LLC Corporate Formation Lawyer Virginia

Why form an entity (corporation or limited liability company) to operate your business?

  • Liability protection
  • Tax benefits and flexibility
  • Perpetual existence and estate planning
  • Enhanced credibility
  • Privacy
usiness Formation and Choice of Business Entities

Liability Protection: The primary benefit of entity formation is liability protection. Either an LLC or a corporation will allow you to separate your personal assets from your business assets. If you incur a liability in your business, only the assets of the business will be at stake. While that may still be significant, you can protect your personal assets, such as you home, stocks, retirement accounts, etc. However, you must properly set up your entity and properly run the entity in order to maintain that protection from personal liability. If you use an on-line service to set up an entity you will not get the advice or assistance that is necessary beyond simply setting up the entity.

Choice of entity: The choice of entity type is dependent on a number of factors that should be discussed with legal and tax professionals. Again, on-line services don’t help you make this choice. The nature of the business is the first consideration. For example, an LLC is generally preferable for investment and passive-type businesses, such as the ownership of investment or rental real estate. A corporation is often preferable for businesses that will pay salaries and benefits, particularly owner salaries and benefits. Other tax and accounting issues should be considered, such as how the entity will be capitalized (financing, investors, or owner contributions of money or property) and how profits or losses will be allocated. The number of owners, the level of involvement of each owner, and the management structure of the entity are further considerations.

While the most popular and commonly known entities are corporations are limited liability companies. However, there are other entities that may be more suitable for specific purposes, such as partnerships, limited partnerships, and business trusts.

Choosing the appropriate entity can be a complex decision involving tax, liability, estate planning and operational considerations. I take a comprehensive approach to advising my clients on the right choice of entity for their particular business. I also stay involved after formation of your business, and I am available to serve as registered agent and to assist with operational or legal issues that may arise at any time.

Tax Benefits: It is impossible to provide a comprehensive list of tax benefits offered by each type of entity because those benefits often depend on the industry, the type of assets held by the entity, salary and benefits to be paid to employees and owners, capital structure of the entity, how profits will be distributed, and other factors. In general, the central tax benefit of a corporation or LLC is that operating expenses are deductible at the pre-tax level, including salaries and benefits in most cases.

An LLC is a pass-through entity, meaning profits and losses pass through to the members, and the entity is treated like a partnership for tax purposes. The LLC itself pays no taxes, but it reports its income or loss to its members in proportion to their membership interests, and the members then account for the same on their personal tax return. A single-member LLC is a disregarded entity for tax purposes, but its liability protection and other benefits remain in place. An LLC can elect to be treated as a corporation, but that is not common for small businesses. A standard corporation is a separate taxable entity (“C corporation”). There is a risk of double taxation on corporate profits because the corporation pays taxes at the corporate level and then the shareholders pay taxes on their dividends at the personal level. C corporations are often companies that retain earnings for investment in future tax years rather than distributing profits to the shareholders when earned. In order to be treated as a pass-through entity a corporation can file an “S-election” with the IRS, in which case the corporation itself pays no taxes. Again, profits and losses are reported to the shareholders in proportion to stock ownership, and then the shareholders must account for the same on their personal returns. Most closely held corporations are S-corporations.

Perpetual Existence and Estate Planning: Both LLCs and corporations have perpetual existence, as long as the registration fees are paid and required filings are made to the State Corporation Commission each year. In the event of death of a member or shareholder, the business still continues (subject to certain licensure requirements for certain professions). LLC membership and corporate share ownership should be integrated into your estate plan to ensure the continued operation of your entity. Succession planning should be covered in your entity’s organizational documents.

Enhanced Credibility: Adding “Inc.” or “LLC” to your business name lends credibility and a sense of permanence to your business. This professional and perpetual appearance can be invaluable in competitive industries.

Privacy: The ownership structure of LLCs and corporations is not required to appear on any of your organizational documents. You are required to maintain a registered office address, which can be your home or office, and you are required to have a registered agent. I serve as registered agent for most of the entities I help form, which provides you with an added layer of privacy and protection. LLCs generally have no officers or directors, so the names of those involved in the operation of the entity are not on file with the State Corporation Commission. Corporations are required to file an annual report listing the names and addresses of their officers and directors. However, an office address can be used rather than your home address. Corporations are not required to list their shareholders, so again, the ownership of the entity remains private.

FORMING AND OPERATING A VIRGINIA ENTITY:

There are specific requirements under Virginia law for properly forming each type of entity. Even single-member and family-owned entities should have a formal set of organizational documents. Entities that have multiple owners or participants should have organizational documents that define relationships between the shareholders, members or partners. Furthermore, every entity should maintain a separate set of books and records that are separate from the finances of its owners. I help my clients get their businesses started on the right foot. I can set up most business entities on-line to obtain immediate approval. I normally do so on a flat fee basis depending on the entity form and number of owners. My flat fee includes the initial filing, organizational documents and obtaining your federal tax identification number from the IRS. If you have already set up an entity but have not completed all the organizational documents I can complete those documents for you.

LLCs: An LLC is organized by filing Articles of Organization. Upon approval by the State Corporation Commission a Certificate of Organization is issued. But that’s not it. If you have a multiple-member LLC you need to obtain a tax/employer ID number from the IRS. If you have a single-member LLC you can use your social security number. You are not required to get a separate tax/employer ID, but I believe it is advisable not to use your social security number for the LLC. Your bank will need your Articles and Certificate of Organization, and possibly an Operating Agreement, to set up a bank account for the LLC. Make sure you set up a separate bank account. Co-mingling personal funds with company funds is the easiest way to lose your protection from personal liability.

An LLC must be operated as a separate and distinct legal entity. An LLC can only act through its members and/or managers. An LLC is not required to have to officers or directors, and no annual member meetings are required. An LLC can be member-managed or manager-managed. A manager does not have to be a member.

For multiple-member LLCs a written Operating Agreement is crucial. The Operating Agreement should state the membership interests of the members, outline voting rights and management authority, dictate the terms of any buy-sell restrictions and obligations, and otherwise fully define the relationships between the members. A strong Operating Agreement can help avoid or resolve disputes and deadlock. It should cover events such as death or disability of a member and should include transfer restrictions, such as a first right of refusal for buy-out offers. Finally, the Operating Agreement should provide a method for determining the value of the company for purposes of buy-outs.

Corporations: A corporation is organized by filing Articles of Incorporation. Upon approval by the State Corporation Commission a Certificate of Incorporation is issued. But that’s not it. Directors and officers must be appointed and By Laws must be adopted. The corporation must have a tax/employer ID number issued by the IRS. Your bank will need your Articles and Certificate of Incorporation and the By Laws to set up a bank account for the corporation. Make sure to set up a separate bank account. Co-mingling personal funds with corporate funds is the easiest way to lose your protection from personal liability. Stock must be issued to the owners of the corporation. If there are multiple shareholders then a Shareholders’ Agreement is advisable to govern their relationships. Much like an Operating Agreement for an LLC, a Shareholders’ Agreement should contain provisions for resolving disputes and deadlock. It should include shareholder death and disability provisions, stock transfer restrictions, and buy-sell rights and restrictions. Finally, a Shareholders’ Agreement should contain a method for determining the value of the stock for buy-out purposes.

A corporation must be operated as a separate and distinct legal entity. The corporation can only act through its directors and officers. Each year the corporation must have a meeting of the shareholders to elect directors and a meeting of the directors to elect officers. It must also pay an Annual Report with the State Corporation Commission confirming the current officers and directors. If I am appointed as registered agent for a corporation I provide all annual minutes, maintain the corporate book, complete the Annual Report and send it to the appropriate corporate officer to sign and file with the State Corporation Commission. Maintaining these corporate formalities is key to maintaining the shareholders’ protection from personal liability.

Operational Issues: In addition to forming corporations, LLCs and other entities, I also routinely assist my clients with a wide range of business operational issues, such as obtaining business and professional licenses, reviewing or drafting leases, reviewing or drafting contracts, handling collections, and handling business disputes.