What are the options for my business’s legal structure?
As a small business owner, one of the first major decisions you will make is to choose a legal form under which to operate your business. It is important to understand the four basic legal forms: sole proprietorship, partnership, corporation, and limited liability company, and determine the advantages and disadvantages of each. There are variations to each type, and it is wise to remember that the best sources of advice for making this decision will be from your accountant and attorney.
Most businesses begin as sole proprietorships, the simplest form of business. No special legal steps are required to get started and it is the easiest one to end. Bookkeeping and tax operation are also the simplest. For income tax reporting purposes, you and your business are considered to be the same. You do not pay yourself a salary as such, because your profits, if any, are your “salary.” You may or may not have a name, as you choose.
There may be good reasons why you need to consider incorporating or forming a partnership. Partnerships are necessary when two individuals want to do business together. Partnerships have the advantage of combining the resources or skills of two or more people into the enterprise. A partner, for example, provides a source of needed start-up capital for a business. A written partnership agreement, although not mandatory, is almost always a practical necessity. It describes each person’s responsibility, how profits and losses will be divided, how a partner can leave the business, and what happens in case of serious discord or a partner’s death or disability. You may wish to use an attorney for this purpose. Partnerships do not have permanence; if one partner leaves, the partnership is dissolved. Partners are personally liable for all liabilities of the partnership. Partnerships must file a federal income tax return but do not pay tax; each partner’s share of profits or losses are included in the individual partner’s income tax return.
The advantages and disadvantages of incorporating are numerous and complex. They take into account issues of duration of the business, capital formation, income distribution and retention, liability protection, ownership transfer, taxation, and legal costs. One main reason businesses incorporate is for the liability protection that a corporation provides to shareholders. In the eyes of the government, a corporation is a legal entity distinct from its owner or owners. It reports and pays taxes separately and its organization and operation are regulated by Virginia law. A corporation has permanence; unlike a partnership or sole proprietorship, it cannot be so easily dissolved. Using an attorney to incorporate is not legally mandatory but recommended. The choice of an S-corporation deals largely with tax considerations. S-corporations pass through profits or losses to the shareholders much like a partnership.
Limited Liability Company
The Limited Liability Company (LLC) has emerged as a very popular business form. It combines selected corporate and partnership characteristics while still maintaining status as a legal entity distinct from its owners. As a separate entity, it can acquire assets, incur liabilities and conduct business. As the name implies, however, it provides limited liability for the owners. LLC owners risk only their investment. Personal assets are not at risk.
What are the factors to consider when choosing the type of legal structure for my business?
There are five
key factors to consider when choosing the type of business structure:
Determine the type of liability your business may incur and how this may affect you and your business in the future.
2. Tax implications.
Yes, we’re all proud of living in the great Commonwealth of Virginia and the United States of America, and we recognize that all the wonderful things brought about by this democracy cost money which is generated by taxes. By choosing the most appropriate business structure, you will ensure that you are paying the correct tax rate.
3. Cost of formation and record-keeping.
There are certain laws and requirements about record-keeping that are associated with each type of business. Perhaps the time and expense involved with this record-keeping is not worth the perceived benefit.
You need to run your business, not vice versa. Some types of business are more rigid than others. Choose the one that gives you the flexibility you need to do your job and maintain a healthy lifestyle.
5. Future needs
. You must anticipate future events, some that may happen and others that will happen. Future events include growth, expansion, bringing in additional partners or owners, rewarding employees with ownership, or the unfortunate possibilities of your retirement, or worse, your death or disability.
The decision on how to structure a business varies for each owner. There is, of course, no need to make the business structure more complicated than it needs to be. If possible, consult with an attorney, an accountant, or business counselor. The person who helps you should be familiar with your type of business, your business goals, and personal finances. For referrals to attorneys or accountants, you may want to contact your local Chamber of Commerce, the nearest SBDC, or even ask some business owners in your community for recommendations on attorneys they've worked with.
What are some of the legal and regulatory requirements for my business?
Again, it is prudent and advisable to consult with an attorney, accountant, or other professional to ensure compliance with all local, state, and federal regulations. However, there are several things required of most businesses:
• Federal Employer ID Number
. Visit the IRS website
to obtain form SS-4.
Contact the county, city, and/or town in which your business is established to find out which licenses are required.
. If you’re a new business, contact the local planning/zoning department to make sure your location is zoned for business activities.
• State taxes
. Contact the state Department of Taxation
for registration and to access information and forms.
• Virginia Employment Insurance.
If you hire employees, you will be subject to unemployment insurance tax. Contact the Virginia Employment Commission
for more information or call the nearest VEC office
• Workmen’s Compensation Insurance
. Employers in Virginia are required to carry workers’ compensation insurance with a private insurance carrier, hold a certificate of self-insurance issued by the Virginia Workers’ Compensation Commission
, or be a member of a self-insurance association approved by the Virginia State Corporation Commission. This holds true for employers with three or more employees. Operations with fewer than three employees may voluntarily come under the requirement.
• Labor Regulations
. All Virginia companies are required to comply with the state and federal labor laws. For guidance in all areas of labor regulations contact the Virginia Department of Labor and Industry
• Business Registration
. The State Corporation Commission
is the clearinghouse for all companies in
Virginia. Most entities must register. Contact the SCC if you plan to conduct business under your business name or a trade name to sell securities, to use a trademark, or to operate a franchise.
• Naming Your Business
. You will need to find out if the name is available for use. Check with the State Corporation Commission
to see if the name you want is available in Virginia. Avoid names easily confused with national brands. Large companies aggressively protect their brand names.
• Incorporating in Virginia
. Companies incorporating in Virginia must file articles of incorporation with the State Corporation Commission
and pay a filing fee and charter fees based on the amount of stock issued. Companies incorporated outside of Virginia have to get a certificate from the SCC to transact business here and pay an entrance and filing fee.
• Annual Registration for Corporations.
The annual fee for a corporation doing business in Virginia is based on the number of outstanding shares of stock shown in the charter. The fee is $100 for 5,000 or fewer shares, plus $30 for each additional 5,000 shares to a maximum fee of $1,700. The fee is assessed two months before the anniversary month of the corporation’s date of incorporation.
• Franchise Registration
. If you plan to operate a franchise in Virginia, you must be registered with the SCC. For additional information contact the State Corporation Commission’s Division of Securities and Retail Franchising
• Trademark Registration
. If you own and plan to use a trademark in Virginia, file an application for registration of the trademark with the SCC. Application forms can be obtained from the SCC’s Division of Securities and Retail Franchising.
• County or City Health Department
. Any food business must comply with state and local food ordinances. Contact your local health department.
• Department of Environmental Quality
. The DEQ
administers state and federal programs to safeguard air, water, and land resources. Contact the local office to obtain an environmental permit.
• Department of Professional and Occupational Regulation
. This department
enforces regulations regarding health, safety, and welfare in 26 professions, from architects to wastewater works operators.