A Virginia sole proprietor should consider forming an LLC or corporation when the business begins to take on greater financial or legal risk, hire employees, enter into significant contracts, add owners, or prepare for substantial growth. For many entrepreneurs, starting as a sole proprietor makes sense. But the structure that worked when you started may not be the right one today. A business law attorney can guide you on forming an LLC or corporation, allowing you to grow your company.
What Is the Difference Between a Sole Proprietorship and a Business Entity?
A sole proprietorship does not create a separate legal entity between you and your business. That simplicity can be useful, but it also means there generally is no legal separation between your personal and business liabilities.
An LLC or corporation creates a separate legal entity. The Virginia State Corporation Commission (SCC) explains that members and managers generally are not personally liable for the obligations of an LLC. Similarly, officers, directors, and shareholders generally are not liable for corporate obligations.
That distinction can become increasingly important as a business grows.
What Are Signs It May Be Time to Form an LLC or Corporation?
You do not necessarily need to wait until your business reaches a particular size. Instead, consider how your day-to-day operations have changed.
It may be time to reconsider a sole proprietorship if:
- Your business is entering into contracts involving significant amounts of money or long-term obligations.
- You are hiring employees or expanding your workforce.
- Customers, vendors, landlords, or lenders could potentially bring claims against the business.
- You are purchasing valuable equipment, real estate, or other business assets.
- You want to bring another owner or investor into the business.
- The company is becoming a significant source of income or accumulating substantial value.
The common thread is increased exposure. As more money, people, property, and contractual obligations become involved, operating without a separate legal entity can carry greater consequences.
Does an LLC Protect a Virginia Business Owner From Personal Liability?
An LLC can provide an important layer of protection between business obligations and an owner’s personal assets.
Under Virginia law, a member, manager, organizer, or agent generally does not have a personal obligation for an LLC’s liabilities solely because of that person’s role in the company. This protection applies whether an LLC has one member or multiple members.
Limited liability, however, is not absolute. Forming an LLC does not protect an owner from every possible personal obligation. An owner could still face personal responsibility for their own wrongful conduct, for example, or for an obligation they personally guarantee.
Business owners should also treat the company as a distinct entity after formation. That can include keeping appropriate records, maintaining separate business finances, and entering agreements in the company’s name rather than casually continuing to operate as an individual.
Should a Sole Proprietor Choose an LLC or Corporation?
Both structures can provide liability protection, but they operate differently.
An LLC is often attractive to closely held businesses because it offers considerable flexibility. Unless its governing documents provide otherwise, a Virginia LLC is managed by its members, though it may be structured to use one or more managers.
A Virginia stock corporation has shareholders who own the company, a board of directors that manages its affairs at a higher level, and officers who handle day-to-day business activities. This structure may be better suited to some businesses that anticipate bringing in investors, issuing shares, or developing a more formal ownership and management structure.
Tax considerations can also influence the choice, but tax treatment and legal structure are not the same thing. The right entity depends on the owner’s goals, anticipated growth, management preferences, and financial circumstances.
What Changes After You Form a Virginia Business Entity?
Creating an LLC or corporation involves more than filing paperwork with the SCC.
For a Virginia LLC, formation generally begins with filing Articles of Organization. Corporations instead file Articles of Incorporation. Businesses also need a registered agent, and the SCC notes that choosing a business type can affect both legal protections and benefits.
Owners should also consider the documents governing what happens inside the business. An LLC operating agreement, for example, can establish rules concerning management and other company affairs. Virginia law gives LLC operating agreements considerable flexibility in addressing the company’s business and internal operations.
Thinking through these issues during formation can help prevent uncertainty later, particularly if additional owners become involved or the business expands.
Choose a Structure That Fits Where Your Business Is Going
If your Virginia business is growing or you are questioning whether your current structure still works, Surovell Isaacs & Levy PLC can help you evaluate your options. Contact us today to discuss forming an LLC or corporation and selecting a structure tailored to your business’s current needs and future plans.
Posted in: Business Law