Virginia LLCs Explained
An LLC, or Limited Liability Company, is a form of business organization that plays an important role in Virginia’s legal landscape. This hybrid type of entity combines characteristics from both corporations and partnerships. LLCs are governed by Virginia state law, as codified in the Code of Virginia § 13.1-1000 et seq. While they provide the limited liability protection of a corporation, LLCs often have simpler management and tax structures similar to partnerships. This flexibility makes them a popular choice for small and medium-sized businesses.
The legal significance of forming an LLC in Virginia lies in its ability to provide a barrier against personal liability. Although Virginia law provides limited liability in other forms of business organizations, such as the corporation and the statutory close corporation, the LLC is more flexible. Another important legal benefit of forming an LLC is to allow one to take advantage of the pass-through taxation structure. Virginia does not tax corporations at the state level, so one would not receive any additional benefit from forming a corporation, given the burden of additional paperwork. By contrast, the LLC provides one with the same liability to creditors but avoids double taxation. For example, in Virginia, a single member LLC may only have to file a Schedule C individual tax return. If the LLC has more than one member, it will fill out an 1065 form for the IRS in addition to the Virginia Schedule C return. However, assuming the four "hurdles to be overcome" are met for pass-through taxation as discussed in the previous post, the LLC offers great advantages over the corporation.
The business significance of forming an LLC is to have the advantage of flexibility. The passive investor can be a member of the LLC, along with other active investors. An LLC also offers the advantage of joint decision-making authority by allowing the members to delegate authority for ordinary and routine decisions to other managers. This division of duties allows the LLC to have all the advantages of a corporation, while avoiding the paperwork associated with forming a corporation. Thus, an LLC can have the continued economic benefit without the periodic need for meetings, record keeping, and minutes required of a corporation. The nature of the LLC is to continue until a member withdraws or a sale occurs. Moreover , if no period for liquidation is specified for the LLC, the LLC will have an unlimited period of existence.
To avoid any confusion, all members should understand the difference between an LLC and a corporation. Above, we use the term "flexibility" to describe the LLC in comparison to the corporation and the corporation’s statutory close counterpart. Flexibility basically refers to the flexibility of management and control. A Virginia corporation, unlike a Virginia LLC, is required to have appointed directors. These directors are required list of officers and issue shares of stock. In addition, under Virginia law, 13.1-645.1, all corporations that incorporate after June 20, 1990, must include a Bylaw provision which requires that under certain circumstances, the corporation shall be terminated. That is, if shareholders holding more than 2/3 of the shares approve the act of terminating the corporation, the corporation must terminate. This is very different from the LLC which is flexible on both counts above.
The nature of the LLC is to continue until a member withdraws or a sale occurs. If no period for liquidation is specified for the LLC, the LLC will have an unlimited period of existence. Moreover, general partners or members, unlike shareholders, do not receive stock but rather are entitled to specific ownership interests in the LLC or partnership known as percentages. That right entitles them profits based on their percentages of ownership. Thus, because a partnership or LLC owns interests rather than shares of stock as in the Corporation, it is a much easier process to change the ownership percentage of the partners or members, respectively.
In recent years, statutory close corporations have become popular in Virginia. Such corporations enjoy the same flexibility as partnerships in terms of being able manipulate the business structure as they would in an unincorporated form. The statutory close corporation allows its shareholders to control the corporation vis-à-vis the officers. Further, all or most of the shareholders must agree that the corporation be treated as a statutory close corporation. It also provides the shareholders greater protection of their ownership interest through restrictions on the transfer and sale of shares. In fact, statutes in Virginia allow shareholders of a statutory close corporation to include the right of first refusal in their Bylaws.
Virginia LLC Operating Agreement Essentials
An LLC operating agreement is a legal document that outlines the management structure and procedures for an LLC, as well as the rights, responsibilities, and distributions of its members. Some of the basic elements that every LLC operating agreement should have are:
Member Roles
The agreement will need to identify all of the members as well as their roles and responsibilities within the LLC. It should also be identified who the members are in terms of their ownership percentages in the business and how they will make decisions together. Do members have an equal role in managing the business, or do some have a different role and it is more of a hierarchy?
Management Structure
The structure of how the company would be managed has to be identified. This is a very important aspect of the LLC that can be overlooked easily. There are two ways to run an LLC – it can be member-managed, which means that each member in the company has a say in the management, or it can be manager-managed, which means that one or some of the members have delegated their roles in managing the company to someone else, such as a board of directors or a single manager.
Dispute Resolution
It is always best for a company to identify how the members will resolve disputes within the company. You can identify if the members would go through litigation if there are disputes, or if they would have a third-party resolve issues through mediation or arbitration. You should identify how the votes would be counted if there are disputes among members over a vote as well.
Unique to Virginia Law
The law in Virginia is very clear on what should be contained in an LLC operating agreement, but one thing that Virginia law does is specifically state that any operating agreement should not reduce the duties and obligations that the Virginia law imposes on LLC managers and members, even if this is something that is normally established within an operating agreement.
How to Write a Virginia LLC Operating Agreement
The first step in drafting an LLC Operating Agreement is to choose a template that best suits the needs of your business. There are many free and paid options available online, or you may choose to create your own from scratch. Your chosen template should include all of the required elements of an LLC Operating Agreement in Virginia, including information about the LLC’s ownership structure, management, and operation.
Next, you will need to fill out any necessary information on the template, such as the names and contact information for each member, the percentage of ownership they hold, and any specific provisions you would like to include in the agreement, such as buy-sell provisions or restrictions on the transfer of membership interests.
Once the template has been filled out, you and your fellow members will need to review the document and make any necessary edits or changes. It is highly recommended that you retain a Virginia LLC lawyer to help you draft the individual provisions of the document (especially those regarding special allocations). Getting it done perfectly the first time will save you money. Once you have reviewed the agreement and made the necessary changes, each member will need to sign the document in front of a notary public. Each state serves as a different jurisdiction and incorrect notarization can lead to a missed invalidation in a court of law. Again, it is highly recommended to consult a Virginia LLC lawyer.
After each member has signed the LLC Operating Agreement, it is important to keep it in a safe place, such as a secure cloud storage solution or a hard copy in a secure location. You may also wish to distribute copies of the agreement to all members for their records. By taking the time to properly draft and execute an LLC Operating Agreement, each member can help protect their personal assets and ensure the future success of their business.
Virginia LLC Operating Agreement Templates
Many entrepreneurs and small business owners can certainly benefit from the efficiencies that operating agreement template software can provide. LLC owners in Virginia should consider the many templates that have been developed to address their specific state legal requirements. Using a software-based tool can also make what might be complex legal language less legally dense and difficult to understand.
Should your business entity use an operating agreement template that is tailored to Virginia? Some of the potential advantages of an operating agreement template over drafting an operating agreement for an LLC in Virginia from scratch are:
Even with all of these advantages in mind, there are some things to watch out for when using an operating agreement template to draft your law firm’s operating agreement. First, templates will often have spots for conflicting provisions that may actually be contradictory. Some of these contradictory provisions will be clear to you and others will not . Spotting these contradictions can be difficult, particularly because those blanks don’t always identify the contradictions that they are meant to fill. Another risk with an operating agreement template is how many of your choices you’ll end up making for you. Even if you have your own template, it is still always better to make these decisions with your business partners beforehand. The operating agreement template will simply require you to agree to language that you may not have prepared in advance.
Finally, the most likely way that an operating agreement template can go wrong is through redundancy. Some of these operating agreements start to have too much language that is repeated. In some cases, this language will be correct and will not contradict each other. However, it can make it difficult to see what has actually changed. That’s why it is important to pay careful attention to exactly what you’re writing in a template. The answer isn’t to simply avoid them entirely. Just like with complicated contracts, they can be useful, but do require your oversight and review.
Procedures and Filing Requirements
In Virginia, there is no legal requirement to file an LLC Operating Agreement with the state. The document is simply signed by its members and stored with the LLC’s internal records for reference and use as necessary. If there is any legal dispute involving the LLC’s members, however, the existence of a written Operating Agreement strengthens the LLC’s legal position. The mere presence of a written agreement is often enough to deter would-be plaintiffs from pursuing costly litigation.
Although a written LLC Operating Agreement is not necessary under Virginia law, it is entirely possible that other Virginia statutes will be implicated by LLC members’ desire to form a written agreement – particularly if the LLC is taxed as an S Corporation. The "Subchapter S" rules (25A I.R.C. §1371 et seq.) contain various requirements relating to S Corporations. Those rules generally apply to Virginia LLCs that elect to be taxed as an S Corporation. If your Virginia LLC is an S Corporation, consult with your accountant or tax attorney for guidance regarding those requirements.
It may also be advisable to provide a written LLC Operating Agreement to a bank, mortgage company or other financial institution that has an account with the LLC. Individual banks and mortgage companies may impose their own requirements for account holders that should be taken into account before preparing the LLC Operating Agreement.
Frequently Asked Questions
Do you have to have an Operating Agreement in Virginia for a single-member LLC?
No, you do not have to have an LLC Operating Agreement in Virginia. However, it is a good idea to have one.
Do you have to do anything with the Operating Agreement after you form the LLC?
No. Once you have formed the LLC and created the Operating Agreement, there is nothing else you need to do with the Operating Agreement. It is simply a private document with the members of the LLC that is not filed anywhere, so you are free to do whatever you would like with the LLC Operating Agreement, including modifying the agreement.
What if the LLC has no Operating Agreement? What is my recourse?
If an LLC does not have an Operating Agreement, the law will simply look to the Virginia LLC Act for the rules that will be followed for that LLC. The LLC Act will control the LLC. That being said, having an Operating Agreement in Virginia is not required, so it will not hurt anything if the LLC does not have an Operating Agreement. But, we find that most people like to have one so they can add flexibility among the members of the LLC . If the LLC has no Operating Agreement, an external Member can make a request for the operating agreement, and the Manager will usually be required give that person a copy of the Agreement (if it exists). However, the manager is not required to provide any information to that member, by law.
How do you actually write an LLC Operating Agreement in Virginia?
Basically, we have a template for an Operating Agreement which we have developed through years of writing Operating Agreements. We have dealt with wide variety of LLCs including real estate investment LLCs, imports and exports LLCs, Amazon.com sales LLCs and many other types of LLCs. We have created language that helps our clients, regardless of the LLC type, to have a simple Operating Agreement that provides the flexibility that various people want. Since the LLC Act is a "default" set of rules for an LLC, we have chosen the rules in our template Operating Agreement that we think the members of an LLC would like under most circumstances. However, you can change whatever you would like.