Starting Your Business
Most business owners choose to conduct their business using one of many available forms of business entity. By conducting your business using an entity, you will limit your individual liability for your business’ debts and liabilities in almost all circumstances. Using an entity to conduct your business thus protects your personal assets, such as your house, car, and savings, from creditors of your business.
Which Business Entity Should I Use?
Grad, Logan, Klewans, and Bowen has corporate attorneys licensed in Virginia, Maryland, Washington, D.C., and Florida. Those jurisdictions offer several forms of business entities from which to choose, including:
- Limited Liability Companies (LLCs)
- Limited Partnerships
- Limited Liability Partnerships (LLPs)
- Other business entities
Our lawyers are familiar with all forms of business entity authorized by all four jurisdictions. Most of our clients select either the corporation or limited liability company form of business entity. Which form is the right one for you depends on many factors, including the business’ needs concerning (1) internal management, (2) the rights of the owners and the extent to which the owners run the business, and (3) the way in which owners receive money from the business.
Operational Considerations for a Business Entity
Generally speaking, a corporation is a more formal structure. The stockholders elect the board of directors, which in turn appoints the officers who run the corporation on a day-to-day basis. In small corporations, the same people can hold all three positions, i.e. stockholder, director, and officer. All four jurisdictions permit the stockholders of a corporation to enter into a stockholders agreement governing how decisions are made, allocating management power and profits, and restricting transfer of corporate shares. Stockholders agreements offer the owners of a corporation considerable flexibility in arranging its affairs.
A limited liability company generally has fewer corporate formalities than a corporation. The owners of an LLC are called “members,” and the director and officer positions of a corporation are combined into one office called “managers.” Members may run the LLC themselves or appoint managers who may, but need not be, members. Members may enter into an operating agreement, to govern decision making, allocating management positions and profits, and restricting transfer of membership (ownership) interests. Operating agreements are similar to a stockholders agreement for a corporation. An operating agreement offers the owners of an LLC great flexibility in organizing its affairs.
Tax Considerations for a Business Entity
Generally, corporations are treated as a taxable entity. So, if the corporation has profits (after deducting expenses from revenue) the corporation is taxed on its income. Corporations that are treated as taxable entities are nicknamed “C” corporations, after sub-chapter C of the Internal Revenue Code governing how they are taxed. Large, publicly traded corporations must be “C” corporations.
Many relatively small, privately held (i.e., the stock is not traded by the public) corporations elect not to be taxed as a business entity. In such cases, the profits or loses of the business are allocated to the stockholders in proportion to their ownership interest. Such corporations are nicknamed “S” corporations, after subchapter S of the Internal Revenue Code governing their taxation. To be an S corporation, the corporation must meet certain other requirements, through which our lawyers can guide you.
Generally, LLCs are treated as non-taxable entities, much like S corporations, and the profits and losses of the business are allocated to the members in proportion to their ownership interest in the LLC.
Our lawyers have experience advising clients regarding their choice of entity and which tax treatment to use for that entity. This is an important series of discussions. Our lawyers are also ready to work with other tax professionals in structuring the tax treatment for your business.
Partners in Success
The business lawyers at Grad, Logan, Klewans, and Bowen will work with you to build a long-term relationship, enabling us to meet the ongoing needs of your business, protect your assets, and plan for tomorrow.
Please contact Grad, Logan, Klewans, and Bowen for more information about business formation and questions and to schedule an appointment with one of our business law attorneys. Call 703-548-8400.