The LLC: A Wise Business Decision
It is safe to say that we have all seen businesses that have certain letters at the end of the company’s name. Unless you are business savvy, it is likely that you do not have a thorough understanding of what those letters represent. This article will attempt to shed light on the characteristics and benefits of the letters L.L.C.
What is an L.L.C.?
An L.L.C., or limited liability company, is one of several types of business entities. Its purpose is to engage in any lawful business, purpose, or activity, regardless of whether such business, purpose, or activity is carried on for profit. In general, an L.L.C. is a company that has certain built-in protections and benefits.
How is an L.L.C. formed?
Forming an L.L.C. is not difficult. In fact, the entire process can be completed online on the Virginia State Corporation Commission’s website (https://sccefile.scc.virginia.gov/). The organizer of the L.L.C. – which can be any person or persons, even if such person or persons will not be a member of the L.L.C. once it is formed – simply needs to submit an articles of organization on the Commission’s website and pay the required fees.
The articles of organization must contain:
- The name of the L.L.C. (which must satisfy the requirements in 13.1-1012 of the Code of Virginia);
- The post office address of the L.L.C.’s initial registered office;
- The name of the initial registered agent at that office who is a resident of Virginia and is either:
- A member or manager of the L.L.C.;
- A member or manager of an L.L.C. that is a member or manager of the L.L.C.;
- An officer or director of a corporation that is a member or manager of the L.L.C.;
- A general partner of a general or limited partnership that is a member or manager of the L.L.C.;
- A trustee of a trusts that is a member or manager of the L.L.C.; or
- A member of the Virginia State Bar; and
- The post office address of the L.L.C.’s principal office (which may be the same as the L.L.C.’s initial registered office).
Once the articles of organization is properly filed and the filing fees have been paid, the Commission will issue a certificate of organization and the L.L.C. will be properly formed.
Is it expensive to form an L.L.C.?
It is relatively inexpensive to form an L.L.C. There is a $100.00 fee for filing the articles of organization and there is an annual registration fee of $50.00. There may be other small processing fees associated with filing on the Commission’s website.
If you would prefer to have an attorney form the L.L.C. for you, the attorney would charge an additional fee.
What are the benefits of filing for an L.L.C.?
There are three main benefits of filing for an L.L.C.
1. Liability Shield
The liability shield that an L.L.C. offers is most likely the greatest benefit that it offers. What this means is that no member (owner), manager, organizer, or agent of the L.L.C. will be personally liable for the L.L.C.’s debts and obligations solely by being a member, manager, organizer, or agent of the L.L.C. For example, if the L.L.C. breached a contract and is ordered to pay damages, the owner will not have to pay the damages out of his or her own pocket. In contrast, a sole proprietor or a general partner would be personally liable for the damages. Therefore, it is a wise decision to protect your personal property by forming an L.L.C.
2. Flexibility of the Operating Agreement
Another benefit of an L.L.C. lies in the way that the entity is managed. The operating agreement is essentially a contract between the members of the L.L.C. that governs how the L.L.C. will be managed. The operating agreement may contain any provisions regarding the affairs of the L.L.C., as long as the provisions are lawful. Common provisions in operating agreements include: (a) how the profits and losses will be shared; (b) which members have management authority; and (c) how many votes are required before action may be taken on behalf of the L.L.C.
3. Pass Through Taxation
An L.L.C. is a “pass-through” business entity. This means that, unlike a corporation, the L.L.C. itself is not taxed. Rather, the income (or losses) produced by the L.L.C. “pass through” to the members of the L.L.C. This means that the members report their share of the profits (or losses) on their personal income tax returns.
Ultimately, the benefit of pass-through taxation is that the income is only taxed once. You can really see the benefit of forming an L.L.C. over a corporation when you examine the differences in the ways those entities are taxed. Corporations are subject to double taxation. This means that the income produced by the corporation itself is taxed and the dividends given to the shareholders are also taxed.
Ultimately, if you are a sole proprietor (a single owner of a business that has not filed any sort of formalities with the Virginia State Corporation Commission), or a partner of a general partnership (two or more people carrying on a business for profit and have not filed any sort of formalities with the Virginia State Corporation Commission) you should seriously consider forming an L.L.C. to protect your personal property from the debts and obligations of your business.