Why form a corporation or LLC?
The primary benefit of entity formation is liability protection. Either an LLC or a corporation will allow you to separate your personal assets from your business assets. If you incur a liability in your business, only the assets of the business will be at stake. You can protect your personal assets, such as your home, stocks, retirement accounts, etc., from business liabilities. However, you must properly set up your entity and properly run the entity in order to maintain that protection from personal liability. If you use an on-line service or pre-printed forms will not get the advice or assistance that is necessary beyond simply setting up the entity.
It is impossible to provide a comprehensive list of tax benefits offered by each type of entity because those benefits often depend on the industry, the type of assets held by the entity, salary and benefits to be paid to employees and owners, capital structure of the entity, how profits will be distributed, and other factors. In general, the central tax benefit of a corporation or LLC is that operating expenses are deductible at the pre-tax level, including salaries and benefits in most cases.
An LLC is a pass-through entity, meaning profits and losses pass through to the members, and the entity is treated like a partnership for tax purposes. The LLC itself pays no taxes, but it reports its income or loss to its members in proportion to their membership interests, and the members then account for the same on their personal tax returns. A single-member LLC is a disregarded entity for tax purposes, but its liability protection and other benefits remain in place. However, current IRS rules allow an LLC to elect to be treated as a corporation so you can get the structural benefits of an LLC but still choose corporate tax treatment. A standard corporation is a separate taxable entity (“C-corporation”). There is a risk of double taxation on corporate profits because the corporation pays taxes at the corporate level and then the shareholders pay taxes on their dividends at the personal level. C-corporations are often companies that retain earnings for investment in future tax years rather than distributing profits to shareholders when earned. In order to be treated as a pass-through entity a corporation can file an “S-election” with the IRS, in which case the corporation itself pays no taxes. Again, profits and losses are reported to the shareholders in proportion to stock ownership, and then the shareholders must account for the same on their personal tax returns. Most closely held corporations are S-corporations.
We will evaluate your needs and consult with your CPA or a CPA that we can recommend in order to put you in the best tax situation possible when setting up a new entity.
perpetual existence and estate planning:
Both LLCs and corporations have perpetual existence, as long as the registration fees are paid and required filings are made with the State Corporation Commission each year. In the event of death of a member or shareholder, the business still continues (subject to licensure requirements for certain professions). LLC membership and corporate share ownership should be integrated into your estate plan to ensure the continued operation of your entity. Succession planning should be covered in your entity’s organizational documents.
Adding “Inc.” or “LLC” to your business name lends credibility and a sense of permanence to your business. This professional and perpetual appearance can be invaluable in competitive industries.
The ownership structure of LLCs and corporations is not required to be in the initial organizational documents filed with the State Corporation Commission. You are required to maintain a registered office address, which can be your home or office, and you are required to have a registered agent. We serve as registered agent for most of the entities we form, which provides clients with an added layer of privacy and separation from their personal affairs. LLCs generally have no officers or directors, so the names of those involved in the operation of the entity are not on file with the State Corporation Commission. Corporations are required to file an annual report listing the names and addresses of their officers and directors. However, an office address can be used rather than your home address. Corporations are not required to list their shareholders, so again, the ownership of the entity remains private.
CHOICE OF ENTITY:
The choice of entity for your particular business is dependent on a number of factors that should be discussed with legal and tax professionals. The nature of your business is the first consideration. For example, a limited liability company (LLC) is generally preferable for investments and businesses that produce passive income, such as ownership of rental real estate. A corporation is often preferable for businesses that will pay salaries and benefits, particularly owner salaries and benefits. Other tax and accounting issues should be considered, such as how the entity will be capitalized (bank financing, investors, or owner contributions of money or property) and how profits or losses will be allocated. The number of owners, the level of involvement of each owner, and the management structure of the entity are further considerations.
Corporations and LLCs are the most common entities. However, partnerships, limited partnership and business trusts are other entity forms that may be appropriate for specific purposes. There are statutory requirements for properly forming each type of entity. Even single-member and family-owned entities should have a formal set of organizational documents. Entities that have multiple owners or participants should have organizational documents that define relationships between the shareholders, members or partners. Furthermore, every entity should maintain a separate set of financial books and records that are separate from the finances of its owners. We help clients get their businesses started on the right foot. We can set up most business entities on-line to obtain immediate approval. We normally set up entities on a flat fee basis depending on the number of owners. Flat fees will include the initial filing, organizational documents and obtaining a federal tax identification number from the IRS. If you have already set up an entity but have not completed all the organizational documents we can complete those documents for you.
Choosing the appropriate entity can be a complex decision involving tax, liability, estate planning and operational considerations. We take a comprehensive approach to advising clients on the right choice of entity for their particular business. We also stay involved after formation of your business, serving as registered agent and assisting with legal or operational issues that may arise at any time.
Limited liability companies:
An LLC is formed by filing Articles of Organization with the Virginia State Corporation Commission (SCC). Upon approval by the SCC a Certificate of Organization is issued. But that’s not all. If you have a multiple-member LLC you need to obtain a tax/employer ID number from the IRS. If you have a single-member LLC you are not required to get a separate tax/employer ID number. You can use your social security number, but we recommend getting a separate tax/employer ID for your business. Your bank will need the Articles and Certificate of Organization, and possibly an Operating Agreement, to set up a bank account for the LLC. Setting up a company bank account is crucial, as you may not co-mingle personal funds with company funds.
An LLC must be operated as a separate and distinct legal entity. An LLC can only act through its members and/or managers. Officers and directors are not required. An LLC can be member-managed or manager-managed. A manager does not have to be a member. Some LLCs hold an annual member meeting, although annual meetings are not required. Ownership and management structure should be covered in an Operating Agreement.
For multiple-member LLCs a written Operating Agreement is crucial. The Operating Agreement should define membership interests and the relationship between the members by covering voting rights, management authority, accounting and profit disbursement requirements, and buy-sell restrictions. A strong Operating Agreement can help avoid or resolve disputes and deadlock. It should cover events such as death or disability of a member and should include transfer restrictions, such as a first right of refusal for buy-out offers. Finally, the Operating Agreement should provide a method for determining the value of the company for purposes of buy-out events. The Operating Agreements we draft will cover all these issues.
A corporation is formed by filing Articles of Incorporation with the Virginia State Corporation Commission (SCC). Upon approval by the SCC a Certificate of Incorporation is issued. But that’s not all. Directors and officers must be appointed, By Laws must be adopted and stock must be issued. The corporation must have a tax/employer ID number issued by the IRS. Your bank will need the Articles and Certificate of Incorporation and the By Laws to set up a bank account for the corporation. Setting up a corporate bank account is crucial, as you may not co-mingle personal funds with corporate funds. Stock must be issued to the owners of the corporation. If there are multiple shareholders then a Shareholders’ Agreement is advisable. Much like an Operating Agreement for an LLC, a Shareholders’ Agreement should contain provisions for resolving disputes and deadlock. It should include shareholder death and disability provisions, stock transfer restrictions, and buy-sell rights and restrictions. Finally, a Shareholders’ Agreement should contain a method for determining the value of the stock for buy-out purposes.
A corporation must be operated as a separate and distinct legal entity. The corporation can only act through its directors and officers. Each year the corporation must have a meeting of the shareholders to elect directors and a meeting of the directors to elect officers. It must also pay an annual registration fee and file an annual report with the SCC confirming the current officers and directors. When we form a corporation we provide all necessary organizational documents. If we handle registered agent services we provide all also provide all annual minutes, maintain the corporate book, complete the annual report and send it to the appropriate corporate officer to sign and file with the State Corporation Commission. Maintaining these corporate formalities is key to the shareholders’ protection from personal liability.
A non-stock entity is often appropriate for charitable organizations, community associations, churches and sports teams. These entities have members rather than owners or shareholders. The organizational documents should state the purposes of the entity, define qualifications for membership and outline how the organization will be governed and operated. In order to acquire tax-exempt status the organizational documents must also contain certain requirements outlined in Internal Revenue Code 501(c). We have successfully established many non-stock entities that have been approved for tax-exempt status by the IRS.
In addition to forming corporations, LLCs and other entities, we also routinely assist clients with a wide range of business operational issues, such as filing trade names, filing trademarks and service marks, obtaining business and professional licenses, drafting or reviewing contracts and leases, handling collections and evictions, and handling business disputes. We provide a full range of legal services to our business clients.