Question

What Should You Consider When Starting A Business In Virginia?

Faisal Moghul

Answered by:
Faisal Moghul

Located in Vienna, VA
Moghul Law PLLC

Faisal Moghul - Real Estate - Super Lawyers

Answered by: Faisal Moghul

Moghul Law PLLC
Vienna, VA
Phone: 571-295-5702
Fax: 866-451-9531

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Answer

Our office is frequently contacted by entrepreneurs across various industries seeking advice on starting a business in Virginia. While there are several steps that you must take before starting a business, the first step is to create a business plan that establishes a framework and vision for how you will make the business a profitable enterprise.

Picking the Right Entity Or A Combination Thereof. The choice of entity depends on the nature of the business and the relative preferences of its owner(s) regarding ownership and management of the entity. There are several types of entities that you may choose from, including but not limited to Limited Liability Companies, C corporations, S Corporations and Limited Partnerships. Each entity has its own unique structural pros and cons.

  • Limited Liability Company (LLC). The entity of choice among real estate investors. Its owners are called members and the LLC may be managed by its members, or by a manager elected by the members, similar to a corporation. However, this is typically not the best entity if there is an intention for the company to go public, since most venture capitalists tend not to invest in LLCs. An LLC owner may consider converting the entity into a C corporation at this time.
  • S and C Corporations. Corporations are formed by filing the articles of incorporation with the Virginia State Corporation Commission (“VASCC”). The biggest difference between the two is that the former is taxed only at the shareholder level whereas the latter is subject to double taxation – once at the entity level and again on distributions to the shareholders (see Form 1120). In other words, the shareholders are paid dividends from the corporation’s after-tax income, and then the shareholders pay personal income taxes on the dividends. Note that only U.S. citizens or resident individuals, and certain trusts, can be shareholders in an S corporation.
  • Limited Partnership (LP). The General Partner in a Limited Partnership is personally liable for the debts of the business but the Limited Partner is not. General Partners have the exclusive right to manage the business, whereas a Limited Partners rights to participate in the management of the business are limited in order to preserve his or her limited liability. There must be at least two owners of a Limited Partnership.

Name Distinguishability and Tax Issues. Any entity name that is selected must pass the name distinguishability test with the VASCC. If the name is distinguishable, then you may file the necessary paperwork to register the appropriate entity. Before filing, you must choose

  • The registered agent for the entity
  • The principal office address for the entity

Next, you must obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). Note that you may also need to register with the Virginia Department of Tax and/or the Employment Commission if you meet certain criteria. Certain businesses may also need to apply for the required county permits and business licenses. Check with your local county for more information.

Trademark. A trademark allows the public to associate a product with its “source of origin,” i.e., your company.  When you sell your products or services under a specific name or phrase or logo, (“trademark”) depending on the uniqueness of that trademark, you have the right to exclusive use and to prohibit others from using it. There are specific rules for common law, state and federally registered trademarks which you should discuss with an attorney. However, create and enforce a trademark, you must:

  • Carefully create a protectable trademark;
  • Take the necessary registration procedures for state or federal trademark protections; and
  • Enforce your trademarks.

If you take the necessary steps you may have the right to sue if someone uses that trademark (“infringement:”) for the same or similar goods and services and stop them from using that trademark.  Depending on the method used to create the trademark, you may have the right to the profits made by the infringer.

Veil Piercing. One of the main reasons for doing business through an entity is the asset protection benefits and limited liability protection afforded to the individual owner. Thus, the owner of an LLC, S/C Corp, or LP must never commingle personal assets with business assets. This may constitute grounds for piercing the corporate veil, that is, the creditor may be able to go through the corporate shield and hold you personally liable for corporate debts and claims. In Dana v. 313 Freemason, 266 Va. 491, 500 (2003), the Virginia Supreme Court has elaborated the veil piercing is warranted where, "the shareholder[s] sought to be held personally liable [have] controlled or used the corporation to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage. Piercing the corporate veil is justified when the unity of interest and ownership is such that the separate personalities of the corporation and the individual[s] no longer exist and to adhere to that separateness would work an injustice" (quoting O'Hazza v. Exec. Credit Corp., 246 Va. 111, 114 (1993)).

Asset Protection Considerations. The goals of effective asset protection are to deter litigation, encourage settlement, simplicity and avoid loss of control. Here are some of the hallmarks of effective asset protection:

  • Reliance on Insurance – E&O, D&O, Key-man insurance;
  • Gifts of Properties – owning assets in other people’s names;
  • Equity Stripping – a process of reducing the equity value of real estate held by another entity, which acts as a deterrent for creditors;
  • Combinations of Instruments – Land trust within an LLC, LP/C-S Corp combinations;
  • Do Not Use Single-Member LLCs;
  • Offshore Trusts – Panama, Cook Islands, Cayman Islands etc.

An effective asset protection strategy involves a combination of these, depending on the business venture.

Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.

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