When Are You Personally Liable for Your Virginia Business Debts?
There are many different structures your business can have in Virginia, and each form has advantages and disadvantages. One of the factors people consider when deciding which type of business entity to form is the amount of protection they will have from creditors. With that in mind, when are you liable for your Virginia business debts?
Business Structures in Virginia
Virginia allows six main types of business structures, each with different rules controlling personal liability for business losses and income taxes. Since income taxes can create financial liability, we include them in this analysis. The forms to structure a business in Virginia are:
· Sole proprietorship. Only an individual or a couple can own a sole proprietorship (SP). SPs do not file business income tax returns because all the business profits and losses count as the personal income of the owner. While SPs offer the highest amount of individual control, they also come with unlimited personal liability for the company’s debts.
· Limited Liability Companies (LLCs). With an LLC, the owners have protection from personal liability for the company’s debts and the LLC pays no tax on its business income. The LLC still needs to file an informational income tax return reporting the allocation of the LLC’s income between its members, and the individual members will report their share of the LLC income on their personal income tax return. (LLCs, by default, are treated as partnerships for income tax purposes, but an LLC can elect to be taxed as a corporation—and many do.)
· General partnerships. General partnerships allow two or more people to band together to accomplish things on a larger scale than one person might be able to do alone. Also, since each partner reports his share of the partnership income on his own personal income return, partnerships are not subject to double taxation. The partnership itself must file an informational tax return, but it pays no income taxes. The downside of this business structure is that each partner bears the full risk of personal liability to the creditors of the business.
· C-Corporations. Since a corporation is a legal entity separate from its shareholders, it shoulders the responsibility to creditors. Shareholders have protection from personal liability for the debts of the corporation. The corporation has to pay taxes on the profits it earns, and the shareholders have to pay income taxes on the profits they actually receive from the corporation in the form of dividends, but many business owners find it beneficial to be taxed at both the corporate and personal levels in exchange for the limited personal liability to business creditors.
· S-Corporations. While not every business can qualify as an S-Corporation, a corporation that qualifies and elects to be taxed as an S-Corporation can provide its owners protection from personal liability from creditors of the company and the corporation does not pay income tax on its profits. In many situations, the optimal entity choice for business owners is an LLC due to the easier operational requirements than a corporation, but then to make an election to be taxed as an S-Corporation.
· Benefit Corporations. Virginia recently created benefit corporations as an entity choice, which offers some of the advantages of nonprofit corporations. Since these are a new form of business structure in Virginia, you should talk with a Virginia business attorney to learn how to protect your personal assets from liability to creditors of the benefit corporation.
But Not So Fast
Regardless of the structure of your business, you can still have personal liability for the debts of the company if you cosigned or personally guaranteed the debts of the business, or if a creditor can pierce the corporate veil. The ways to pierce the corporate veil include:
· The corporation did not follow required formalities
· Shareholders mixed personal and business assets
· The corporation was just a shell corporation with no significant purpose other than to shield from liability.
Doing business in Virginia while protecting your personal assets is a delicate balancing act. An experienced Virginia business attorney can help you decide which form of business structure best meets your overall needs. Business formation attorney Steve Thienel provides personalized service and legal advice for individuals in DC, Maryland, and Virginia regarding all aspects of business formation and business operations. Call today to schedule a consultation.