When forming a business, it is easy to overlook legal factors during the formation and planning stages that may impact the future of your business. Mistakes in your financial documents, operating agreements, bylaws or other documents can adversely affect your company’s future and legal liability. The Attorneys at McClanahan Powers have a strong foundation in business, intellectual property and commercial law, and are fully prepared to counsel nonprofit and for-profit businesses of any size.
Unlimited Liability: The Dangers of Operating as a Sole Proprietor
A Sole Proprietorship is a type of business entity with a single individual owner whereby there is no legal distinction between the owner of the Sole Proprietorship and the entity, meaning that the owner is personally liable for all debts and liabilities of the company. If you operate your Sole Proprietorship under a name other than your legal name then you must register the entity’s Assumed Name with the appropriate Circuit Court’s Office of the Clerk where your business is located. For example, in Virginia, if your business is located in Fairfax County, you would file your Fictitious Trade Name with the Clerk located at the Fairfax County Circuit Court.
There are several considerations to take into an account before and during the initial phase of forming your Corporation and what type of Corporation to form. It is also extremely important to note that a well-organized business plan prior to forming any type of business entity is probably the most pivotal step in the initial development of your company. Once your business plan is developed you are ready to begin the process of legitimizing your Corporation.
Despite the availability of the modern Limited Liability Company as a business entity selection, if you still wish to start a formalized Partnership, you should generally form a Limited Partnership (or Limited Liability Partnership if your state offers such an option). To form a Limited Partnership, which is offered in most states, you would begin by filing a Certificate of Limited Partnership with the appropriate division of a state’s Secretary of State. In Virginia, the Certificate of Limited Partnership is filed with the Commonwealth of Virginia’s State Corporation Commission.
A Limited Liability Company (“LLC”) is an extremely popular business entity due to its fluidity, favorable tax structure, and flexibility. The LLC is a separate entity unto itself. An LLC is controlled by its members and operated by its managers, similar to a Corporation’s shareholders and officers respectively. It has the power to do things that an individual can do, such as purchase land and enter into contracts, and even has its own federal identification number, similar to an individual having a social security number.
Limited liability protection allows the member(s) and manager(s) of an LLC to protect their personal assets, in most circumstances, from business creditors and individuals (or other business entities) who seek remedies stemming from the negligence or wrongdoings of the LLC. This protection, however, may be pierced (“Piercing the Veil”) if an LLC and its member(s) and manager(s) do not take the necessary steps to ensure that the entity is separate from themselves.
A Nonprofit Corporation (“Nonprofit”) is a Nonstock Corporation that uses the Corporation’s profits to help achieve a charitable purpose. In terms of the structure and liability, with some specific exceptions, protection is roughly identical to a For-profit Corporation. However, a Nonprofit has different rules regarding taxation. Generally, a Nonprofit does not have to pay many of the taxes that a For-profit Corporation furnishes.
In terms of state taxes, a Nonprofit should register with the appropriate state agency to receive a Sales and Use Tax Exemption. In Virginia, this exemption is applied for via the Virginia Department of Taxation’s Sales and Use Tax Exemption. Further, a Nonprofit, depending on its purpose and other factors, may apply forFederal 501(c) Tax Exempt Status with the IRS via IRS Form 1023. Lastly, most states require that a Charitable Solicitation License (“License”) be filed with a specified state agency in order to solicit contributions; failure to do so when soliciting contributions is unlawful and may be punished criminally. In Virginia, a Nonprofit soliciting contributions must register with the Virginia Department of Agriculture and Consumer Services via the department’s Form 102. These filings can be extremely complex and lengthy and it is strongly recommended that you consult an experienced attorney who is familiar with the process.