Business Entities in Virginia: Article 1 of 4
W. Brandon Cowan, Esquire
Have a great idea for a business, tired of working for the man, or infused with an entrepreneurial spirit? Thinking of starting a business, but not sure what business entity is best for your product or service? Unsure or confused about how the entity is legally established? These questions and concerns impact all potential business owners. Unfortunately, the unknown answers to these same questions deter people from ultimately "hanging their own shingle"; while others are unaware they should be considering these questions – "you don't know what you don't know". Even worse, entities are often improperly created, which unnecessarily exposes its owners to civil liability. Conversely, an entity may be legally formed, but still have deficient governing documents that can lead to future disputes, confusion and law suits.
These questions, and other issues, will be addressed over a series of four articles that will define and explain common corporate terms; discuss the formation of entities; and sort through the features, benefits and pit-falls of the various entities. The three most utilized entities will garner particular focus: partnerships, limited liability companies and corporations.
Everyday entrepreneurs are launching new businesses, even in the current economic climate. These individuals bring an energetic optimism to their venture. The entrepreneur begins with the expectation that his expertise and passion assures success. Product knowledge is generally not an issue. Unfortunately, elements outside the entrepreneur's expertise often challenge the business's vitality: taxes, accounting, inventory management, succession planning and establishment of the appropriate entity.
The commencement of a new business generates multiple challenges ranging from creation of a business Entity (e.g. Partnership, Limited Liability Company or Corporation, or other) to operations and marketing. The prudent entrepreneur focuses his energy on his area of expertise, and seeks guidance on those important elements where his knowledge is limited.
It is recommended to seek legal counsel for both the selection and establishment of business Entities. It is crucial to understanding the acute differences among the different types of Entities, including their advantages and disadvantages. Entities are primarily distinguished by formation, management, exposure to liability, taxes, dissolution and transferability of ownership. Three subsequent articles will tackle these distinguishing differences.
Prior to diving into more detailed analysis, it is important to understand key business terminology. Following are frequently used terms that generally either pertain to business or to companies as a whole. These terms will be incorporated into the subsequent articles. Please visit this site over the next few months to read those subsequent articles.
Annual Meeting: Annual Meeting of company owners for the purpose of holding elections and conducting other routine business.
Annual Report: Comprehensive account of a company's activities and financial performance for the preceding year.
Assumed Name or Fictitious Name or Doing Business As (D.B.A.): A name differing from the business's official name, typically that under which a business operates or is commonly known. Individuals and unincorporated Entities that regularly conduct business using an Assumed Name must file an Assumed Name certificate with the county clerk in each county in which business premises are maintained. Incorporated Entities must file Assumed Name certificates in the county or counties where the registered office and the principal office are located in addition to filing with the SCC.
Business Trust: An association of shareholders formed under the laws of the Commonwealth and registered with the SCC, in which a trustee (a Fiduciary who acts on behalf of the beneficiaries) directs the business operations (similar to Officers of a Corporation – i.e. president, vice-president, secretary and treasurer). The Trust does not terminate upon the death or Dissociation of a beneficiary; the Trust may Incorporate a governing document, similar to Bylaws of a Corporation or an Operating Agreement of an LLC; and the beneficiaries of the Trust have limited exposure to liability and can transfer shares.
Capital Account: As of any given date the amount calculated and maintained by the Entity for each individual's Capital Contribution.
Capital Contribution (Contribution): Any Contribution to the capital of the Entity in cash, property or services by anyone holding an ownership interest.
Certificate or Charter: The order of the SCC that grants a company its legal existence and the right to function as a company in Virginia.
Co-operative (Co-op): An association formed under laws of the Commonwealth and registered with the SCC, in which the owners are the same parties that use the Co-operative's services (e.g. farmers often create Co-ops to enhance their bargaining position in purchasing feed, livestock supplies, petroleum, etc. In turn, the farmers purchase their supplies, at a better value, from the Co-op they established). A Co-op owned by its users, controlled by its users and benefits its users.
Commonwealth: The Commonwealth of Virginia
Consolidation: When two or more companies unite and form a new company.
Conversion: When an Entity is converted into a different type of Entity (e.g. a Corporation converted into an LLC).
Dissociation: Signals a change in the relationship between business owners that is caused by any owner's cessation of association with the business. Dissociation requires express notice to the other owners of the intent to disassociate. Dissociation signals the conclusion of the disassociating owner's right to share in profits, ability to bind the business and liability for business obligations.
Dissolution: Signifies the Termination of an Entity's legal existence by expiration of its Charter, by legislative act, by bankruptcy, or by other means. Dissolution immediately precedes the liquidation or winding-up process.
Duty of Care: Imposes liability upon a Fiduciary when he or she demonstrates nonfeasance, meaning the Fiduciary does not act with the care a prudent person would employ when managing their personal business affairs (e.g. a Director's continual absence from mandatory Board meetings). Conversely, the Fiduciary is not liable for the misfeasance of bad business judgment (e.g. making a bad real estate investment that takes a substantial economic toll on the business).
Duty of Loyalty: Fiduciary Duty owed by certain individuals directly impacting the operations of the business. The Fiduciary breaches his or her Fiduciary Duty by engaging in self-dealing, usurping company business opportunities or making secret undisclosed profits at the detriment to the business or business owners.
Entity: An organization (such as a business or a governmental unit) that has a legal identity apart from its Members (the following are business Entities: General Partnership, Limited Partnership, Limited Liability Company, Corporation, Professional Corporation, Joint Venture, Business Trust, Co-operative or other association).
Fiduciary: An individual who owes the duties of good faith, trust, confidence, and candor; and who must exercise a high standard of care in managing another's money or property (a Fiduciary Duty) (e.g. Officers and Directors of a Corporation and Managers of a LLC).
Flow Through Entity means the Entity itself is not taxed, and the taxation "flows through" the Entity to another tax return; typically to the tax return of investors or owners, to whom it is treated as ordinary income. These Entities usually avoid dividend tax and the double taxation subjected to Corporations.
Foreign Entity: A business Entity organized under laws other than the laws of the Commonwealth, and Unincorporated in the Commonwealth.
Formation: The creation of the new Entity, formally accomplished by registering with the SCC; or informally accomplished through conduct that indicates intent to operate a business for profit.
Fundamental Changes: Significant company changes that generally require more stringent voting procedures and a greater voting percentage of company owners (e.g. Charter amendments, reduction in company capital, Mergers, Consolidations, certain asset sales and Dissolution).
General Partnership: A Partnership in which partners participate fully in running the business; and, in proportion to their ownership interests, share in profits and personally liability for the Partnership's debts.
Incorporated Entity v. Unincorporated Entity: An Incorporated Entity is formed in accordance with applicable laws of the jurisdiction where it is founded and registered with the appropriate governing body for that jurisdiction; while an Unincorporated Entity is not.
Involuntary Dissolution: Dissolution that is automatic (resulting from failure to file an Annual Report, failure to pay required fees or taxes, or failure to timely notify the SCC of a change in Registered Agent); or Dissolution mandated by order of either the SCC or a court.
Joint Venture: A business Entity, formed for a finite period of time, to pursue a specific enterprise; and in which there is joint ownership interest, joint control and joint sharing of profits and losses.
Limited Partnership: A Partnership composed of one or more persons who control the business and are personally liable for the Partnership's debts (i.e. Partners or General Partners); and one or more persons who contribute capital and share profits, but who cannot manage the business and whose only risks the loss of the amount of their Contribution (i.e. Limited Partners).
Merger: When one company unites with, and becomes a part of, another company (the surviving company).
Notice Requirement (Notice): Annual and Special Meetings characteristically require notice, typically in writing, to company owners in a specified number of days prior to the meeting.
Partnership: A voluntary association of two or more persons who jointly own and carry on a business for profit. A Partnership is the default Entity; meaning if the business is not registered with the SCC, a Partnership is presumed to exist if two or more individuals intend to share proportionally the business's profits or losses.
Piercing the Veil: The judicial act of imposing personal liability on otherwise immune company leaders and owners; typically done when the company is simply acting as an alter ego to the company owners, when the company has been under capitalized or when there is fraud.
Principal Place Of Business: The primary office, either in or out of the Commonwealth, where the executive offices are located (e.g. the business nerve center).
Professional Corporation: A company formed under the laws of the Commonwealth and registered with the SCC that is exclusive to licensed or certified professionals (e.g. doctors, lawyers, architects, accountants, etc.), limits personal liability of the shareholders and enables the company to take advantage of tax benefits offered to Corporations.
Registered Agent: A person authorized to accept Service of Process for a business in a particular jurisdiction. The Registered Office is the office of the Registered Agent.
SCC: The Virginia State Corporation Commission, which is the governing body responsible for the management and regulation of business Entities.
Service of Process: Procedure that is mandated by the Code of Virginia, designed to give legal notice (typically in the form of a writ or summons) to an individual or business of a court's exercise of jurisdiction over them. Service of Process is most often associated with the serving of suit papers.
Sole Proprietorship: A business in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity. In layman's terms, any individual operating an Unincorporated business is a sole proprietor. As a result of being Unincorporated, the sole proprietor is not shielded from liability by those laws of the Commonwealth that protect legal Entities; and is therefore personally liable for any obligations of the business and any court judgment against the business (e.g. While operating in the scope of their employment, an employee of the Sole Proprietorship is the negligent party in an accident while driving a business vehicle. The other party is severely injured. The sole proprietor is directly liable to the injured party. This direct liability also pertains to financial obligations of the business).
Special Meeting: A meeting called for some extraordinary purpose, such as Fundamental Changes.
Termination: The end of the business, following the period of Winding Up.
The Code of Virginia: A complete system of law for the Commonwealth, created from statutes adopted by the General Assembly, carefully arranged and officially promulgated.
The Code: Internal Revenue Code of 1986, as amended.
Ultra Vires: Whenever a company exceeds the powers and purposes that were either authorized by statue or in its Charter.
Virginia Corporation (Corporation, C-Corp. or De Jure Corporation): A company formed under the laws of the Commonwealth and registered with the SCC by virtue of the company's Articles of Incorporation, amendment, or Merger; having authority under law to act as a single person distinct from the Shareholders who own it and having rights to issue Stock and exist indefinitely.
Virginia Limited Liability Company (LLC): A company formed under the laws of the Commonwealth and registered with the SCC that is characterized by limited liability for its Owners / Members, management by Members or Managers, limitations on ownership transfer and as a Flow Through Entity for tax purposes.
Voluntary Dissolution: Dissolution by company action (e.g. vote of the owners), Dissolution by unanimous consent (i.e. the agreement of all owners), or Dissolution prior to the company receiving its Charter.
Winding Up (Liquidating): The period between Dissolution and Termination of the business when accounts are settled, obligations concluded, assets liquidated and assets distributed.
 This Article is intended to provide an overview of business Entities in Virginia, specifically focused on Partnerships. This Article does not constitute and should not be treated as legal advice regarding any issue pertaining to legal business issues, generally; and should not be treated as legal advice regarding business organizations in Virginia, and the establishment thereof. Each recipient and reader of this Article should consult with an attorney and other advisors (i.e., tax advisors) regarding issues pertaining to businesses, issues specifically pertaining to the business organization, the establishment of a business organization, and both the tax and non-tax implications and consequences relevant to business organizations.
 CowanGates guides our clients in establishing the appropriate business entity and incorporating an individualized succession plan into their business.
 Capitalized terms herein shall have the meaning delineated in the Definition Section.
 Article 2 will be posted on, or about, September 1, 2011; Article 3 will be posted on, or about, January 15, 2012; and Article 4 will be posted on, or about, April 1, 2012.