The most important first step in starting a successful business involves deciding on a particular legal structure that will work best for your business. In Virginia, a business owner has the choice of forming either a sole proprietorship, limited liability company (LLC), general partnership, corporation, limited liability partnership (LLP), professional service corporation (PS), or a limited partnership (LP).
What is a sole proprietorship?
A sole proprietorship is an informal business structure that tends to be inexpensive to form. Therefore, a sole proprietorship is usually owned by a single person who operates the business. Sole proprietorship provides certain advantages such as its informal business structure, the ability to freely transfer the business, and the ability of the owner to report profits or losses on their personal income tax returns. However, a sole proprietorship provides no legal protection to the owner as the owner and business are considered one entity. As a result, the owner remains personally liable for all of the business’ debts.
What is a limited liability company (LLC)?
An LLC is a business structure that combines both the limited personal liability feature of a corporation with the tax advantages of partnerships and sole proprietorships. As a result, an LLC is generally considered advantageous for small businesses. In an LLC, profits and losses can be passed through the LLC to its members/owners, or they can elect to be taxed like a corporation. Unlike corporations, however, LLCs do not have stock and are not required to observe extensive corporate formalities. Instead, the LLC is managed by these members or by appointed managers.
What is a general partnership?
Differing slightly from sole proprietorships, general partnerships tend to be inexpensive to form and include two or more individuals or entities that jointly own and operate the business. Therefore, as directed by a partnership agreement; profit, loss, and managerial duties are shared between the partners. Each partner remains personally liable for the partnership’s debts.
General partnerships also differ slightly from sole proprietorships in regard to taxation. Just like sole proprietorships, general partnerships do not pay taxes. Instead, individual partners report their share of profits and losses on their own personal returns. Unlike sole proprietorships; however, general partnerships must file an informational return.
What is a corporation?
Unlike partnerships, a corporation is a legal entity that is separate from its owners who own shares of stock in the company. As such, a corporation is a more complex business structure with more startup costs than many other forms. The advantage of the corporation; however, is that shareholders are not personally liable for obligations of the corporation. This separation between the corporation and the shareholders is called a “corporate veil.” The corporate veil protects the personal assets of shareholders unless corporate formalities have not been observed, there has been malfeasance, or other improprieties have occurred.
When it comes to federal taxation, a corporation can either be designated as a C Corporation or as a Sub Chapter S Corporation. Under a C Corporation, profits are taxed both at the corporate level and again when distributed to shareholders. If a corporation qualifies for S status; however, it is taxed like a partnership. As a result, the corporation itself is not taxed, but profits distributed to shareholders are taxed when reported on their individual returns.
What is a limited liability partnership (LLP)?
An LLP is a business structure organized in order to protect the partnership’s individual partners from personal liability for any negligent acts of other partners or employees who are not under their direct control. As with other forms of partnerships, LLP partners report their share of profits and losses on their own personal tax returns.
What is a professional service corporation (PS)?
A PS is a business structure that can only be adopted for the sole purpose of providing a professional service for which each shareholder is licensed. As such, a PS is only available to certain professionals, such as doctors, lawyers, and accountants. The main advantage of a PS is limited personal liability for shareholders.
What is a limited partnership (LP)?
Unlike other forms of partnerships, LPs have complex formation requirements. This is because LPs require at least one general partner who is fully responsible for the partnership’s obligations and normal business operations. An LP also requires at least one limited partner, who is not involved in everyday operations. This is the main advantage of the LP because the non-managing limited partner tends to be shielded from liability for partnership’s obligations beyond the amount of his or her investment. In regard to taxes, LPs are the same as general partnerships.
Why should I partner with Juris Day?
With decades of business formation experience, the attorneys of Juris Day have assisted numerous enterprises in taking the first step towards becoming their own bosses. As such, the attorneys of Juris Day will take the time to meet with you, thoroughly examine your particular situation, and recommend a business structure that will help your new company succeed.