Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Massachusetts, the choice of entity for operating a business is an important decision that affects personal asset protection, taxation, investment attractiveness, employee incentives, and administrative requirements. The common types of business entities include corporations, general partnerships or limited partnerships, limited liability companies (LLCs), and sole proprietorships. Corporations offer limited liability protection to shareholders and are conducive to raising capital, but they may be subject to double taxation unless an S corporation election is made. Partnerships offer pass-through taxation but can expose partners to personal liability, with limited partnerships providing some liability protection for limited partners. LLCs combine liability protection with pass-through taxation and are flexible in management and profit distribution, making them a popular choice. Sole proprietorships are the simplest form, with no separate legal entity from the owner, thus offering no liability protection. The costs and formalities of forming and maintaining these entities vary, with corporations and LLCs typically requiring more formalities like annual reports and fees. Massachusetts law governs the formation, operation, and maintenance of these entities, and it is advisable to consult with an attorney to determine the most suitable entity based on the specific business needs and goals.