Protect your personal assets by doing business as a

Corporation or

Limited Liability Company

1. PERSONAL LIABILITY.

Business owners, are exposed to personal liability for activities related to their businesses. As such, personal assets may be exposed to the risk of attachment, seizure and sale.

To reduce the risk of personal liability for business owenrs, consider creating a separate legal entity for your business, i.e., a corporation or a limited liability company (LLC).

2. CHOICE OF ENTITY.

There are several ways you may create a separate legal entity, including, establishing a Corporation or a Limited Liability Company (LLC).

Factors involved in deciding which business formation is right for your business, include, the following: is there foreign or US ownership of the business; how many owners of the business; is the business involved in international or domestic transactions; what are the local laws governing corporations and LLC's and other related issues.

To find out about when two entities are better than one, click here.

SEPARATE IDENTITY.

Treat Entity as a Separate Person. In giving birth to new Corporation or an LLC, you are, in the legal sense, giving birth to a "Person." The new legal person (corporation or LLC) has its own tax identification number, and its own liability.

Avoid Veil Piercing. One of the keys to reducing the risks of third parties "piercing the corporate veil" of your corporation or LLC, is to treat the new entity as a separate legal Person. For example, open a new bank account for the new entity and all funds should be maintained separatel. In addition, avoid commingling business funds with the owners' funds. In addition, corporate formalities should be followed.

Give Notice. Also, give notice to the world that the responsible party for business transactions is the corporation or LLC. To give such notice, all purchase orders, letterhead, receipts, labels, advertisements, signage, contracts, etc., should reflect in a conspicous manner (not as the trademark/brand necessarily) the full legal name of the entity, including the suffix ("Inc.", "Corp.", "LLC", etc.), for example at the top or on the bottom of each the appropriate materials.

Signing Documents. In addition, as an Officer or Director of the Corporation or a Manager of the LLC, each contract you sign on behalf the business should be signed with your title describing the capacity under which you are signing, for example, "Sarah Smith, as President of Smith Wholesalers, Inc." Any contract signed without such language may be deemed to have been entered into by you personallyand any liability arising out of such a contact may be outside the scope of corporate or LLC protection.

Difference between an LLC and Corporation. There is more paper work associated with corporate compliance than LLC compliance, in that there are additional formalities required in maintaining an "Active Corporation." For example, a corporation must file the Articles of Organization, draft By-Laws, conduct annual Board of Directors meetings, keep records of meetings, file Annual Reports (different from financial Annual Reports) with the Secretary of State, etc.

One basic rule to remember is that, in order to have the protection of a Corporation you must "act" like a Corporation. Simply filing the Articles of Organization with the Secretary of State and paying the filing fee is not enough to protect you. To establish a Corporation in Massachusetts, the filing fee for the Articles of Organization is Two Hundred Seventy-Five Dollars ($275.00). To maintain a Corporation in Massachusetts, the Annual Report filing fee is approximately One Hundred Twenty-five Dollars ($125.00) each year.

With regard to an LLC, there are less formalities required. To establish an LLC in Massachusetts, the filing fee for a Certificate of Organization is Five Hundred Dollars ($500.00). To maintain an LLC in Massachusetts, you must file an annual report each year and the filing fee is Five Hundred Dollars ($500.00) each year.

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