Business owners in Virginia have several options when it comes time to choose a business entity. Each type of entity has its own advantages and drawbacks depending on your business and goals, and making a mistake can be costly.
At Joyce & Bary Law, our business attorneys spend a lot of time reviewing the pros and cons of each business entity as they apply to a client’s particular situation. First, let’s talk about why you would want to set up a business entity in the first place?
What is a business entity?
A business entity is an organization created by one or more people for the purposes of conducting business. Business entity formation and administration is governed at the state level in the state where a business is based.
Entities must comply with state laws to maintain their status, which includes filing specific documents and paying required fees to set up and maintain the business entity. Business entities can be terminated by the state where they are founded if they fail to comply with applicable laws and regulations.
Your choice of business entity is dependent largely on the kind of business you wish to operate and how many people hold ownership in your business. Your business entity will determine several things:
- Your organization’s structure
- Your options for funding
- How liability is determined
- How taxes are paid (consult an accountant for more information about tax liability)
While most states recognize the same basic business entities, there may be subtle state-to-state differences in how entities are set up and how they operate. In addition, some states have defined unique business entities to govern particular businesses within their jurisdiction.
What business entities are available in Virginia?
Virginia business owners can structure their businesses in a number of ways.
A general partnership is an unincorporated business entity of two or more people that is considered an extension of its partners as individuals.
A general partnership does not have to register with the state, but it does have to obtain a local business license and any additional permits required by its locality or industry.
All partners in a general partnership are personally liable for business obligations, and all partners have specific responsibilities for managing the business.
⇨ Advantages of a general partnership
- A general partnership is easy to set up and requires no state registration in Virginia.
- You do not have to file articles of organization.
- Virginia does not require a partnership agreement (but our attorneys would definitely recommend one).
- Owners share in profits and losses.
⇨ Disadvantages of a general partnership
- Owners are personally liable for business debts and other liabilities. This puts each partner’s personal assets at risk.
- Any partner can independently enter into a debt or contract that binds the business.
- General partnerships may face difficulty getting business loans and other kinds of funding.
- In Virginia, all partners in a general partnership are liable for the negligence of other partners.
- The partnership dissolves if one of the partners dies.
Some of these issues can be addressed in a partnership agreement, but Virginia law is very specific about what can and cannot be included in a partnership agreement. That’s one of the weaknesses of websites where you can download business agreements. We often find that they include things that sound good but are not enforceable in a Virginia court.
A limited partnership is a type of business entity that allows a business to have multiple partners and owners; however, it restricts personal liability of some of the partners.
Limited partnerships define two types of partners:
- General partners, who have unlimited personal responsibility for the debts and liabilities of the business.
- Limited partners, who have financial interest — money or property — in the business, but they do not participate in the management of the business or have voting power. Because they do not manage the business, a limited partner’s liability is restricted to the value of their investment.
Limited partnerships are formal business entities that must be registered with the state where they conduct business. They are sometimes used for commercial real estate projects or businesses that take on family or friends as investors.
⇨ Advantages of a limited partnership
- It allows flexibility in the partner structure.
- The partnership can have any number of limited partners, making it easier for general partners to take on investors and still maintain full management control.
- Limited partners take on no management responsibility and only limited liability.
⇨ Disadvantages of a limited partnership
- In Virgina, a partnership must file a Certificate of Limited Partnership with the state and maintain its registration to remain in good standing, so there’s more paperwork involved than with a general partnership.
- For general partners, full control means full personal and legal liability.
- To maintain their limited liability status, limited partners cannot provide assistance with operation of the business if it is needed.
- Limited partners are considered passive investors, which means shares are regulated by federal and state securities laws.
Be careful with limited partnerships. They are very useful in the right situations, but setting them up is deceptively complicated. If they are formed incorrectly and the right agreements are not in place, partners can find themselves with more personal liability than they intended.
Limited Liability Partnership
Limited liability partnership is a status that can be granted to a general or limited partnership.
In a general partnership, the LLP status makes the individual partners not liable for the obligation of the general partnership.
In a limited partnership, the LLP status means the general partners are not individually liable for the debts or obligations of the partnership.
Limited Liability Corporation
The LLC is a popular structure, especially for smaller businesses, because it offers legal and tax advantages for owners. In some ways, owners are able to combine the best of partnerships and corporations.
LLC members manage their companies and make all decisions regarding the company’s operations. Specific guidelines about decision-making limits can be outlined in an operating agreement.
Owners often choose the LLC because it is considered a separate legal entity, and members can operate their businesses without exposing themselves to personal liability. Even a sole owner can form an LLC to limit their own liability.
In addition, the members of an LLC can be taxed as a pass-through entity, which means they avoid double taxation.
⇨ Advantages of a limited liability corporation
- Owners do not have personal liability for the actions or debts of the LLC.
- Members maintain operational control over their businesses.
- LLCs have fewer state filing requirements than corporations.
- LLCs can be taxed as pass-through entities.
⇨ Disadvantages of a limited liability corporation
- It’s a more formal structure than the partnership, so you do have to register with the state to get the limited liability.
- In Virginia, the LLC is so easy to set up that business owners often skip important steps, such as the operating agreement, and leave themselves open to problems if a member dies or wants to leave the LLC.
- As our own Jim Joyce would say, “It’s easy to get into business together. It’s a lot harder to get out.”
A corporation is a distinct legal entity that exists entirely independently of its owners. It is managed by a board of directors who elect officers to run the day-to-day activities of the corporation.
In Virginia, there are two types of corporations:
- C Corporations are typically used for larger companies who plan to issue stock. The drawback of the C Corp is that owners are subject to double taxation. The business pays taxes on corporate earnings, and shareholders pay tax on dividends. In addition, any owners who work in the business pay personal income tax on their salary.
- S Corporations are taxed like partnerships. The owners avoid double taxation by passing through profits, losses and credits to their personal tax returns.
⇨ Advantages of a corporation
- Corporations provide powerful liability protection to their owners.
- A corporation can continue in perpetuity, even if an owner dies or leaves the company.
- Business funding, including investors and loans or other lines of credit, are much easier to obtain
⇨ Disadvantages of a corporation
- As the most complex of the business entities, they require much more work to set up and have more annual filing requirements.
- Owners of C Corps are subject to double taxation.
- The management structure of a corporation is more complicated and subject to more oversight.
Compared with the other entities, the business trust is a relatively new kind of business in Virginia. Used primarily for real estate operations, a business trust can be beneficial when the alternative is forming multiple LLCs to manage multiple properties.
Business trusts offer limited liability, a flexible business structure, and a variety of taxation options. However, with this flexibility come lots of additional complications and opportunities for error. If you choose to explore a business trust, be sure to find an attorney with specific expertise in this area.
Don’t sort through the options alone. Let Joyce & Bary Law help.
We don’t want you to become an expert on business entities. That’s what our business attorneys are here for! From the initial concept to the launch of your business, Joyce & Bary’s business division has the experience to help you choose a business entity that will limit your liability while maximizing your opportunity. In addition, our service as a registered agent ensures that your business entity stays in force and legal issues that might arise are less likely to disrupt the daily operation of your business when papers are served. Contact us today to tell us about your business!