Article modified and edited by Bennie A. Wall, Esq.
So you are starting a new business and wondering: What choice of business entity is right for me? How do I choose among the Virginia business entities? Which business entity will best suit my needs?
You may have heard a lot about the benefits LLCs (Limited Liability Companies), C Corporations, and S Corporations. You may have even heard the perils of sole proprietorships and general partnerships. When choosing which Virginia business entity is right for your business, knowledge is power. So, we have provided you a general outline of the many choices of business entities in Virginia.
The Sole Proprietorship
A sole proprietorship is a business entity which has no separate existence from its owner. Any person who does business alone is a sole proprietor by default. In a sole proprietorship, the owner is personally liable for all debts of the business. In short, a sole proprietorship is an “easy” business entity that offers no liability or asset protection for the owner and has no defined structure. If you are interested in protecting you and your family’s personal wealth, home, and other assets from your business venture, then perhaps this is not the best Virginia business entity for you.
A partnership is a business entity in which partners share with each other the profits or losses of the business. If two or more people engage in a business they are a partnership by default. Absent an agreement, the partners share profit and loss equally. Such an equal division of rights and liabilities is called a general partnership. By default, every partnership begins as a general partnership. Like sole proprietors, general partners are personally liable for all debts of the business. A partnership agreement can determine how the partnership is managed, the allocation of profits and losses and the liabilities of the individual partners to each other and to the business. Keep in mind, however, that each partner is jointly and severally liable for the obligations of the business. Thus, a creditor can seek full satisfaction from either partner attacking his personal wealth just as a sole proprietor. But wait! We just told you that by default business owners in a partnership share losses equally, how can a creditor go after just one of us? Great question: If a creditor satisfies their debt by going after one partner, the aggrieved partner can then bring suit against his other business partner(s) for them to pay up their fair share. The only problem is the added cost and headache of litigation. If you must choose this route, please have a well drafted partnership agreement made by an experienced attorney. Again, if it is asset protection you are interested in, this may not be the best option for you.
The Virginia Limited Partnership
A limited partnership is a type of partnership which is organized into two classes of partners: general partners and limited partners. General partners manage the business and are personally liable for all debts of the business. Limited partners may own part of the business but they do not manage the business. The limited partners’ responsibility to pay business debts is limited to their investment in the business. This limited liability means that if the business goes bankrupt, all the business assets may be lost but the personal assets of the limited partners are protected from creditors of the partnership The general partners enjoy no such immunity and remain “on the hook” for business liabilities. Therefore, business owners will find it easier to find investors if the business is a limited partnership.
The Virginia Corporation
A corporation is a business entity that has an existence separate from its owners. Corporations have 3 Major Benefits over partnerships:
- While a general partner would be personally liable for business debts, every shareholder’s liability is limited to his or her investment in the company. That is to say, all of the shareholder’s other assets are protected.
- The corporation can continue in perpetuity ensuring everything you have worked so hard building can continue as your legacy even once you retire or pass on.
- Shares of a corporation are easier to transfer than other business interests.
If Virginia Corporations are so great, then why doesn’t everyone have them? Many do not know it is an option. Others believe that it is too much red tape. In Virginia, Corporations must be created in a legal document and must be registered with a State Corporation Commission to legally conduct business in the Commonwealth.
If you want powerful asset protection and a company’s investors are comfortable investing with and a little paperwork does not scare you, then a Virginia Corporation may be a great choice for your business venture. The next question is, which type of Virginia Corporation will you choose?
There are two main forms of corporations: C Corporations and S Corporations.
Difference between C Corps and S Corps
C Corporations are more commonly used for publicly traded or growing companies because there are no limits as to who may own stock. C corporation stock is the easiest business interest to sell; publicly traded companies are typically C corporations. Unlike S Corps, C Corporations can have different classes of stock to suit the needs of the directors and investors. The disadvantage of C Corporations is that they pay double taxation: they pay tax on corporate earnings first and then shareholders pay income tax on dividends upon receipt.
S Corporations are taxed like partnerships (to the shareholders). This is good for companies with high earnings but whose value is unlikely to increase. Some accountants use S Corporations to treat some income as a dividend to shelter income from self-employment taxes for contractors. S Corporations have limitations: They are limited to one class of stock, there can be no more than one hundred shareholders, and all shareholders must be United Stated citizens or US residents and must be personal (and not entity) taxpayers.
At this point you may be thinking:
I really like the protection the Corporation provides me, but all this legal and tax talk has my head spinning—it sounds like an administrative nightmare.
Perhaps you a doubting whether either of these types of Virginia Corporations are right for you at the present time. Yet, at the same time, you are intrigued at the possibility of asset protection from your business. Well, then you may want to read on to learn more about another great choice of Virginia business entity: The Virginia Limited Liability Company.
The Virginia Limited Liability Company
The Limited Liability Company (LLC) is a business entity which shares both the liability benefits of a corporation with the beneficial tax treatment and structural flexibility of a partnership. In many ways, an LLC is like a corporation. Both LLCs and corporations are business entities that enjoy limited liability for owners, have their own separate existence, and can continue in perpetuity. Like corporations, LLCs must be registered with a state to conduct business there. Owners of an LLC are typically called “members” instead of a corporation’s “shareholders.” Like a C Corporation, an LLC can have multiple classes of membership (stock).
LLCs are more flexible and less burdensome than corporations. An LLC can choose to be taxed as a sole proprietor, a partnership or a C-Corporation. An LLC in Virginia can have only one member or it can have many. Like a partnership, an LLC can operate without a written agreement but to do so would be risky and not advisable.
LLCs share the major benefits of corporations and are easier to create and manage. As a result, LLCs have becoming the choice of entity for businesses ranging from personal contractors to service and sales companies.
I know what you are probably thinking at this point: Nailed it! I get a corporate shield over my personal assets, but with the ease of a partnership. Sign me up. Not so fast. While the LLC has been the business entity of choice for most Virginia business owners, there is a relatively new kid on the block: The Virginia Business Trust.
The Virginia Business Trust
A Business Trust is the newest form of business entity offered in Virginia and is quickly becoming the entity-of-choice for holding and managing rental real estate, particularly where there are several properties. It has all of the benefits of LLCs, plus several additional benefits and advantages.
A Business Trust is an association of beneficial owners formed under the laws of the Commonwealth and registered with the Virginia State Corporation Commission, in which a Trustee or Trustees (a fiduciary who acts on behalf of the beneficial owners or beneficiaries) directs the business operations (similar to the Officers of a Corporation – i.e. president, vice-president, secretary and treasurer or the Manager of a Limited Liability Company). A Business Trust, like Corporations and LLCs, does not terminate upon the death or dissociation of a beneficial owner. Further, the Trust may incorporate a governing document called a “Trust Agreement,” which is akin to the Bylaws of a Corporation or an Operating Agreement of an LLC. And, very importantly, the beneficial owners of the Trust can have limited exposure to liability and can transfer shares during their lifetime or upon death in accordance with the beneficial owner’s estate plan.
A very useful feature, which sets it apart from other types of business entities, is that a Business Trust may be structured to hold different income producing properties, the income of which may go to different beneficiaries in multiple “Series.” Each Series may designate a separate set of trustees, beneficial owners, or beneficial interests having separate rights, powers, or duties with respect to specified property or obligations of the Business Trust. Further, profits and losses associated with any Series may have a separate business purpose or investment objective.
A single Business Trust is superior to forming multiple Limited Liability Companies (LLCs) or Corporations for the following reasons:
- Ease of administration: Since a single Business Trust can provide limited liability protection for each Series within it, forming a separate company for each asset is not necessary; the result, one entity instead of many;
- Limitation of liability: Each individual Series established under a Business Trust enjoys liability protection separate and apart from any other Series;
- Flexibility of management: Each Series can have a different management structure and ownership allocation, thus allowing each beneficial owner to exercise control over a Series;
- Easy transferability of ownership: Each beneficial owner of a Series can direct his/her beneficial interest in a Series to his or her heirs;
- Flexibility in the division of income and expenses: Income and expenses can be allocated to each individual Series;
- Effective transition of management: Upon the incapacity or death of a beneficial owner, a Business Trust can provide for successor trustees to manage the business;
- Variety of taxation choices: Similar to an LLC, a Business Trust can choose to be taxed as a disregarded entity, a partnership or an S-Corporation. Like an LLC, a Business Trust can have only one member or it can have many; and
- Business Structure can be Simple or Complex: Like a partnership and an LLC, a Business Trust can operate without a written agreement, but to do so would be risky and not advisable.
I hope this gets you on the right path for selecting a Virginia business entity. As you have seen, Virginia has many options when choosing the best business entity, so determining which of the many business entity options is right for your business takes a careful consideration of the nature and size of your business as well as your business’ goals and objectives. It is always imperative that you explore these options with an experienced attorney as well as your business’ tax advisor.
Want to learn more about these different business entities, or help determining which entity best suits your needs? Then take a look around our free resource center or call today and schedule an appointment with one of our experienced attorneys.