Step Two: Operating a Business

Business Structure

NOTE: A business license is not required in Stafford County .   

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 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)

Forming a sole proprietorship is the easiest way to start a business. In most cases, the only step required is filling out a simple form to register the business with your local government and conducting a search of your company’s name to make sure there are no other companies operating with the same name in your jurisdiction. A very small fee is usually required for this service.


 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.

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. The two main types of partnerships are: General and Limited.

General Partnership

A general partnership is the easiest type of partnership to form. The only step required is that you file to protect your trade name. This will prevent another business start-up from using the name you have chosen.

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. You may also wish to consult an attorney.

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.

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 one major exception. Each partner is only liable to the extent of his or her individual investment. In the case of the Water Works example above, your loss would only amount to your investment in the company. The company might fold due to your deadbeat partner’s poor decisions, but you would not have to bear financial losses above what you initially invested in the business.

A limited partnership is a bit more complicated 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.


Partnership Pros and Cons

Pro. The largest advantage of the partnership is that it is relatively simple to start a business this way, even in the case of the limited partnership.

Con. The largest disadvantage is that with a general partnership, 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.

For additional information on business partnerships:

http://www.bcentral.com/articles/anthony/130.asp

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 (http://www.state.va.us/scc/index.html) and paying filing fees and other initial fees. To access a copy of the Articles of Incorporation form, click here (PDF) .

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.

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.

For more information on corporations, consult the State Corporation Commission (SCC). Or contact the SCC by phone at 1-800-552-7945.

Additional web sites offering information on corporations:

Office of the Clerk, State Corporation Commission-frequently asked questions.

NOLO Law Centers (Information on Corporations)

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.

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.


Go To: Step Two: Requirements

Skip to Step Three: Business Plan



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