Structuring a New Business for the Long Run

A solo consultant has different needs from a company that plans to hire employees, purchase equipment, open multiple locations, or add new owners.

Before choosing a structure, consider:

• Who will own the business?
• Will additional owners join later?
• How will profits be distributed?
• Will the company hire employees?
• Does the work create financial or legal risk?
• Will the business need financing?
• Could the company eventually be sold?
• How will the owner be paid?

The U.S. Small Business Administration notes that a business structure influences taxation, daily operations, fundraising options, paperwork, and the extent to which personal assets may be exposed.

Sole Proprietorship — A sole proprietorship is often the simplest way for one person to begin operating a business. Income and expenses are generally reported through the owner's individual tax return.

The simplicity can be useful for a small, low-risk activity, but a sole proprietorship does not create a separate legal entity between the owner and the business. As the company takes on larger contracts, debt, employees, or greater risk, another structure may become more appropriate.

Limited Liability Company — An LLC is a separate legal entity created under state law. In Virginia, its members and managers are generally not personally responsible for the company's obligations solely because they own or manage the LLC.

LLCs are widely used because they can offer liability protection while allowing flexibility in management and federal tax treatment.

A single-member LLC is generally treated as part of its owner's tax return unless another tax classification is elected. A domestic LLC with multiple members is generally taxed as a partnership unless it elects corporate treatment.

Partnership — When two or more people operate a business together, the arrangement should be documented carefully.

A partnership generally passes profits and losses through to its partners rather than paying federal income tax at the partnership level. The partnership must still file an annual information return, and each partner reports their allocated share on an individual return.

The owners should have a written agreement addressing capital contributions, responsibilities, voting rights, profit distributions, disputes, departures, disability, and what happens if an owner wants to sell their interest.

Corporation — A corporation may be suitable when a business expects to raise outside capital, issue shares, retain earnings, establish a formal management structure, or prepare for significant expansion.

Corporations generally require more formal governance and recordkeeping than sole proprietorships or many small LLCs. The additional administration can be worthwhile when the company's ownership and growth plans require it.

One of the most common sources of confusion is the belief that an LLC and an S corporation are competing business structures.

An LLC is formed under state law. An S corporation is a federal tax election available to qualifying corporations and LLCs. An LLC may keep its default tax classification or elect to be taxed as a corporation, including as an S corporation when eligible.

An S corporation election should not be made simply because someone says it will reduce taxes. It introduces payroll, tax-return, bookkeeping, and compliance responsibilities.

An owner who performs services for an S corporation will generally need to receive reasonable compensation through payroll before taking non-wage distributions.

The potential benefits should be evaluated against the additional cost and administrative work. The appropriate choice depends on the company's profit, cash flow, industry, ownership, and long-term plans.

Registration documents create the entity, but they rarely answer every question that can arise between owners.

An operating agreement, partnership agreement, or shareholder agreement should explain:

• Each owner's percentage and initial contribution
• Who can make financial and operational decisions
• How profits and losses will be allocated
• When distributions may be made
• Whether owners must work in the business
• How new owners can be admitted
• What happens when an owner leaves
• How the company will handle a deadlock
• How an ownership interest will be valued

These agreements are especially important when the owners are relatives or close friends. A strong relationship is not a replacement for clear written expectations.

Once the company is formed, operate it as a real business.

Obtain an Employer Identification Number when required, open a dedicated business bank account, and use separate cards and financial records. The IRS provides EINs directly at no cost.

Keeping business and personal funds separate makes bookkeeping more accurate and helps demonstrate that the company is being operated independently from its owners. It also makes it easier to monitor profitability, prepare tax returns, apply for financing, and explain transactions if questions arise.

From the beginning, establish:

• A bookkeeping system
• A consistent method for paying owners
• A process for saving receipts
• Payroll procedures when employees are hired
• A schedule for tax payments
• Monthly financial reviews

A legal entity cannot compensate for disorganized financial records.

Forming an LLC or corporation with the Virginia State Corporation Commission is only one part of opening a business.

Depending on its activities, the company may also need to:

• Obtain an EIN from the IRS
• Register with Virginia Tax
• Register for sales tax, withholding, or other applicable taxes
• Obtain professional or industry-specific licenses
• Register a fictitious or trade name
• Obtain insurance
• Apply for a Virginia Beach business license
• Confirm that the business location complies with zoning rules

Businesses operating in Virginia Beach must register with the city, and business-license applications require zoning approval. Home-based businesses may also have additional documentation and location requirements.

Completing these steps before operating can prevent delays, penalties, and costly corrections later.

The structure that works during the first year may not remain the best choice forever.

Review it when the business:

• Adds an owner
• Becomes consistently profitable
• Hires employees
• Enters another state
• Purchases substantial assets
• Accepts outside investment
• Changes its services
• Takes on greater liability
• Prepares for a sale or succession

A regular review with an accountant and, when appropriate, a business attorney can help confirm that the company's legal structure, tax treatment, payroll, and accounting practices still support its direction.

The strongest business structure is not necessarily the most complex one. It is the structure that matches the company's current reality while leaving room for responsible growth.

Susy Ivy Accounting helps entrepreneurs and small-business owners in Virginia Beach understand the financial and tax considerations involved in forming and operating a business. From registration and bookkeeping to payroll and tax preparation, proper support at the beginning can prevent avoidable problems later.