Choosing an Operating Entity for Your Business

As published January 27, 2011 on

Virginia Business asked Richmond lawyer William Gaines Ellyson for advice he’d give to entrepreneurs choosing an operating entity for their business.
by William Gaines Ellyson

We work primarily with very small businesses, which are very different from larger businesses in that they take on more personal risks than larger businesses and therefore have to be more nimble and aware and defensive in order to survive.

Very small businesses also have different tax advantages than larger businesses and, usually, different legal relationships with the owners, employees, vendors and customers.

The limited liability company is the vehicle of choice for most of our very small businesses as they are much simpler to operate than a corporation, while enjoying the same protection from liability. The limited liability company can also be taxed in several different ways that the corporation cannot.

Liability surrounds all of us and the question is: “Who is us?” If a corporation or a limited liability company is the only “person” responsible for a debt or contractual obligation, such as a lease, the owners are not personally liable absent some other fact.

In addition, “hidden” liability abounds in the world of all businesses, big and small — for example, all businesses are responsible for the negligent acts of their employees (including you) performed in “the course of their employment.” (A FedEx employee who runs over a child while delivering a FedEx package makes both FedEx and the employee responsible if the driver is proved negligent.)

If you do not have some sort of legal entity, you, the owner, will be responsible to everyone, including your employees and customers and, of course, the tax (person) knocking at your door.

The limited liability company is also more flexible and can be taxed as an individual (one owner) or a partnership (more than one) or a sub-chapter “C” or “S” corporation (one or more owners). There are reasons to choose any of these types of taxation, depending on circumstances, but—

“S” taxation is usually the more beneficial taxation for the very small business because any profits to the owners over and above salaries are taxed to them as a “distribution” and not a salary. A distribution is not FICA taxable (a 15.3 percent tax last year). The absence of which “saves” the recipient $1,500 with each $10,000 distributed.

There are so many creative structures possible once you become aware of the possibilities, and this small space can only cover a few of them, but, as examples: with a limited liability company (only), you can add other kinds of companies as partners — an investor’s corporation can be a partner, for example; or (with any entity) you can form a joint venture with another company in order to develop a property, or set up separate companies to own separate stores and manage then centrally.

Caveat: there is more to this than meets the eye (the generalities expressed here), but this is a creative process so get on the Internet and choose your legal and accounting team and learn more — (you will never stop learning once you start, I promise you.)

William Ellyson is a Richmond-based lawyer who specializes in advising small businesses. He can be reached at (804) 780-0880 or