once when they earn profits and again when they pay out dividends to shareholders
  • Even though shareholders chip in for a piece of the company, they take no responsibility for debt or employee actions
  • Limited liability for debt

Corporations have shareholders. These are private investors who purchase stock in the company. The money earned from the stock purchases goes back into the company to pay for operations and other things.

This form of ownership requires a Board of Directors as well. A Board of Directors is a group of people who represent the shareholders. In the Commonwealth of Massachusetts, it is mandatory that every corporation have a Board of Directors.

A limited liability company (LLC) can also be formed. This is like a corporation with a small difference. An LLC can file taxes as a sole proprietorship or as a partnership. A corporation must file taxes as an entity. Also, with an LLC, the Commonwealth requires that LLC, L.L.C., L.C. or LC be part of the name.

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