What Structure Should I Use for My New Business?
Starting and running a new business can be exciting, but there are a ton of decisions you’ll have to make on the front end. Not only do you want to protect your investment in the business, but also your personal assets.
No matter the size of your business, it’s always a good idea to pursue some form of legal entity. When you do this, you’ll get some protections for personal assets, limited liability, tax benefits, and some of the additional credibility that comes with taking this formal step. Here are some of the most common business structures and their benefits.
A sole proprietorship is essentially a business owned by a single person. Nothing needs to be filed with the state. You simply set up shop, obtain any required licenses, permits, etc., and start doing business.
The downside to this is that your business is inseparable from you as the owner. All business income and losses are reported on your personal tax return, and you will be personally liable for any debts or other judgments related to the business. This may be reason enough to pursue a business structure that is more formal.
Anyone in Virginia that owns a business alone or with others has the right to incorporate. This is true whether your business is small, large, engaged in civil, religious, or charitable work. Unlike a sole proprietorship, a corporation is a legal entity that is separate from its owner. This means that the business owner is protected from any business creditors, meaning their personal assets will be shielded from business liability and debt.
Other than their investment in the company, owners of corporations are not at risk of losing personal assets due to the company’s obligations. Also, retirement plan deductions, travel expenses, and insurance are all tax-free benefits for a corporation owner. One of the major downsides of a C-Corp is double-taxation. Net income is taxed once at the corporate level, then at the personal level when the income is distributed to owners in the form of dividends.
A Sub Chapter S Corporation has a similar structure to a C-Corp, but it allows you to avoid double taxation. This called a “pass-through” entity where the corporation is not taxed, but earnings flow through to shareholders who report the income on their individual tax returns. With this type of entity, you still have all of the protections of a corporation, but there are some limitations that you would not have with a C-Corp. S-Corps limit the number of shareholders to 100, and only certain individuals and entities are allowed to be shareholders of this type of corporation.
Limited Liability Company (LLC)
An LLC is a common choice for small businesses. With an LLC, the business owner gets the limited personal liability feature that comes with having a corporation. There is also flexibility on how you choose to be taxed. An LLC can be taxed as a C-Corp or an S-Corp. In other words, it can have its income taxed like a corporation or have the earnings passed through to the owners. If the LLC has a single owner, it is treated as a “disregarded entity” by the IRS, and the owner is taxed as a sole proprietorship unless they elect to be taxed as a C-Corp or an S-Corp.
Virginia law also allows for the formation of different types of partnerships. These include limited partnerships, general partnerships, and limited liability partnerships. A general partnership is essentially two or more people that choose to co-own a business for profit. Partners share in the expenses and responsibilities of running the business and get an ownership stake in return. They are not, however, shielded from liability or get protections for their personal assets. A Virginia limited liability partnership can accomplish these things.
Other Business Entities
There are many other types of business entities available, and some may suit your particular needs. These include a business trust, cooperative, and nonprofit corporations. The formalities and expenses associated with setting up different business entities vary, as do the benefits and drawbacks of each. This is why it makes sense to speak with an experienced business attorney before making your choice.
Contact Our Charlottesville Business Attorney Now
So, what is the best structure for your business? There is no definitive answer, but an experienced business lawyer can certainly assess your needs and help bring some clarity to your situation.
When you choose the right entity, you may be able to protect yourself from debt and liability. A knowledgeable business attorney can help you make an educated decision about the right entity for your business so that you have the best chance of achieving your goals. Buck, Toscano & Tereskerz specializes in business and corporate law. We cater our legal services to new and existing businesses and entrepreneurs. We help our business clients with entity formation, commercial transactions, and business litigation.
Contact our office today at (434) 977-7977 to schedule your initial consultation.