Virginia Business Entities
Virginia business entities can be created as one of six different business types. Below we cover each business structure permitted under Virginia law.
A sole proprietorship is the most basic Virginia business entity. Establishing a sole proprietorship means that rather than acting as a legal entity, you own the business and accept personal responsibility for the debts of your business.
In other words, there is no legal distinction between you and your business, which also makes you liable for any losses that the business might incur.
Setting up a sole proprietorship is as simple as getting to work and generating your own income. For example, if you are self-employed as a writer, tutor, nanny, or other kind of individual business, you are already a sole proprietor. No registration is required to operate as a sole proprietorship.
However, if you are performing services as an independent contractor or other services that require permits and licenses, you may be required to register for those documents in order to operate legally.
Sole Proprietorships are inexpensive and easy to establish–it’s really just the legal definition we give to someone who works for themselves without formal registration. As the sole owner of your business, you maintain complete control of your business, and your business taxes are not filed separately from your personal taxes, making it easier to file at the end of each year.
Unlike a sole proprietorship, a partnership is a single business venture that is owned by multiple individuals, or “partners.” There are three types of business partnerships: general, limited, and joint partnerships.
A general partnership is established so that each partner is equally liable for any and all profit, liability, and management tasks. Any deviations from equal shares must be documented in the “Partnership Agreement” prior to the establishment of the general partnership. Ultimately, you are each equally responsible for the business.
A limited partnership, or a partnership with limited liability, allows certain partners to limit their liability and input in business management.
Limited partnerships often have at least one General Partner who manages the day-to-day operations of the business and assumes much of the responsibility for company successes and failures. Limited partners with little to no control over business operations are shielded from liability. However, investment in the partnership is always at risk.
In this way, each limited partner’s liability is limited to the investment that they make.
Such a partnership is usually of interest to investors who are seeking collaboration on short-term projects.
A joint partnership, or joint venture, is one which is fundamentally like a general partnership, but exists for a limited amount of time. This partnership would also benefit investors looking for brief project collaboration, but it is also a flexible business option.
Registering Your Partnership
Keep in mind that establishing your partnership takes a little more effort than a sole proprietorship. While some partnerships can be informal like a sole proprietorship, when you’re working with others it’s generally a good idea to register your business.
Partnership ventures provide shared liability, a mixture of differing management skills, and investment incentives.
However, shared liability also means you may be responsible for the actions of your partners as much as you are for your own actions. Therefore, it’s important to choose your partners wisely and plan for both success and potential failure. Unequal partnership investments and limitations often cause tensions in business management. Plan ahead for these issues by addressing them in a “Partnership Agreement” before starting your business.
Limited Liability Company (LLC)
A limited liability company is a business structure that lies somewhere between a corporation and a partnership. LLC owners are considered “members” who have the benefit of the limited liability of a corporation combined with the flexibility of a partnership.
Like a sole proprietorship and partnerships, an LLC is a pass-through tax entity. This means that members only pay personal income taxes. While LLCs file information returns with the IRS, LLCs do not pay corporate taxes.
LLCs can be structured for two primary management types: Member-managed and Manager-managed.
Member-managed LLCs are exactly what they sound like–the members of the LLC are responsible for the day-to-day operations of the business. These LLCs generally operate in the same way as partnerships.
For most important business decisions, members in the LLC have voting power equal to their percentage of ownership in the business.
Manager-managed LLCs occur when members choose to give up control of the business to designated managers. Managers can be third parties who are not members of the LLC, or LLC members may select specific members to act as managers of their enterprise.
Because of the structural flexibility of LLCs, the operation of these businesses vary widely. Some LLCs operate like partnerships, while others can function as formally as a C corporation.
The limited liability granted by the LLC structure prevents members from being held personally liable for business actions, lawsuits, and debts. Members’ personal assets are protected from seizure due to business liabilities.
Given its protection against personal liability through formal registration, and its flexibility in terms of business operations, the LLC is a popular business structure for new businesses and startups.
A cooperative is a democratic system of business–all members, regardless of their ownership percentage, have an equal vote and voice in business management. The profits of the cooperative are distributed equally among the members. To gain membership, individuals purchase shares in the cooperative.
The success of the cooperative relies on the support and investment of its members. If members don’t pull their weight as a community, the co-op often experiences functional difficulties.
A C corporation is owned by shareholders and acts as an independent legal entity. Shareholders (owners) are protected from liability for business activities. While shareholders own the C corporation, control over its management rests with a Board of Directors.
This dichotomy is known as the separation of ownership and control.
Establishing a C corporation is generally more costly than other business options, but it is ideal for large businesses with numerous employees. The C corporation has the most formality requirements of all the available business structures. Shareholders in a C corporation setup a board of directors to manage the company, establish bylaws, and maintain records of board meeting minutes, in addition to other formalities.
C corporations must also pay a separate corporate tax return.
Given these formality requirements, and what some view as double taxation, it might be difficult to understand why someone might choose the C corporation structure.
One of the positive aspects of the C corporation is its ability to sell shares of business ownership as stocks. This allows C corporations an avenue to raise capital and grow in ways that other businesses cannot. Publicly traded companies are generally C corporations.
The C corporation structure is also common with large businesses, and closely held family businesses.
Because of its formality requirements, it’s recommended to speak with a lawyer and accountant prior to setting up a C corporation.
Unlike a C corporation, an S corporation is an IRS tax elected corporation. According to the IRS, S corporations are separate legal entities from those who own them. S corporations are common for sole proprietors who choose to formalize their business.
Limited liability is a benefit of the S corporation; however, shareholders are not immune from lawsuits against the business.
Profits and losses of S corporations are claimed on your personal taxes. The business itself is not taxed – only you, as a shareholder, are taxed.
Under an S corporation, business operations are more strictly regulated within the business structure. Additionally, shareholders and employees are required by the IRS to receive “reasonable compensation.”
Starting a business can be tricky, and finding a business structure that suits your needs may seem unclear. Establishing a successful business plan begins with a qualified attorney.
Schedule a consultation with our business law attorney to discuss your business plans.