Forming a company?

When forming a company or changing the organization of your current business, it is important to know the different options available to you. The legal entity that you are operating will determine what tax structure you will comply with and your legal liability as a business owner, among other things. This post will give you a general overview of three types of companies: corporations, partnerships, and limited liability companies (LLCs).

Corporations

Incorporating your business gives you the highest level of personal liability protection available. However, it also comes with greater corporate responsibilities, particularly in regard to taxes. There are two types of corporations: c-corp and s-corp.

Both are distinct legal entities separate from its owners (“shareholders”), which protects their personal assets. Both require articles of incorporation, a registered agent, elected directors, issued stock certificates, and by-laws. Corporate responsibilities include annual shareholders meetings, periodic director meetings, recorded minutes, detailed financial reports, and separate income tax returns. In both cases, personal liability protection can be forfeited if corporate formalities are not followed.

Where c-corps and s-corps differ is how they are taxed. C-corps incur double taxation; profits are taxed both at the corporate level and at the individual level. In an S-Corporation, corporate taxes pass through to the shareholders’ personal tax returns.

Partnerships

A partnership is simply when two or more people operate a for-profit business. There’s no fee or process for starting a partnership, though you may need to register a trade name. The drawback is that partners are personally liable for any business debts or lawsuits. A partnership agreement is also recommended to reduce conflicts. There are three main types of partnerships: general, limited, and limited liability.

In a general partnership, each partner is equally liable for the business and the actions of other partners. In a limited partnership, at least one general partner has full liability in the company while a limited partner is only liable for his or her own portion of ownership. In a limited liability partnership, each partner is only liable for his or her own actions. It is important to establish a partnership agreement that defines each partner’s role and responsibilities.

Limited Liability Companies (LLC)

LLCs offer the tax benefits and simplicity as well as limited personal liability protection. Requirements vary by state, but in Virginia, forming an LLC requires filing articles of organization, a registered agent, an annual $50 registration fee, and regulatory compliance. An operating agreement is not required, but its highly recommended to prevent or reduce conflicts. The only corporate responsibilities of an LLC are to file an annual report with the secretary of state and pay quarterly estimated tax payments.

Want more information?

For more general information on forming a company, QuickBooks has a set of short, informative videos that explain the differences between various business types.

Additionally, many of our attorneys are also business owners, and they have a deep understanding of both the practical and legal realities of forming a company. They can help with your business’ needs; contact us here.

Disclaimer: this blog does not constitute legal advice