Choice of Business Entities: Corporation, LLC or Partnership?
Ask for our offer to incorporate a small stock corporation for $495.00, plus filing fees, $75.00 at the time of this writing. This offer may be withdrawn at any time without advance notice. Contact us and we will send you a sheet to fill out and return to obtain necessary information and begin the process. The fee also includes our services as registered agent for a period of one year, and obtaining subchapter S status and a corporate EIN number, if desired. The fee is for incorporation of regular stock corporations issuing only one class of stock, and subchapter S corporations, as long as the corporation does not intend to sell or trade stock publicly. Charitable corporations are not included in that fee, due to additional work relating to qualification as a charitable entity with the IRS. If the corporation intends to issue more than 25,000 stock shares the filing fees will increase. Call for an appointment to set up a nonprofit corporation.
In Virginia a one-person business can form either a corporation or LLC.
You need not issue stock certificates, if you comply with certain procedures I will advise you on. This will save money and is perfectly legal. Likewise, you need not purchase an expensive corporate record book, and, in most cases, you do not need a corporate seal. Of course, you may obtain all these items at an additional price, if desired.
For premium incorporation service, including corporate record book, seal, and stock certificates, inquire about the additional fee.
Sole Proprietorship: As a sole proprietor you will be in business for yourself, have sole responsibility for paying the business debts, and will enjoy all the profits. This is the simplest type of business to form and operate. However, there is no liability protection for the sole proprietor. All business debts are also personal debts. Personal debts, such as child support, can be collected from your business accounts. Any business accident or liability will also result in unlimited personal liability. There will be tax disadvantages, especially concerning FICA and social security taxes.
Why Incorporate? Every person who operates a business as a sole proprietorship (sole individual owner) or general partnership has unlimited personal liability for the business. With general partnerships, each partner also has unlimited personal liability for all mistakes and actions of all the other partners. In a corporation each stockholder holds an ownership interest in the corporation equal to the percentage of shares held, and is not liable personally for normal corporate activities.
Incorporation helps shield your personal assets from the reach of plaintiffs suing the corporation. It also protects business property and assets from the owner's personal creditors. If you properly sign a contract in your capacity as a corporate officer, you should not be personally liable on that contract. If you are married and in business with your spouse, there may be additional liability protections, especially if you hold property as tenants by the entireties. One individual may incorporate a business in Virginia and control that business.
A corporation offers both liability protection and tax advantages. After receiving a reasonable salary, owners may take additional income distributions free from FICA and Medicare taxes, which amounts to a current tax saving of 15.3% on that income (but income tax is still due on those distributions). That means your wages computed for social security retirement income will be reduced if you are nearing retirement, but the savings can be placed in a retirement account. No specific promises of tax benefits are made for your specific situation. Please consult a qualified tax professional.
Corporations are permitted to offer retirement plans and benefits for employees (e.g. a 401(k) program). If your retirement plans are ERISA qualified under federal law, you will better protect your retirement benefits from creditors. You should discuss retirement programs and benefits with your financial advisor.
If you do not incorporate, and operate a business under anything other than your own name, you must comply with the fictitious name laws, which require filing your "fictitious name" in every locality where you do business. With a corporation, the name is on file statewide, and as long as you use the exact corporate name, you need not file your business name in every locality where you do business.
We encourage everyone to make timely child support payments. However, if you own your business and fall behind, collection of those back payments can result in a garnishment of your business account for your personal obligation. This can cause obvious problems for the operation of your business. A business account for a sole proprietor is treated the same as a personal account when it comes to collection of personal debts. This can be avoided by incorporating the business. Then, only your personal account is subject to garnishment for personal debts, provided corporate formalities are observed.
What are subchapter S corporations? All corporations come into being as subchapter C corporations. That is the corporate status of large, publicly traded companies. However, with a C corporation income to the corporation is taxed, and then income to the employees is taxed again. To avoid this “double taxation”, small businesses may elect subchapter S tax treatment by timely filing IRS form 2553. We help obtain subchapter S treatment for the corporation as part of our basic incorporation package.
Subchapter S corporations have certain restrictions. For example, if you will have over 75 shareholders, any foreign shareholders who are nonresident aliens, or more than one class of stock, you cannot elect subchapter S. If you begin as a subchapter S corporation and any of the above occurs, you are no longer eligible for that status and the IRS will recharacterize the corporation as a C corporation.
With a corporation, after paying a reasonable salary to the owner(s), additional income may be taken without paying the FICA and Medicare taxes that are levied against a salary (but income tax will be due on those distributions). Please note that your salary must be reasonable, or the IRS may attempt to levy additional tax and/or penalties. No promises are made with respect to your tax savings. Tax benefits may result from incorporation. The subchapter S corporation is a "pass through" entity, meaning that deductions, credits and income pass through the corporation directly to you, the owner(s)/stockholder(s). Please consult a tax expert about how incorporation would affect your taxes.
If you expect losses for the first year or so, you may want to avoid the subchapter S tax treatment. Please consult your tax advisor.
Professional corporations: These are corporations formed by certain types of professionals, such as doctors or lawyers. Rules will vary state to state, but in Virginia, the stockholder/owners must all be licensed members of that profession (with certain exceptions for architects, land surveyors and ) and the corporation's purpose is limited to offering those professional services. In Virginia, regular corporations can engage in almost any legal business, except certain types of businesses that require separate licensing, such as banking or insurance. Otherwise, professional corporations are basically like other corporations.
What about the LLC ? Limited Liability Companies offer a popular alternative to incorporating and may hold advantages for some businesses. Like corporations, they offer liability protection. However, for most small family businesses, subchapter S remains an appropriate and efficient business entity. The LLC is new and somewhat unsettled in the law. That means that a legal issue related to your company might have to be resolved in court, because there may be no precedent to determine correct action in the event of a dispute involving the company. Forming and maintaining the LLC may be slightly more expensive, but there is only a small difference in the state fees. The LLC does not issue stock to raise capital.
The laws of various states are not all uniform as to requirements to form and operate the LLC. Therefore, it is possible that operating a Virginia LLC in another state could cause problems. If you plan to operate in multiple states you might be better off with a traditional corporation.
If you cannot qualify as a subchapter S corporation, perhaps because you have a foreign owner, or if you need to allocate loss or income differently among different owners for tax reasons, the LLC is a good choice. Like a subchapter S, there is liability protection and the tax treatment is similar to that of the subchapter S corporation (which is virtually identical to partnership tax treatment).
The LLC also has fewer necessary formalities than a corporation, and that can be an advantage. The LLC may be managed by its members, similar to the way a partnership is managed. You may also choose for it to be managed by a designated manager or group of managers, similar to a corporation's management style. If you would like to form a Limited Liability Company, please call.
Partnerships and Limited partnerships: In a regular partnership, all partners share all debts, liabilities and profits, and have an equal say in the management of the business. There is no liability protection with a regular partnership. A written partnership agreement is always advisable, but a partnership can be created without one.
Limited partnerships allow for limited partners who contribute capital but have no operational control of the business. However, unless the general partner(s) are corporations or LLC's, the general partners have no liability protection, and each general partner would have unlimited liability for the other's actions. They may be more expensive to set up than a regular partnership or corporation. A detailed written partnership agreement is essential. A Limited Liability Limited Partnership (LLLP) offers limited liability for partners, but also requires a relatively expensive written partnership agreement.
Corporate Formalities: These are important to avoid legal action that could later result in personal liability. For this reason, the corporation must hold an annual meeting, keep proper minutes, obtain a separate EIN number, file a corporate tax return and open a corporate bank account. We will help obtain the employer identification number (EIN) for the corporation as part of our basic incorporation package. You must keep corporate money separate from personal money. Business meetings must be held to approve sales of stock, election of officers and directors, and other corporate business, and minutes of meetings must be kept in a minute book (notebook). You must also have adequate funding to start and operate the corporation.
You must use your corporate name on all letters, contracts, ads, business cards, signs, etc. to give everyone notice that you are operating as a corporation. If you fail to observe basic corporate formalities you risk losing the liability protection offered by the corporation through a process known as piercing the corporate veil. In that event, you could be held personally liable for acts of the corporation.
An annual meeting is required, and is adequate for many small businesses. We can prepare basic annual records for you for a fee of $150.00, or you can do it yourself. The important thing is to do it! Also, when signing legal documents or contracts to bind the corporation, you must sign as an officer to avoid becoming personally liable on the contract, note or whatever. For example, you would sign John Smith, President, ABC Inc., rather than John Smith. Your registered agent (required) may be an attorney or reliable person who must have your updated address and contact information on file so that legal notices and lawsuits can be forwarded to you. A lawsuit can be served on an officer, or on the registered agent, and that will be valid service on the corporation. The Incorporator is the person filing the articles of incorporation, and for convenience, the attorney will act as Incorporator.
Why select us for your registered agent? You may want us for that job because our office is within the conservative "small town" City of Colonial Heights. You should avoid a registered agent in a large city such as Richmond, where you do not regularly do business, because you can be sued wherever your registered agent is located. If you have a registered agent in Richmond, you will practically guarantee that you will be sued there for any serious case. Juries there are considered more friendly to injured parties and have a reputation of giving much larger monetary awards in lawsuits. So, you can even minimize liability by your choice of registered agent! The registered agent will receive and forward to the corporation any legal process served on him/her as well as any notices received from the state corporation commission.
Where to incorporate? Some experts recommend incorporating in Delaware, or even Nevada! However, incorporating here has definite advantages, particularly for corporations only doing business in Virginia. Virginia has low filing fees, a conservative business climate, and a single individual may incorporate. Futhermore, the corporate business does not have to be described or specified in the articles of incorporation. For large publicly traded national corporations, Delaware is often recommended. However, any advantage to incorporating in Delaware rather than Virginia may be minimal.
According to a survey by the U.S. Chamber of Commerce, Virginia is ranked second in the country, just behind Delaware, for a court system friendly to businesses. See the Virginia Lawyer, Vol. 52, No. 1, June/July 2003, page 26, footnote 2.
Finally, Virginia's "business judgment" rule is even more favorable than Delaware's "business judgment" rule. This Virginia rule provides corporate directors potentially greater liability protection than is provided under Delaware law. See "Virginia or Delaware? No reason to Leave the Old Dominion", Virginia Lawyer, Vol. 52, No. 1, June/July 2003, page 21.
Corporate or business name: A national mark search should be performed to determine if your corporate name is already in use. That fee is not included in the basic incorporation service. Registration of your corporate name in Virginia or approval of the State Corporation Commission does not substitute for a national search. If someone has already registered your business name properly as their mark, trademark or service mark, and you use that name without permission, you may owe monetary damages and have to change your business name later. Also, you cannot trade off someone else's business name to cause confusion or attract their business. For example, if you try to open a Mexican fast food restaurant and name it Taco Dell, you will have legal problems.
You must use your exact corporate name, or comply with the fictitious name laws, which require filing a "fictitious name" certificate in every locality where you do business in Virginia. If you engage in interstate commerce, or intend to do so in the near future, you can file for protection of the name of your business, service, or product name or slogan by filing for trademark protection. Search trademark availability and learn about the requirements for trademark protection here.
Further information: A good book for your review for basic incorporation concepts is Own Your Own Corporation, by Garrett Sutton, published by Warner Business Books. Or, go to your local library and seek information. For tax information, we always encourage consultation with a competent tax specialist.
These pages provide general information only, and are not intended to offer specific legal advice for your situation. Visiting this site does not establish an attorney-client relationship. Please note that we are licensed attorneys only in Virginia, and we do not purport to do business or offer advice outside of Virginia.