Formation – Choosing a Business Entity

Choosing A Business Entity

Are you launching a start-up, ready to begin a home-based business, or finally taking the steps to make your small business dream a reality?  As your excitement grows, it is important to understand the business options available in Virginia so you can select the correct legal structure to bring your product or service to the marketplace.  Here is a basic primer of the types of business forms that are available to you as the owner of a Virginia business.

Sole Proprietorships

A sole proprietorship is a simple business to form, as the owner essentially treats the business as an extension of themself.  While the simplicity of running an informal sole proprietorship has many benefits, the owner remains personally liable for debts and lawsuits filed against the business.  This reason alone is why is it usually best to have a more formal business structure to protect your personal assets.

Corporations

In Virginia, anyone who operates a business, alone or with others, may incorporate.  This is true regardless of the size of your business and even if you engage in religious, civil, non-profit, or charitable endeavors.  Unlike a sole proprietorship, a corporation is a separate legal entity that is owned by the stockholders or shareholders.  As such, the owners are protected from the creditors of the business and their assets are protected from business debt and liability.  Other than the amount of investment in the company, an owner of a corporation is not at risk of losing personal assets due to any obligations by the corporation.

Virginia law recognizes two types of corporations:  stock corporations and non-stock corporations. Stock corporations are authorized to issue shares to people, called shareholders, who become the owners of the corporations.  A stock corporation exists to generate a profit for the shareholders.  In non-stock corporations, however, shares are not issued.  The owners of a non-stock corporation are referred to as members and are usually organized for other purposes such as charitable endeavors, tax-exempt organizations, or property owners’ associations.

There are also quite a few other benefits that come with the incorporation of a business.  Insurance, travel expenses, and retirement plan deductions may be considered tax free benefits.  In a stock corporation, it can provide an easier way to raise capital through the sale of stocks and bonds.  Additionally, under Virginia law, incorporation includes advantages in the management, duration, and ownership transfers that may occur during the lifespan of the business.

Limited Liability Companies

Virginia law also authorizes the formation of a limited liability company, or LLC.  A Virginia LLC is an unincorporated associated of one or more members who become the owners of the LLC.   They share in the profits and losses of the business.  A LLC will have an operating agreement that specifies its precise management details and operating arrangements.  Some LLCs are managed by one or more of the members and referred to as a member-managed LLC.  Others may rely on one or more managers and are referred to as a manager-managed LLC.  In both situations, an LLC is a separate legal entity, and the members or managers are not liable for the obligations of the LLC.

Partnerships

Virginia law authorizes the formation of other business entities including partnerships, limited partnerships, and limited liability partnerships.  A partnership, or general partnership, is simply the association of two or more persons to carry on, as co-owners, a business for profit.  Each partner contributes money, goods, property, or services in return for an interest in the business.  The partners share in the profits and losses of the business and have equal rights in the management and conduct of the business.   While the partnership is a separate and distinct legal entity, a general partnership does not protect the partner’s personal assets from the liabilities of the business.  If a partnership is registered as a Virginia limited liability partnership, however, the partners’ personal assets are protected from the liabilities of the business.

Other Business Entities

Although corporations and limited liability companies are the most common forms of entities in Virginia, there are a number of other entities that may be available, including a business trust, a general partnership, or a limited partnership.  There are also several subcategories of these general business forms, such as a benefit corporation, a cooperative, a professional corporation, a professional limited liability company, a public service company, a registered limited liability partnership, or a registered limited liability limited partnership.

Benefits of a Formal Entity

Regardless of size, there are great advantages to pursuing some type of formal entity protected by Virginia law, including limited liability and personal asset protection, tax benefits, and having a certain level of credibility that comes with an incorporated company.

If you are considering taking your business to the next step, please contact Gregory M. Johnson, a business formation attorney at MartinWren, P.C. at (434) 817-3100.  We will listen to your business objectives, explain the available business entity options, and help you navigate the proper course to making your business dreams a reality.  The early stages of business formation are critical to ensuring long term business and personal success.

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