Selecting a Corporate Form

I’ve started, and let expire, a variety of businesses. At every step I had to ask myself “What am I going to offer?” and then the most important question of putting things together – “How am I going to protect myself while doing it?” Every case was unique, sometimes it was a need for a corporate form and, other times, it was just not worth the lift to file paperwork just to end back at where I was starting anyway.

In Virginia you have the option of a sole proprietorship, a partnership, a limited liability company, and a corporation. Within each of those are some subclassifications (Stock corporations, charitable non-stock corporations, general and limited partnerships, etc…), but those corporate forms are the basics. With each form representing its own positives, negatives and tax implications, you need to know what you’re getting into before you dive in (Spend ten seconds on Google or YouTube and everyone tells you to start an LLC, it’s not always the best path forward). The more complex the corporate form the more compliance requirements and the more robust the protections.

So let’s look at these corporate forms from a high level.

Sole proprietorships. The sole proprietorship or “sole prop” is straightforward. You, as a private citizen, decide that you’re going to offer a good or a service. All sales count towards your income and your business expenses becomes an item on your tax records for deductions. If someone is injured by your goods or services, you are on the hook (Plus any insurance you carry minus anything you control through contracts, through warranty and indemnity clauses). Think of the sole prop as the American ideal – you’ve gone into business yourself and put all of your chips on the table. You’ve got everything to gain and everything to lose.

Partnership. Virginia adopted the Uniform Partnership Act and the Revised Uniform Limited Partnership Act. This means that Virginia’s laws conform to what you’ll see in most other places. A general partnership is generally defined as two people come together, pool resources, and decide to introduce an offering into the market to make some money. General partnerships are similar to the sole prop from a liability front with no real mitigation outside of contracts or insurance.

A limited partnership is a partnership registered with the Virginia Corporation Commission that distinguishes between limited and general partners. Limited partners are, typically, financiers who exercise no control in a company whereas general partners handle day-to-day operations. Limited and general partners face different liabilities should something go wrong –general partners, as active participants, face greater liabilities to the market for their actions whereas limited partners are generally shielded when decision making results in a problem. The name of a limited partnership must indicate that it is one (Or contain “LP”).

Partners pay taxes of the partnership on their income.

Limited Liability Company. The limited liability company (LLC) is the most common corporate form – it’s accessible, simple, and offers a fair amount of protection for businesses. This form bridges the gap between the sole prop and the corporation. An LLC is registered with the Virginia Corporation Commission (“Commission”) to create a separate legal entity (Otherwise known as a “creature of statute”) where you will file your articles of incorporation. You may file other documents to ensure public notice of things such as authorized agents and officials and will file your annual reports with the Commission. LLC’s don’t carry rigorous annual meeting requirements, boards, etc… LLCs are required to indicate their corporate form in their name.

It's worth noting that the federal government does not recognize the LLC as a tax filing status. The LLC owner will have to elect taxation as a sole prop (“pass-through” taxation meaning the LLC’s earnings and expenses are yours personally) this is also known as a “discarded entity” LLC. An LLC may also be taxed as a corporation (S Corp or C Corp). A discussion of the S Corp versus C Corp is beyond the scope of this article, unfortunately, but corporate taxation generally deals with how corporate revenues are taxed, how payroll is deducted, and write-offs.

Corporations. Corporations are the quintessential exercise in liability insulation. Corporations are separate legal entities –imagine that they are new people, in a sense. Should anything create liability that doesn’t amount to some form of fraud or reason to remove those protections (Otherwise known as “piercing the corporate veil”), those who run the corporation may not be liable for harm caused. A corporation’s liability, generally speaking, can only run as far as its ability to pay out; after it can’t pay anymore, it goes bankrupt and dissolves. Corporations in Virginia are required to indicate their status in their name, such as “Corp” or “Incorporated” or “Inc.”

Corporations require that your paperwork game be on point – articles of incorporation, bylaws, operating agreements, corporate records requirements (Board and Shareholder meetings at least once per year, etc…), required officers and similar positions. The reward for this level of work is reliable and predictable business that’s capable of weathering significant changes or even complete transitions in leadership.

Tax-wise, corporations elect S or C corporation treatment at the federal level.

A note on professional organizations. Certain professions, such as attorneys, cannot insulate themselves fully from liability. Negligence on behalf of an attorney or doctor still hits the individual rather than the entity they practice under. For instance, if a doctor or an attorney commits malpractice, the individual (Or their firm’s) insurance may be implicated but the individual’s license is at risk. Professionals may, still, choose to collectivize to offer their services to the market in Virginia. For those professionals, Virginia offers Professional Limited Liability Partnerships, Limited Liability Companies, and Corporations – all of which require the same indicators but with a “P” in front of the standard disclaimers.

When picking a corporate form, you’ll want to balance your tolerance for risk, your tolerance for paperwork, and your taste for taxes. In structuring your business, as well as looking to minimize problems long term, an attorney with a business mind is an absolutely indispensable partner in minimizing potential issues.

The upside is that the Virginia Corporation Commission makes registration extremely simple and their customer service is very responsive.