The Jacobs Law LLC.

In Massachusetts, there are a number of ways business owners can structure their business entity. Some examples include: Sole Proprietorship, General Partnership, Limited Partnership (LP), Limited Liability Partnership (LLP), Limited Liability Company (LLC), S Corporations and C Corporations. Although one could give an explanation of each and provide examples on how a particular business structure works for a particular entity, it is best to consult a business law attorney for many important reasons.

In order for a business law attorney to determine which business structure will best suit your needs, and the needs of the entity, there are several factors that must be reviewed: 1. What type of business are you starting? (sale of goods, services, financial consulting, etc.); 2. The level of risk involved in your business (i.e. a car wash & detail business is inherently less risky than a business that manufacturers and distributes all terrain vehicles); 3. What is the business relationship between you and your partner and how do YOU envision the structure of your business (i.e. will one partner put up the money while the other does most of the day-to-day work – a shared approach – or do you intend to hire managers for a multi-store operation); 4. Will your business require licensing or hold intellectual property? ; and 5. What is your end-game objective (i.e. is the business a web-based start up that you’ll need venture capital for to really make it work ultimately, do you intend to build up the business and sell it off, or is the business something you envision doing for the rest of your life, maybe making it a family/generational-type business?).

Only when you have worked out these details with an attorney who is familiar with the business-related laws in your state will you be able to determine the best type of entity to start your business. Obviously, many people don’t always take the time required to start up a business properly. Often things work out just fine, but often they do not–and when the cause is a failure of your business type, structure, planning etc., it can be disastrous, costly and/or lead to financial troubles and debt. Setting up your business properly the first time around can save you many big headaches down the road.

When starting or maintaining a business, it is always a smart idea to obtain legal advice. As always, an experienced attorney at THE JACOBS LAW, LLC can help you with the creation of a business or help draft articles or organization and agreements for business maintenance. We can also help you convert your business into any entity type that fits your needs. If you have any questions or wish to speak to a business attorney, feel free to contact THE JACOBS LAW, LLC at CONTACTUS@THEJACOBSLAW.com .

Restrictive Covenants are contractual agreements between employees and employers, or between the buyer and seller of a business. Non-Competition Agreements (also called Non-Compete Agreements, Covenants Not to Compete, or simply non-competes) are agreements whereby the employee/seller promises not to compete with the employer / purchaser of the business for a specific period of time and/or within a particular geographic area should the relationship terminate. Non-Solicitation Agreements are agreements whereby the employee or seller of a business agrees not to pursue the customers, clients and/or other employees of the purchaser / employer. Non-Disclosure Agreements (also called Confidentiality Agreements) are agreements whereby the employee or seller of a business agrees not disclose the Confidential Information learned during and/or through the relationship between the parties. Massachusetts courts have generally enforced such covenants where necessary to protect trade secrets, confidential data, or the employer’s good will, but there are specific limitations to these agreements and Massachusetts law on Non-Compete Agreements may be changing in the very near future. In enforcing a Non-Compete Agreement, the courts balance the reasonable needs of the former employer / purchaser of a business against the rights and interests of the employee to earn a living. They also take into consideration the purpose of and manner in which the agreement was made, whether there was sufficient consideration to support the agreement, and the public’s interest in not enforcing Non-Compete Agreements if they interfere with ordinary, healthy competition or violate some other aspect of public policy.

Confidential Information or trade secrets are generally defined as valuable information used in the business that gives that business an advantage over a competitor who does not know or have access to that information. The greater the value attributed to the information, the more likely the courts will enforce the Restrictive Covenant. However, courts typically do not enforce the agreement if the employee or seller of the business can demonstrate that the Confidential Information was not disclosed by him/her/the business or was made public by some other unrelated individual. Good will is generally defined as a beneficial relationship between a business and its customers or clients. The disruption of the good will relationship between a business and its customers occurs when a salesperson leaves his employer and attempts to entice or solicit the former employer’s customers to now become customers of the new employer.

A Non-Compete Agreement will generally only be enforced by the courts if the restrictions and limitations imposed on the employee / seller of a business are reasonable in time and geographic area. Short-term employees are not as great a threat to the former employer’s good will relationship with its customers than long-term employees. Massachusetts courts consider the totality of the facts and circumstances in determining whether to enforce Restrictive Covenants, such as a Non-Compete Agreement. For example, courts will consider the nature of the employment, the relationship between the parties, the relative bargaining power, whether the terms and provisions were negotiated, the consideration (i.e. compensation) the employee or business seller was given for his/her agreement to the Restrictive Covenant, and whether the employee was terminated or left the employment voluntarily. Moreover, courts examine the necessity of the time and geographic restrictions for the protection of the employer’s business and balance that necessity against the right and interest of the employee to work to earn a living. Restrictive Covenants designed to protect an employer’s good will relationship with its customers will generally be enforced with respect to the geographic area previously served by the employee, especially when the employee was a salesperson. However, courts have the power to reduce or expand the scope of the geographic area as it deems just and necessary.

The court will generally not uphold a Non-Compete Agreement where the employee was placed in duress or coerced into signing a Non-Compete Agreement, Non-Solicitation Agreement or Non-Disclosure Agreement. In addition, courts typically refuse to enforce Non-Compete Agreements if the employee was forced to sign it after the employment began as a condition of keeping the employee’s job. Also, if the employee was discharged by the employer without adequate cause or if the employer breached the employment contract in some other manner, the courts may not enforce the Non-Compete, Non-Solicitation, and Non-Disclosure Agreement.

Massachusetts courts will also generally refuse to enforce a Non-Compete Agreement against certain types of employment positions to due public policy reasons and/or statutory prohibitions. For example, M.G.L. c.112 §12X specifically provides:

“Any contract or agreement which creates or establishes the terms of a partnership, employment, or any other form of professional relationship with a physician registered to practice medicine pursuant to section two, which includes any restriction of the right of such physician to practice medicine in any geographic area for any period of time after the termination of such partnership, employment or professional relationship shall be void and unenforceable with respect to said restriction; provided, however, that nothing herein shall render void or unenforceable the remaining provisions of any such contract or agreement.”

There are nearly identical statutory, regulatory or industry-wide prohibitions applicable to (1) Registered Nurses: M.G.L. c.112 §74D, (2) Psychologists: M.G.L. c.112 §129B, (3) Social Workers: M.G.L. c.112 §135C, (4) Broadcast Industry Employees: M.G.L. c.149 §186, (5) Lawyers: SJC Rule 3:07, Rule 5.4, and (6) Financial Services Advisors: FINRA Rule 2140.

If you need an attorney to draft or review a Non-Compete Agreement, Non-Solicitation Agreement, or Non-Disclosure Agreement, or to litigate the enforceability of these types of agreements, please contact an attorney at The Jacobs Law, LLC at 800-652-4783 or ContactUs@TheJacobsLaw.com.

…as well as Non-Disclosure Agreements, Non-Solicitation Agreements, and other Restrictive Covenants!

Massachusetts has long been poised to change the law with regard to Non-Compete Agreements (also known as Non-Competition, Covenants Not to Compete, or simply Non-Competes). This type of agreement is typically combined with other restrictive covenants like non-solicitation agreements and non-disclosure / confidentiality agreements.

The latest bill before the Massachusetts Legislature is H.2293 “An Act Relative to Noncompetition Agreements”. If your non-compete agreement was drafted before this bill, and fails to take into consideration the new limitations and requirements contained in this new bill, even though this bill has not yet passed, you may discover the hard way that your non-competition agreement is unenforceable. See also the remarks prepared by the Massachusetts Housing and Economic Development Secretary Gregory Bialecki before the Joint Committee on Labor and Workforce Development on September 15, 2011.

However, the problem with boiler-plate non-competition, non-solicitation and non-disclosure agreements does not stop there. The law, and especialy case law (judge made decisions that serve as precedent for future cases) is different from state-to-state. Therefore, the requirements of an enforceable non-compete agreement vary from state-to-state as well. A non-compete agreement (or non-solicitation / non-disclosure agreement) that was drafted with one state’s laws in mind, may be entirely inapplicable to another state – and therefore unenforceable – eliminating the protections they can provide to your business.

Some key issues affecting enforceability and which can vary from state-to-state include (1) the reasonableness of the geographic restriction and duration of the time constraint, given the facts of each case, (2) whether the non-compete agreement was presented to the employee upon the start of employment, mid-employment or upon termination of employment, (3) whether there was consideration (some additional benefit to the employee) to support the non-compete agreement (continued employment alone is generally insufficient) and (4) whether the non-compete agreement violates public policy in some way. It is this public policy argument that could be the most devastating to the enforceability of your non-compete agreement, especially if other elements of a valid and enforceable non-compete agreement are lacking.

If you have non-compete, non-solicitation, or non-disclosure agreements with your employees, you should consider revising them and updating them to reflect the current state of the law in the Commonwealth of Massachusetts with regard to non-compete agreements. If your business has no non-compete or other restrictive covenants with its employees, you may want to consider using them to protect your business, customer base, confidential information, trade secrets and other key information. If you are an employee who has been presented with a non-compete agreement, or an employment agreement that contains non-compete, non-disclosure and/or non-solicitation provisions, you should have an attorney review that document BEFORE you sign it. Similarly, if you are involved in a dispute over a non-compete agreement, non-solicitation agreement, or non-disclosure agreement, it is extremely important that you consult an attorney.

The Jacobs Law, LLC is based in Boston, Massachusetts and has experience drafting and litigating issues involving non-compete agreements in Massachusetts. Email The Jacobs Law, LLC at ContactUs@TheJacobsLaw.com if you need an attorney to draft, revise, or review an employment agreement that involves non-compete, non-solicitation or non-disclosure agreements or other restrictive covenants. The Jacobs Law, LLC can also pursue or defend the enforcement of non-compete, non-solicitation or non-disclosure agreements against an employee.

For additional resources go to “Massachusetts Law About Non-Competition Agreements” at the Massachusetts Law Library online.

Did you know that there is a type of commercial business insurance for any kind risk you can imagine? When people think of these types of coverage they probably think about insuring factories or storefronts. The truth is that there are ways to insure just about anything, just look at professional athletes and actresses that have policies on their legs for millions of dollars in the event of an injury…like Troy Polamalu who insured his hair for $1Million (just in case he gets into a fight with scissors and loses). My point is that if you have a need for something to be insured for your business then I can guarantee you that it can be written into a policy.

Most people hate to talk about insurance, but most businesses no matter how big or small need to have some kind of insurance in order to operate and assure their business partners of their solvency in case of the unthinkable. If you are looking to protect yourself from risk your goal in the end is to purchase the best and most affordable coverage. We have listed some of the more popular types of business insurance below. This way you can start making a list of the different types available that you might need for your business to operate smoothly and efficiently.

Whether you are starting a new business or have owned a business for many years, commercial insurance can be one of the most important financial investments you make in the life of your company. Operating a business is challenging, even without having to worry about suffering significant unforeseen financial loss. Commercial insurance can protect you from some of the most common losses experienced by business owners – losses such as property damage, business interruption, theft, liability, and worker injury. Purchasing the appropriate commercial insurance coverage can make the difference between going out of business after a severe loss or recovering with minimal business interruption and financial impairment.

The 9 Different Types of Major Commercial Business Insurance:

1) General Liability – One of the reasons general liability is so popular is that it covers and protects general things such as injuries, property damage, accidents, or negligence claims. Some policies are also designed to protect your company in the case that people slander your business reputation and it costs you money or clients.

2) Property or Casualty – Usually these types of policies are lumped into general liability insurance, but they can also be interchangeable, so pay close attention when you are reviewing your policies. Remember, peril specific policies such as flooding, fire, crime, and business interruption is not something automatically covered under most property insurance, so these types of coverage will need to be added separately.

3) Product Liability – This is a way of creating a liability shield. As you are responsible for your products, insurance will be able to cover you in case your product causes harm or does not operate as intended.

4) Life & Disability – Personal life and disability insurance aside, you might want to consider insuring key employees in case of death or disability. The employees that make your business operate smoothly can create business problems if they are no longer around to help.

5) Commercial Auto – This is the same type of insurance as you have for your personal car but it is meant to cover your business fleet.

6) Business Interruption – This insurance protects you in case there is an unforeseen interruption in business. Some example can be: accidents that shut down your operations or a natural disaster that make it impossible for you to operate your business.

7) Home Business – Your home business is NOT covered under your homeowner insurance. Therefore you cannot recover business assets if they are destroyed by fire, flood or accident. As some policies cover home business, they are nowhere near as comprehensive as if you had home business insurance.

8) Internet Business – The number one problem with having an internet business is the security for your customers. Insurance can cover damage to your servers and any data lost as a result of an attack on the integrity of the website. It can be a stressful process but if you have insurance the inconvenience is time not money.

9) Specialty Insurance – Dentists, Doctors, Accountants, and Not for Profits can all have their businesses covered for miscellaneous things that may go wrong such as errors on taxes or malpractice suits. As a matter of fact all active, non-government lawyers are required to have this insurance.

Now that we have discussed some of your options for attaining commercial business insurance it’s time for you to think about what insurance your business needs. A couple of things to keep in mind when talking to insurance companies: Customer service goes a long way with insurance agents. Make sure you get an idea that they are going to be there for you for the long haul, not just for when something bad happens. Most good insurance agents will check in with you periodically to see if anything needs to be updated in your policy. Shop around and get a bunch of quotes from different companies, because you will have more options and the negotiating power to get the best overall coverage for your company. Lastly, if any issues, concerns or problems arise please do not hesitate to contact The Jacobs Law LLC and we can help you with your insurance needs.

Today, we discuss how a business can protect itself from slanderous website posts. Regardless of how you feel about social networking websites, we have all heard about the unfortunate stories where an employee gets fired because of something they posted on one of these widely used, and viewed, sites.  It happened recently to a local teacher/school administrator. As a business owner, firing somebody can lead to unwanted legal action.  Employees who feel that they have been wrongfully fired can pursue those claims in a court of law.  But, as a business owner, you main concern is to ensure that you have a Use of Social Media Policy, that it is enforceable and not unconstitutional, and will protect your business from negative press or rumor.

First, we discuss the two types of employees your business may have. Most employees are classified as “at-will”. When you hire an at-will employee, there is no written contract in such an employment. Most importantly, either party can terminate the employment at will.  Several exceptions do exist, especially if unlawful discrimination is involved.  However, for your purposes we do not need to worry about the exceptions, except for one that we will discuss later. The other type of employment is one formed under an “employment contract”. This is usually referred to as a “contract of service,” but not to be confused with a “contract for services.” An employer and employee sign a contract that states specific conditions of the employment that both sides have to fulfill in order to have a successful relationship. It defines the rights and responsibilities of the employer and employee. Termination of a ‘contract’ employee is a lot more difficult, especially if the reason you want to terminate the employee is not part of the contract.

Now let us discuss the route that should be taken to ensure that you can legally enforce your Social Media Policy and a termination based on a breach of that policy will be legal justified in a court of law.  Let us first look at the ‘at-will’ employee/employer relationship.

1)     Since the relationship is ‘at will’ and termination can happen at any time for almost any reason, very little justification needs to be given for the termination.

2)     However, it is better to have as much justification for the termination as you can to ensure that you do not leave anything to chance.

3)     If you have a social media policy or are thinking about implementing one it is important that you provide your employees with notice of it and a copy.

4)     If you can, hold an employee / staff meeting outlining the policy. If logistics are a problem in your office, make sure every employee receives a copy of the policy and has an opportunity to review it.

5)     Have your employees sign a statement that they have received, read and understand the social media policy. Make it clear that the policy goes into effect from that date forward and will carry consequences if violated.

6)     Now lets talk about the termination exception to the ‘at-will’ employment that might affect you in this situation. It is important to follow your business’ policy on termination. If you do not do so, the employee might have a valid claim for wrongful termination.  This is why it is important that they acknowledge their understanding and agreement to the social media policy.

7)     Always contact a lawyer when you have any doubt whatsoever about the legality of an employee’s termination. It could save you a lot of money and aggravation in the long run.

For an employee who you have an employment contract with, it is a little bit harder to implement a social media policy during their course of their employment. You may want to include in the original employment contract that future business-wide policies shall be complied with.  Below are some points that you may find useful in dealing with contract employees and your new social media policy.

1)     If a social media policy has been implemented after entering into an employment contract with an employee, but before it ends, he or she may be exempt from the new policy.

2)     Once the original employment contract is executed, modifications, like a new employee policy, can be difficult to implement.

3)     Have a lawyer look over your employment contract. Hopefully the contract includes a provision that will allow you to add and implement the social media policy, and hold the employee to it.

4)     If the contract does not have any flexible provisions, there are two courses of action you can take.

Wait for the contract to expire and before re-signing a new contract. Then have a lawyer include the social media policy directly into the new employment contract.

Enter into a separate contract with the employee that makes them bound by the social media policy. You would need to extend their employment term, increase compensation or provide some other ‘consideration’ to make this binding.

5)     Unless directed by your lawyer, never attempt to fire an employee with an employment contract even if he/she refuses to abide by your social media policy. If you do, you may not only violate employment law but you might also breach the original employment contract.  Such litigation is expensive and will unnecessarily consume business resources.

Instituting a social media policy in a business can be a very useful tool in maintaining the positive image and good will of your company. However it is very important to be careful about the implementation and enforcement of such a policy on your employees. The Jacobs Law LLC is happy to help you and your business with these matters. Whether it is a single termination of an ‘at-will’ employee or the drafting and implementation of a social media policy into your business, we can help you achieve the results you want in your small to medium-sized business. Please do not hesitate to call an attorney at The Jacobs Law, LLC with any questions or concerns on the subject of social media policies.

As a small to medium business expands and starts to hire new employees, it is important to know your risks as an employer. In certain circumstances your business can be liable for the harmful actions of your employees. This is called “Vicarious Liability.” There are important things to remember with this legal doctrine. Probably the best way to illustrate this principle is through a hypothetical.

You started a business called “Burnside Hotdogs.” Over the past several years business has been very good. As a result you decide to open four more locations that continue to bring in substantial revenue. Naturally, when you open the new locations you hire extra staff. For each additional branch you hire a manager, a cook, a busboy, and a cashier. In addition since the locations are in a college neighborhood you decide to stay open late to cater to the kids coming back home for a night of partying. One day, an intoxicated college kid enters your establishment and starts to disrupt your business. The manager directs the busboy (who happens to be the Massachusetts weight lifting champion) to “Escort the gentlemen off of the premises.” The busboy takes the kid and not-so-gently pushes him out the door. With the momentum the door and the kid hits a girl on her way back home and breaks her nose.

This is a horrible scenario, but it is absolutely feasible. Now let us examine the legal risks of the parties involved. It is very likely that the girl in the above scenario will attempt to get compensation from the wealthiest source. The busboy might be directly responsible but he is only a busboy and might not have a lot of money. The same principle applies to the manager of the hotdog store. Even though she is in a little better position than the busboy, the restaurant and you as the owner are going to be named in the lawsuit.

The ability for the girl to sue the employer for the actions of the employee falls under the principle of “Vicarious Liability.” As an employer you directly have the power to control the employee. With this control comes the means to prevent the harmful action. However, the law recognizes that an employee has his own will and might act in a manner that is not consistent with the employment.

The legal risk of the employer rests on the actions of the employee, acting in his capacity as allowed by the employer. In short, the employee acts in the scope of his employment. It is possible for the employer not to be responsible for the actions of his employee when the employee does not act in furtherance of the employer’s interest. The law calls the employee’s actions a “frolic.”

To come full circle with the hypothetical, let us look at the legal risks that the busboy, manager and you as the owner would have in such a situation. First, the busboy can be sued because he did the pushing and is the first link in the chain of harm. His actions directly created the harm caused. Next, let us look at the manager who gave the direction to remove the drunken kid from the premises. It was her order that made the busboy act. Moreover he is a weightlifting champion and it could be easily foreseeable that he might use a little bit of excess force. The law will view the busboy as a tool for the managers will. Finally, you as an employer might also be liable because you are the one that appointed the manager and the manager is acting as your representative. By assigning a representative you are assuming responsibility for the actions of that manager. The manager is acting on your behalf, they are perpetuating your interest and you are benefiting from this representation.

As you can see this is a very complicated issue because you can be held liable for a course of action that other people have initiated. As a business owner it is possible to have to pay for the harmful actions of your employees. However there are remedies that a good lawyer can institute to shield you from such liability and in case of legal action can minimize the fallout from a series of unfortunate events. If you are ever in need of liability defense or liability prevention, The Jacobs Law, LLC can help you with any questions or concerns.

Nowadays, everyone’s a critic. Thanks to the internet, the person who was once your customer is now a reviewer with an opinion heard by thousands, if not millions, of people. Personal blogs and websites such as Yelp ® have facilitated the emergence of the individual opinion. Potential customers scour the posts looking for the best place to visit or, more importantly, which to avoid like the plague. So, naturally, a well articulated negative opinion-post could have undesirable results for any business, and an especially detrimental effect on Small to Medium-sized Businesses. The question becomes: how do you protect yourself from the negative attention one person might bring to the business you have worked so hard to build and maintain?

Imagine that your business gets a negative review on a widely visited website. The review complains about the services and products. It goes on to say that your business is not worthy of its customers. Over the next few days you see interest in your business diminish and a few regulars mention the negative publicity. You contact the website and request that the review be taken down. The website states that the review can only be taken down by the author. You ask the identity of the author and are told that it is anonymous. You begin to think that you are going to have to contact your lawyer and file a defamation lawsuit. Stop right here; there are many alternatives to dealing with such a situation.

Review sites act as a public forum to freely express opinions and Section 230 of the Communications Decency Act legally protects them from liability. This law provides nearly complete immunity for such websites from any harmful information posted by its members. This means that legally the review website is not held responsible for damaging information about a business.

Websites, just as Internet Service Providers, do not have to disclose the identities of their members. The only time that they would surrender such information would be by an order of a court. They are usually bound by a privacy agreement that members consent to when signing up for the website’s service. If they violate that contract the website would be responsible to the member for damages associated with such disclosure.

Although the situation may look bleak and the Small Business Owner may feel helpless, there are several ways to protect your business that do not violate privacy agreements. The following is a list of options for resolving this issue with minimal effort:

1)     Ask the website if there is a way to contact the member without revealing their identity. Usually a website will let you write to the member directly. You can then request clarification for the negative review.

2)     Offer an incentive to the member who wrote the negative review. Understand his position and persuade him to take another look at your business. Suggesting a ‘peace offering’ might be enough to change the reviewer’s cold demeanor.

3)     Start a positive marketing campaign on the review website. Offer special deals to members of the website and encourage them to make their own opinions about your business instead of listening the negative reviewer.

4)     Create a profile for the business and become active in the online community. By participating in social networking your business will attract new customers and increase the number of reviews written. This will provide a more comprehensive look at the quality of service and product your business provides. As the number of reviews grows the single negative review will become less and less significant.

Even though the aforementioned solutions are simple, they can be easily overlooked if the review makes it personal. No matter how horrible the review is, here is a list of things that should be avoided when attempting to correct your image:

1)     Never assume that the person does not know what they are talking about. Nowadays the most unlikely person can be an internet superstar. Some people have hundreds if not thousands of friends, fans and followers. The sheer numbers of people that care about that individual’s opinion make them either a great advertising tool or a negative marketing campaign.

2)     Don’t take it personally. A lot of these reviewers feel that they can be harsh because their identity is unknown. The most that you can do is justify the actions of your business and attempt to persuade the public not to listen to the negative review.

3)     Be reasonable. It is only a review. Yes, it might affect your business, but there is no reason to attempt to track down this person, contact their employer or attempt to intimidate them into liking you. Such events can lead to legal action taken against you by the reviewer.

4)     Cut your losses. If the reviewer is not willing to work with you to change the review, post your response to the reviewer on the website and leave the issue alone. Even though the person might have a million friends, it doesn’t mean that they all like him.

An online negative review with a large readership can be a source of unease for any business owner. However, it is a manageable situation that can be reversed to benefit your business without the need for judicial intervention. If an issue such as this arises in your business you can contact The Jacobs Law LLC and we will be happy to help in any way we can.

Being a business owner means that you are responsible for the actions of your business, which includes your employees’ actions under certain circumstances. However, in Massachusetts, there are a number of ways that the choice of entity type for your business may limit your personal risk. Usually the myriad of letters after a company name represents the level or degree of liability that a business (or rather its owners) is exposed to. We will look at these entity types in two separate posts. First, we will look into the Sole Proprietorship and different types of Partnerships. Then we will look at the Limited Liability Company and the Corporation.

Sole Proprietorship: This is a business with one owner. He or she is the ultimate decision maker and business manager and as such is responsible for the actions of the business and its employees. This is a very inexpensive entity type because taxes are calculated based on the owner’s personal income tax liability, there is limited government involvement, and no entity excise tax to operate such a business. The disadvantage of this entity type is that liability for the actions of the business and its employees, as well as business debts and contracts, falls on the owner. In other words, the owner has direct, personal liability. If another individual or business obtains a court judgment for money damages against the business, a court can enforce that judgment against the business owner’s personal property, like his/her house, car and personal bank accounts. While a Sole Proprietor may avoid state filings and fees, corporate maintenance obligations, and business attorney’s fees, there is no limited liability protection of the owners’ personal assets. Organizing a separate and independent legal entity will save entrepreneurs / incorporators money in the long-term and protect the owners’ hard-earned assets.

General Partnership: The General Partnership involves some of the same governing principles as the Sole Proprietorship, however there must be two or more owners. These owners share in the authority and liability of the business. There are tax benefits to a General Partnership and there is limited government involvement. Like in the Sole Proprietorship, a court can go after one or both of the partners’ personal assets. The obvious disadvantage to operating your business as a General Partnership is that each partner is directly and personally liable for the acts and misdeeds of the other partners, not only his/her own. The General Partnership provides no limited liability protections to its partners. For this reason, there are few circumstances where it is advisable to operate a business as a General Partnership.

Limited Partnership (LP): This type of entity is usually used by professional services businesses such as accounting or law firms. There is usually a hierarchy within the structure of partners. There must be at least one “General Partner” (GP). The GP has direct and personal liability for the entire Limited Partnership. He/she is also the one with the most authority and managerial power. The other partners in this organization are called “Limited Partners” (LP). The LP has minimal or no decision-making authority. The liability of an LP is limited to the amount of funds or investment he/she injects into the business. However, one important note, is that if it is determined that the structure of the LP was created as a sham or fraud, all partners may be held directly and personally liable.

Limited Liability Partnership (LLP): This entity type limits the personal liability of a single partner for debts, obligations and liabilities of the partnership, whether in tort contract or otherwise from negligence, wrongful acts, errors or omissions, to what the partner ’invested’ in the entity. However, a partner cannot eliminate liability for his own negligence. Every LLP is required to file an annual report with the Secretary of the Commonwealth of Massachusetts. One other thing to note is that the taxation of LLPs in Massachusetts does not depend on an LLP’s federal tax classification. LLPs are taxed as partnerships under Massachusetts General Laws Ch. 62, sec. 17.

Limited Liability Company (LLC): LLC members are not personally liable for the LLC’s debts, obligations and liabilities. Each members’ liability is limited to whatever assets each has ’invested’ in the entity. Each members can also participate in management and control of the LLC without increasing their personal liability exposure beyond their contribution to the entity. LLC in Massachusetts (and organized under the laws of Massachusetts) must have two or more members at the time of formation and at all times thereafter. An LLC can elect pass through tax treatment as a partnership for federal income tax purposes, while also maintaining the limited liability of its owners (called members).

One thing to recognize is that, in general, the greater the protection from liability an entity has, the greater the government supervision or involvement in the entity’s organization. Once created, some of the most important things a business should do to protect its owners from liability is 1) obtain insurance (for hazards and director/officer liability insurance), 2) implement policies that set standards of conduct for employees and executives, 3) do not commingle assets, accounts, funds, or other property between the entity and any owner/member/partner, and 4) maintain proper records.

When starting or maintaining a business, it is always a smart idea to obtain legal advice. As always, an experienced attorney at THE JACOBS LAW LLC can help you with the creation of a business or help draft conduct and record-keeping policies for business maintenance. We can also help you convert your business into any entity type that fits your needs. If you have any questions or concerns, please feel free to contact THE JACOBS LAW LLC at TJACOBS@THEJACOBSLAW.com .