To Be or Not to Be: Creating a Business Entity

Starting a new business brings with it a lot of excitement and a lot of legal issues.  Maybe you need a non-disclosure agreement with your suppliers to protect your trade secrets, or a transfer of ownership agreement to ensure that you own the copyright to the software created by the independent contractor you have hired.  Before you do all that, however, you need to get your legal house in order by forming a business entity.

A business entity is a simple way to immediately limit your liability in your business enterprise.  Without taking any action, a business started by a single person is a “sole proprietorship,” which is to say that the business is run under the individual’s name.  This open’s up the individual to personal liability, meaning that the individual’s personal assets–the individual’s house, car, and private bank accounts–could be lost in a lawsuit arising out of the activities of the business.  By forming a business entity, the individual can have limited liability for the activities of thebusiness, and thereby shelter his personal assets from the liabilities of the business.  To do this, an individual will need to make sure the business entity is truly separate from the individual, otherwise a person with a legal cause of action might ask a court to “pierce the corporate veil” and get at the individual’s personal assets.

The main business entities to choose from in the Commonwealth of Virginia are Corporations and Limited Liability Companies (LLCs.)  A Corporation must observe certain corporate formalities, like holding annual meetings and appointing a board of directors.  In contrast, an LLC has almost no corporate formalities to follow, making its maintenance easier.  Moreover, Corporations and LLCs have difference tax implications by default.  Corporations are subject to double taxation, which is to say that Corporations pay taxes on their income, and then the individuals earning wages or dividends pay taxes on those disbursements.  In contrast, an LLC, by default, is a “pass through” tax entity, meaning that the income earned by an LLC is immediately attributed to the LLCs members.  An LLC, incidentally, may also choose to adopt a corporate tax status, making the forming of an LLC even more enticing.

The Creekmore Law Firm has experience counseling businesses at their inception on formation of a business entity.  In addition to assisting clients with the choice of business entity, we also counsel clients on the best ways to resolve member or shareholder disputes, and embody those methods in an appropriate operating agreement or bylaws.  With proper planning, we can help your business prepare for the worst, while expecting the best in your legal affairs.