Starting Your Business. Select a Business Entity.

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. As such, using an entity to conduct your business can protect personal assets, such as your house, car, and savings, from creditors of your business.

Which Business Entity Should I Use?

Bowen & Logan, PLLC attorneys are licensed in Virginia, Maryland, and Washington, D.C. Those jurisdictions offer several forms of business entities from which to choose, including:

• Corporations
• Limited Liability Companies (LLCs)
• Partnerships
• Limited Partnerships
• Limited Liability Partnerships (LLPs)
• Other business entities

Our lawyers are familiar with all forms of business entity authorized in Virginia, Maryland, and Washington, D.C. Most of our clients select either the corporation or limited liability company form of business entity. Selecting the right form depends on many factors, including the business’ needs concerning (1) internal management, (2) rights of business 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 three 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.”  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 Choosing 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 referred to as “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 referred to as “S” corporations, after sub-chapter 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, the profits and losses of the business are allocated to the members. This allocation is in proportion to each member’s ownership interest in the LLC.

Our lawyers have experience advising clients regarding their choice of entity. This advice includes tax treatment considerations for that entity. These are 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 Bowen & Logan will work with you to build a long-term relationship. As such, we are better able to meet the ongoing needs of your business, protect your assets, and plan for tomorrow.

Please contact Bowen & Logan for more information about business formation and to schedule an appointment with one of our business law attorneys. Call 703-548-8400.