The following is a brief discussion of several types of business entity forms. Because there are tax ramifications and because liability is different under the types, it would be a good idea to set up an appointment with us for some counseling first.

Generally, this is a default business entity when the business has one owner, and it does not file with the state for one of the other business entity types (below). In Kilmarnock, as well as in certain other jurisdictions, the sole-proprietor must obtain a business license from the Town office. There are local property taxes as well on real estate and inventories at year end.

The sole-proprietor is personally responsible for a debts of the business.

Advantages of Sole-proprietorship business entity

• Simplicity (of all the business entity types)
• The greatest freedom from regulation of business entity
• Minimal working capital requirements
• The owner is in direct control of the business entity
• All profits go to the owner (income taxes are not on the business entity, but on the owner)
• There are some tax advantages to small business entity owners
• Formation is easy, fast, and has low cost
• There are few restrictions for terminating the business entity

• Unlimited liability (liability falls on the owner rather than the business entity)
• Total responsibility, even if an employee of the business entity is not behaving in accordance with your specified standards
• Difficult to raise capital for the business entity

When there is more than one owner, the default entity is a partnership business entity. It is good to have an understanding between the owners, called a partnership agreement. The agreement should specify at a minimum:

• The ratios of profits and losses
• Any guaranteed payments
• Percentages of distribution upon termination of the business entity
• Property to be contributed to the business entity

• Additional sources of capital
• Help in decision making
• Ease of formation of the business entity (compared to a corporation)
• Broader management base
• Relative freedom from government control and special taxation
• Share in profits
• Flexibility in the business entity

• Organizational problems
• Unlimited liability of at least one partner
• Difficulty in raising additional capital
• Disposing of partnership interests
• The partnership business entity terminates on death of any of the general partners

This is a variation of the general partnership business entity formation discussed above. Rather than having all general partners, there are limited partners who do not participate in the management of the partnership and do not share in the partnership's liabilities. Limited partners do invest in the partnership and do share in the profits of the partnership.

A corporation is a business entity with a legal existence apart from its owners. Corporations have to comply with laws of the state of incorporation. Under Virginia law there are stock and nonstock corporations. Treasury stock is not recognized under Virginia law.

Advantage of Corporation Form

• Continuous existence of the business entity
• Easier to raise capital
• Limited liability
• Possible tax advantage (you can talk to us about this)

• Double taxation (an S-election gets around this)
• Need to hold annual meetings and document elections and salary arrangements of key officers in the corporate record book
• Tax attributes are locked into the corporate structure and can't be used personally (S-election gets around this)
• More extensive record keeping

A limited liability company is a hybrid entity that fails to be either a corporation or a partnership. Each state determines which test the entity has to flunk to have that state's statutory recognition. In Virginia the LLC lack perpetual duration of the business entity.

Advantages of LLC Formation

• Can be treated for tax purposes like either a corporation business entity or a partnership business entity, with an election being made on its first tax return.
• Unlike a partnership, members can be replaced without terminating the LLC business entity
• Unlike a limited partnership, LLC members can participate in management but do not share in the liabilities of the business entity.
• There are no limitations on the number of members like there are in an S-Corporation

• Lacks continuity of life
• When a member dies or withdraws, the LLC terminates as a business entity
• Restrictions on transfer - ability of membership rights