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Step
Two: Operating a Business
Business Structure
 Starting
a new business requires making many decisions. A business owner is,
by default, a decision-maker. Fortunately, resources at the local, state
and federal levels abound to assist you with decisions related to starting
and running your new business.
Decision: Business Organization
Once you know the type of business you wish to operate,
you will need to decide on its organization. Will it be a sole proprietorship,
a partnership, a corporation, or a limited liability corporation? Perhaps
these choices sound confusing, but once you understand the pros and
cons of each, your decision should be easy to make.
The Different Types of Business Ownership
Sole
Proprietorship (return
to top)
Usually there are no special requirements in Virginia
to form a sole proprietorship. Simply register your trade name and obtain
a business license and you will be in business in most localities.
To find out more about forming your sole proprietorship,
please contact the Virginia Department of Business
Assistance or your local economic development department. For information
about requirements related to starting your business, please
click here.
Sole Proprietorship Pros and Cons
Pros. The biggest advantages to a sole proprietorship are:
1) It is an easy way to start your business;
2) It is an inexpensive way to start your business.
Con. The biggest disadvantage to a sole proprietorship is:
The business owner (YOU) is personally liable for the business.
This means that if a disgruntled customer sued you, you could
potentially lose your personal belongings, like your house.
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For additional information on starting a sole proprietorship:
http://www.nolo.com/lawcenter/ency/article.cfm/objectID/3FD19141-DB91-4FCA-BDB93416A4D05479
http://www.mycorporation.com/Solprop.htm
Partnerships (Return
to Top)
 A
business partnership is created when two or more persons agree, in person
or in writing, to start a business. To form a partnership in most Virginia
localities, you will simply need to register your trade name, and obtain
a business license. To find the specific requirements for forming a
partnership in your locality, please contact your local economic development
department.
The two main types of partnerships are: General and
Limited.
General Partnership
A general partnership is the easiest type of partnership
to form. For specific information about requirements related to starting
a business, please click here.
One additional step which you may wish to take if forming
a general partnership is preparing and signing a partnership agreement.
Partnership forms should be prepared by your attorney. For your convenience,
a sample of a partnership form is included with this CD and may be accessed
by clicking
here.
The biggest disadvantage to a General Partnership is
that each partner is liable for the whole business. To explain this,
here is an example:
You and your friend Joe Smith
form a business called Water Works that sells custom-made plumbing
fixtures. Unfortunately, Joe uses money set aside for the business
to fund his vacation in Florida. A month later, Water Works folds,
but it owes its creditors thousands of dollars. Joe is unable
to provide any funds, so guess who is responsible for these debts?
You are. Even though the business is a partnership, if your partner(s)
turns out to be a deadbeat, you will be responsible for not half,
but all, of the liabilities.
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You are also responsible for any poor business decisions
Joe may have made. Compare it to a marriage. If your spouse buys a house
in an unsafe neighborhood while you are away on business, you are just
as responsible for the house payments as your spouse is, even though
it wasn’t your decision to buy the house.
Limited Partnership
 A
Limited Partnership is similar to the general partnership, with several
major exceptions. There are two actual classes of partners that make
up the partnership: General Partners and Limited Partners. General Partners
have the same pros and cons as in a general partnership above; however,
each Limited Partner in a limited partnership is only liable to the
extent of his or her individual investment. Limited Partners have no
say in the day-to-day operations of the company; the General Partners
actually manage the company. In essence, a limited partner is an investor.
In the case of the Water Works example above, a limited partner’s loss
would only amount to the investment made in the company. The company
might fold due to one of the general partner’s poor decisions, but a
limited partner would not have to bear financial losses above what was
initially invested in the business. However, general partners (those
that manage day-to-day operations) may have the same liabilities as
under a general partnership.
A limited partnership is a bit more complicated (and
expensive) to start than a general partnership. In addition to registering
your trade name to protect it, you must file a Certificate of Limited
Partnership with the Virginia State Corporation Commission (please click here).
Partnership
Pros and Cons
Pro. The largest advantages of
the partnership are that it is relatively simple to start a business
this way, and it allows the business to benefit from a combination
of talents. Another advantage, in the case of a limited partnership,
is that each limited partner is only liable to the extent of his
or her individual investment.
Con. The largest disadvantage
with a general partnership is that you are personally responsible
for more than half of the business’ losses, if it incurs losses.
And you are also responsible for your partner’s business decisions,
even if they are bad decisions. Also, as in the case of the sole
proprietorship, with a partnership, you and your partner are not
protected from liability related to the business. For instance,
if an unhappy customer sued you, you could lose personal belongings,
like your car.
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For additional information on business partnerships:
http://www.bcentral.com/articles/anthony/130.asp
For additional information about requirements related
to starting your business, please click here.
Corporations (Return
to Top)
 A corporation is a legal entity that is separate from the people who
own it. Shareholders govern the corporation indirectly by electing people
to manage it.
Forming a corporation is somewhat complicated, and
you may want to enlist the assistance of an attorney if you choose
to organize your business this way. To form a corporation requires
filing Articles of Incorporation with the State Corporation Commission
(please
click here) and paying filing fees and other initial fees. To
access a copy of the Articles of Incorporation form in Word format, click here. To access
the Articles of Incorporation form in pdf format, click
here.
In addition, a corporation, once formed, must comply
with several formalities, such as holding regular meetings and maintaining
explicit records.
There are several different types of corporations:
C Corporation
This is the most common form of incorporation for America’s
largest companies. The letter “C” simply refers to a subchapter of the
IRS for corporate tax purposes. The separate nature of the C Corporation
creates advantages and disadvantages.
 Since
the C Corporation is separate from its owners, also known as shareholders,
the owners may be taxed twice for any profits. That is, the corporation
pays taxes on its profits. Then the corporation distributes the profits
to the shareholders in the form of dividends. The shareholders then
pay taxes on these dividends. This is known as double taxation and is
considered a disadvantage of forming a business this way. Pending legislation,
however, may change this form of double taxation. Be sure to check with
your accountant.
An advantage is that the shareholders are only responsible
for the company up to the amount of their personal investment. They
may lose all of their stock in a corporation if it goes belly-up, but
they will not lose their homes or other personal belongings.
S Corporation
 The
S Corporation shares much in common with the C Corporation. Like the
C Corporation, it is owned by shareholders who do not bear personal
liability for the losses of the corporation. Also, the same filing requirements
and formal rules apply to both types of corporations.
There are several differences between the two types
of corporations, however. A major difference and an advantage of the
S Corporation is that its shareholders will not be taxed twice for the
company’s profits. All profits are passed through to the shareholders’
individual income tax statements.
Another difference is that the S Corporation cannot
have more than 75 shareholders, while the C Corporation can have an
unlimited number of shareholders. For this reason, larger corporations
are C Corporations.
Other Types of Corporations
There are several other types of corporations, including:
professional corporations (operated by licensed professionals, such
as doctors and lawyers), nonprofit corporations, and cooperatives.
Corporation
Pros and Cons
Pro: An advantage is that the
corporation is a separate legal entity from the individual(s)
owning it. This means that if someone sues the corporation, shareholders
are only liable for the corporation up to the amount of stock
they own.
Con: A disadvantage
is that it may be more complicated and more expensive to start
a business this way. There are ongoing regulations to abide by
and fees to maintain when you run a corporation.
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For more information on corporations, consult the State Corporation Commission
(SCC) web site: http://www.scc.virginia.gov/.
Or contact the SCC by phone at 804-371-9967 (in Richmond) or toll-free
from other parts of Virginia at 1-800-552-7945.
Additional
web sites offering information on corporations:
http://www.scc.virginia.gov/division/clk/index.htm
(Office of the Clerk, State Corporation Commission-frequently asked
questions)
Limited
Liability Company (Return
to Top)
 A
Limited Liability Company (LLC) is not a corporation. It is a distinct
form of business ownership that combines features of the corporation
with features of the partnership or sole proprietorship.
Forming an LLC is similar to forming a corporation.
Articles of organization must be prepared and filed and fees must be
paid. You may wish to consult an attorney if you choose to form an LLC.
An LLC is like a corporation in that it provides
liability protection for its owners. It is like a sole proprietorship,
partnership or S Corporation in that it protects its owners from double
taxation: profits are accounted for on the individual owner(s)’ income
tax returns. The LLC owners may choose to operate the LLC like a corporation,
and elect managers to run it, or they may choose to operate like a
partnership and manage the company themselves. A single person may
also operate an LLC.
Articles of Incorporation for a Domestic Limited Liability
Company (in Word format) may be downloaded from this CD by clicking
here. If you prefer pdf format of this document, click
here.
Additional forms related to LLC's may be accessed on
the State Corporation Commission web site at: http://www.scc.virginia.gov/division/clk/fee_dom_llc.htm
For additional information on LLCs, visit the NOLO
Law Center's web site.
LLC Pros and
Cons
Pros. The major advantages include:
1) the owner(s)’ liability is limited;
2) there is no double taxation.
Con. It
is somewhat complex and expensive to form an LLC.
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Two: Operating a Business, Requirements
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