Entrepreneurs must account for a range of complex issues that can significantly affect their legal liability and tax obligations. Selecting the right entity type is critical to shielding a business owner from personal liability for lawsuits against the company.
When you are starting a company, a Virginia business formation lawyer can provide guidance on choosing the right entity for you, ensuring you make informed decisions. The experienced business attorneys at our firm are here to assist you with all your contracts the easy way.
Major lawsuits can significantly impair a company’s success. In some cases, certain entity structures even allow someone who is suing the company to pursue compensation against a business owner’s personal assets. This is why seeking legal help when forming a Virginia entity is critical to protecting an owner from personal liability. Sole proprietorships or general partnerships are good examples of business structures that do not protect their owners from personal liability.
In a sole proprietorship, the business is not legally separate from the owner, making the owner personally liable for lawsuits against the company.
In a general partnership, the partners share the profits and losses of the company equally, including personal liability for lawsuits against the business.
Limited partnerships (LPs) offer a hybrid solution in which only certain owners can be held personally liable. In LPs, there is a general partner who is responsible for day-to-day business operations and limited partners with a more passive investment role. Only the general partner’s personal assets can be targeted in a lawsuit.
Entities such as corporations, limited liability companies (LLCs), and limited liability partnerships (LLPs) offer the most protection against personal liability. In these structures, an investor’s personal liability is generally limited to their investment in the business. For most of our clients, the LLC is the right entity choice, but not always, which is why consulting an attorney is the right decision.
As a Virginia business formation attorney can explain in detail, the entity formation choice has a significant impact on the tax consequences for businesses and owners. Specifically, certain entity structures allow an owner to avoid double taxation on business income.
Pass-through entity structures allow business income to flow directly to the owner’s personal tax return. This structure avoids taxation at the company level, as income is only taxed once—upon distributions to the business owner.
Some examples of pass-through entity structures are:
In contrast, double taxation means that income is taxed first at the company level and again upon distributions to shareholders or investors. While corporations offer a shield from personal liability, they also subject the business income to double taxation. These entities—also known as C-Corps—are generally required to file their own income tax return that is separate from company owners.
One important note is that all of the above is the default status for taxation. Regardless of what entity you choose, state law usually allows you to choose to be taxed differently. While this can get complicated, typically, the most common election is an S-Corp election, which you can make as a corporation or as an LLC. Choosing your entity and tax status can be difficult, which is why we recommend discussing it with us first.
When forming any type of entity in Virginia, a knowledgeable lawyer could ensure the business owner complies with certain state filing requirements to set up their company. For example, setting up an LLC requires that the business owner file articles of organization with the state and pay the required filing fees. These documents are made simple in our Handshake Portal.
When a company has multiple owners or investors, it is best practice to outline the operational rules for the business in an operating or partnership agreement. An operating or partnership agreement memorializes key issues on how the company is governed, which is key when the business has multiple owners, as it sets forth terms, such as:
Additionally, when an owner is considering selling their stake in the business, operating and partnership agreements outline how that process will take place.
Consulting with a Virginia business formation lawyer could help save a lot of time and avoid a lot of expenses on future disputes. That is why Earley Business Legal offers a fixed fee rate for entity formation on our Handshake Portal. After you provide some basic information about your business, the Handshake Portal will automatically generate your documents, and one of our seasoned attorneys will reach out and answer any questions you may have. Click here to get started, or call today with any questions you have.
When setting up your company or preparing business agreements, a well-practiced Virginia business lawyer could help save you from future headaches and costly litigation.
The legal professionals at our firm use our Handshake Portal to help get you started in the right direction for your contractual needs without the complicated legal jargon. To help minimize your legal costs, we provide these services at a fixed fee rate. Contact us today to schedule a consultation and get started.
