West Virginia Department of Commerce deciding on a legal structure

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deciding on a legal structure

Corporation
Limited Liability Company (LLC)
General Partnership
Limited Partnership
Joint Venture
Sole Proprietorship

The first formal decision to be made in starting a business is to select the legal structure for the company. This decision will depend on the number of people who will control the company, how decisions are to be made, and other considerations such as liability and tax issues. The information here may help you make the decision, but it is important to consult with someone with experience who can answer your questions. That may be an attorney or accountant, or a specialist with the Small Business Development Center of the West Virginia Development Office.

A Look at Legal Organizations

In some cases, the business you do may be regulated and some business types may not be acceptable. For example, the Alcoholic Beverage Control Commission will not issue a license to sell alcoholic beverages to a sole proprietorship or a member-managed limited liability company. To save time, money and frustration, take the time to find out everything you can about the requirements for your new business before you file the organization papers.

It is important to consider each form of business organization carefully to evaluate the most appropriate structure for your business. While it is possible for a business to start out under one organizational form and change to another later, proper planning can prevent difficulties caused by an unsuitable legal structure. Seek counsel from an accountant or attorney to determine the form of business organization that best suits your business.

The success of your new business depends on planning. The following is a list of company types with a short description of the characteristics of that company type. The bold bullet under each description is the paperwork needed to file with the West Virginia Secretary of State’s office.

Corporation

A Corporation is a legally created entity distinct from its owners with rights, duties, powers, and responsibilities in and of itself. This usually means that when individuals act on behalf of a corporation, these actions are attributable to the corporation but not the individual, thus limiting the liability of the owners.

When forming a corporation, the owners transfer money, property, or services to the corporation in exchange for shares of stock. Each owner, then, is referred to as a stockholder. The managers of the corporation may or may not be stockholders.

Advantages of a Corporation
  • Stockholder liability is limited to the amount of investment.
  • Business continues to exist after the death of an owner.
  • Transfer of ownership is easily done by the sale of stock.
  • Capital may be obtained by selling stock to investors.
  • Employee benefits (insurance programs, pension plans, and other fringe benefits) can be created more easily and possess tax advantages when borne by the corporation.
Disadvantages of a Corporation
  • Corporation’s income is subject to double taxation only if dividends are paid.
  • Costs to organize a corporation are higher than any other form of business.
  • Corporations are heavily regulated .
  • Corporations doing business in other states generally must apply for corporate authority prior to commencing any commercial activity outside their home state.
  • Stockholders holding the majority of stock will control the corporation.
There are two types of corporations: Regular and Subchapter S corporations. The profits of a regular corporation are taxed twice, at the corporate as well as the individual level, only if dividends are paid. A regular tax return must be filed each year to pay tax on the corporation’s income. Any profits left after taxes may be given to stockholders, who must then pay tax on the amounts they receive.

The S corporation is treated as a partnership for tax purposes and like a corporation it enjoys limited liability. But like a partnership, it is not subject to corporate federal income tax. Although a tax return is filed, the income and expenses of the S corporation are divided among its stockholders who report the profits on their individual returns. Thus, it is taxed only once.

Because the S corporation avoids double taxation while providing stockholders the protection of a regular corporation, this form of organization is popular among small businesses. However, Subchapter S status may create certain disadvantages that should be considered.

Specifically, an S corporation may have no more than 100 shareholders and may issue only one class of stock, thus limiting its ability both to raise capital and to attract certain investors. Meanwhile, stock in an S corporation cannot be sold to another corporation or partnership. Only individuals, estates and some
trusts may own shares. Further, all shareholders must be United States residents and must consent to the S corporation election.

Finally, shareholders that own more than two percent of the corporation’s stock are not eligible for taxsheltered fringe benefits allowed to regular corporations. This includes accident and health plans, group term life insurance, and employer-provided meals and lodging.

Corporations
  • May be for-profit or nonprofit.
  • Must have at least two officers, elected at annual meeting. 28 Going into Business in West Virginia Deciding on a Legal Structure
  • Corporation operated under charter and by-laws; law governs voting requirements for amendments and changes & record-keeping.
  • May create and issue stock.
  • Law provides personal liability protection for directors and officers acting in good faith.
  • Annual report, attorney-in-fact fee and corporation license tax required.
  • File Articles of Incorporation for Corporations, S- and C-type.

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Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a form of business organization that incorporates components of both a partnership and a corporation. Specifically, this organizational structure is treated like a corporation for state law purposes and thus offers limited liability to its owners. Yet, the limited liability company is treated by the Internal Revenue Service and by the West Virginia Department of Tax and Revenue as a sole proprietor if you have one member or a partnership or corporation for multiple members for income tax purposes.

Advantages of a Limited Liability Company
  • More flexible than a limited partnership or S-Corporation with similar tax advantages.
  • Limited liability to the members.
  • Income is taxable only once at the member’s tax rate.
Disadvantages of a Limited Liability Company
  • Restrictions to transferability.
  • Life of the LLC varies from state to state.
  • Does not have stock therefore not transferable.
Limited Liability Company (LLC)
  • For-profit only.
  • May be fixed term or perpetual.
  • May be single-member or multiple-member company; members may have authority defined in operating agreement.
  • May be member-managed or manager-managed.
  • Members have equal ownership unless otherwise defined by agreement.
  • Company operated under articles of organization. Additional provisions may be provided by operating agreement, or if none is written, then by the provisions of law.
  • Law provides personal liability protection for members and managers acting in good faith.
  • May be taxed as partnership under federal law, depending on structure.
  • Annual report and attorney-in-fact fee required.
  • File Articles of Organization for Limited Liability Companies.

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General Partnership

A Partnership is two or more individuals or businesses as co-owners under a partnership agreement. Although West Virginia law does not require a written partnership agreement, many organizations and government agencies such as the Small Business Administration will require the partners to have a written agreement before guaranteeing a loan. If there is no partnership agreement, the partnership is subject to the terms of the Uniform Partnership Act. Each co-owner, or partner, contributes money, labor, property or skills to the partnership, and shares in the profits and losses of the business. The partnership agreement should be in writing. It determines the powers, liabilities, and authorities of each of the partners. A partnership may have general or limited partners (these are two distinct types of partnerships). In most cases, a limited partnership cannot be set up for the specific purpose of operating a business.

General partners actively participate in the management of the business and have unlimited liability. The income of the general partnership is directly taxable to each individual partner based on his or her proportionate interest in the company.

Advantages of a Partnership
  • Easy to organize.
  • Combined financial resources.
  • Combines the managerial skills and judgments of two or more persons.
  • Income is taxable only once at the partner’s tax rate.
Disadvantages of a Partnership
  • General partners have unlimited liability: all partners are liable for each other’s actions.
  • A change in partners could terminate the partnership.
  • Authority for decision-making is divided.
  • Difficult to sell or transfer.
General Partnership
  • For-profit only.
  • Must have two or more partners; partners have equal authority unless otherwise defined in partnership agreement.
  • Partners have equal ownership unless otherwise defined by agreement.
  • Company operated under partnership agreement .
  • No personal liability protection provided by law.
  • Taxed as partnership, with profits assigned according to partnership interest.
  • A general partnership is not required to file with the Secretary of State. However, the law provides the option of filing.

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Limited Partnership

Limited partners, or investors, cannot actively participate in the management of the business and have limited liability. Limited partnerships must have at least one general partner who is responsible for all debts, liabilities, and obligations of the firm. Generally, the liability of the other partners is limited to the amount of the investment by each partner. Both general and limited partners share in the profits and losses of the business.
  • For-profit only.
  • Must have at least one general partner and one limited partner; partners have equal authority unless otherwise defined in partnership agreement.
  • Partners have equal ownership unless otherwise defined by agreement.
  • Company operated under partnership agreement.
  • No personal liability protection provided by law.
  • Taxed as partnership, with profits assigned according to partnership interest .
  • Annual report and attorney-in-fact fee required.
  • File Statement of Registration for Limited Partnerships and Limited Liability Partnerships.

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Joint Venture

Joint Venture is a partnership of one or more sole proprietorships, partnerships, or corporations for the purpose of pursuing a specific business activity or transaction. The main advantage of a joint venture is that existing businesses can join together without having to form a new entity and without having any continuing obligations to each other beyond the joint venture agreement. The primary disadvantage is that parties of the joint venture are liable for the actions of each partner.

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Sole Proprietorship

A Sole Proprietorship is a business owned by a single individual. It is the easiest legal structure to adopt and is the most common form of business organization. However, the owner assumes all the risks of the business.

Advantages of a Sole Proprietorship
  • Easily created and terminated.
  • Controlled solely by owner.
  • Owner receives all the profits.
  • Flexible: because owner makes all decisions regarding the business, owner can quickly make any changes that are needed.
  • Minimum legal restrictions.
  • Profits are taxed only once.
Disadvantages of a Sole Proprietorship
  • Owner is liable for all business debts.
  • Ownership limitations: the business cannot assume additional ownership without becoming a partnership or corporation.
  • Capital limitations: equity capital is generally limited to the assets of the owner.
  • Business is completely dependent on one individual: If the owner dies or becomes seriously ill, the business is immediately affected.
Sole Proprietorship
  • For-profit only.
  • May only have one owner.
  • Company operated under business franchise registration requirements.
  • No personal liability protection provided by law.
  • Profits taxed as individual income.
  • A sole proprietorship is not required to file with the Secretary of State.
Remember, this is general information. It is important to consult with someone with experience who can answer your questions. For more detailed information, visit the West Virginia Secretary of State’s Web site.

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