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Business law is a very exciting area of law for most clients. Generally, the formation of a business is the first step most clients meet with me for. Many people who start a new business contemplate how to legally form their business. Generally speaking, business are formed one of three ways: Sole-proprietorship, partnership or incorporation.
A sole-proprietor is generally an individual doing business on his own without any partners. Generally someone who is "self-employed" is usually considered a sole-proprietor. The only limitation to be a sole-proprietor is that you have to be on your own without partners. A sole-proprietor may have employees, but essentially, there is no corporate protection or other entity to share risk. All of the business income and expenses are reported directly on the taxpayers Schedule C on their annual 1040 tax return.
A partnership can be set up as a General Partnership or a Limited Partnership. Partnerships must have at least two principle owners to be considered a partnership. Partnerships are separate entities in Virginia and file their own tax returns. General partners usually share the risk and rewards of the business equally. Although it is possible to have more than two general partners in a partnership and it is also permissible to apportion ownership unequally. However, in a limited partnership, investors who only invest assets or money into the business are generally immune from liability in excess of their initial investment. Also, partnerships can have the fancy initials after the name, like "Allen & Johnson, G.P. " or "Allen & Johnson, L.P." Partnerships file their own separate tax returns, but the gains or losses are carried directly to the partners individual tax returns.
Corporations are separate entities in Virginia that require at least one charter owner. Corporations can be set up as an Incorporation, Limited Liability Corporations, Limited Corporation, Professional Corporations or Professional Limited Liability Corporations. There are a host of other specialized corporations that Virginia recognizes but are difficult to discuss in a broad format. Generally, if you have ever seen a business that says "Allen & Johnson, Inc." or "Allen & Johnson, LLC" or "Allen & Johnson, PC" or "Allen & Johnson, P.L.L.C" such letters signify that the business is a corporation authorized to do business in Virginia. The Virginia State Corporation Commission is in charge or registering and chartering Virginia corporations and also determines which foreign corporations can do business in Virginia.
Every corporation type is very specific, and some are limited to specific occupational businesses. Over the years that I have formed corporations, the client usually wants to set up a LLC or Limited Liability Corporation. However, in most cases, a LLC is not necessary or does not achieve the goals of the owners. The hype to set up LLC's is generally overrated and hyper-inflated by late night television infomercials. All corporations are essentially the same. They are individual entities that attempt to shield the owners from broad liability. However, the specific type of protection a particular corporation provides must be analyzed by a skilled attorney familiar with Virginia business law and applied to the individual facts of the owners.
All corporations must have a "registered agent' to accept service of process. Most business elect to have their corporate attorney serve as the registered agent, but any officer of the corporation can elect to be the registered agent. A registered agent is responsible for accepting service of process in civil matters on behalf of the corporation and also is the point of contact for communication between the corporation and the State Corporation Commission.
Most corporations are elect to be stock corporations. Stock can be issued initially at 100 shares or can be issued with millions of shares. The filing fees for the initial charter are based on the number of shares issued, so most people start with 100 shares. However, the bi-laws of the corporation will determine how many "common" and "preferred" shares may be issued at any one time.
Once we discuss your goals, I can direct you on the right type of corporation to form that will maximize your goals and minimize your risk.
Many foreign business incorporate in Virginia because of the pro-business attitude of Virginia. We have caps on punitive damages and medical malpractice and our jury awards are much more conservative then other states in the United States. Many business who are not doing business at all in Virginia charter their corporation in Virginia and do business in their home state. This strategy could help get a lawsuit transferred to Virginia if other venues are less appropriate.
Finally, corporations are individual entities that file their own tax returns. The IRS treats corporations as either "C" corporations or "S" corporations. Your corporate designation will be discussed and if necessary a CPA should be consulted to determine the maximum tax advantages of either designation.
If you would like to discuss forming a business in Virginia, please feel free to contact me by filling out the general information form.