Archive for January, 2014
Starting a new business in Virginia can feel like a daunting task and can overwhelm you with “things to do.” When you are considering starting a new business, the first thing you will want to do is work on a business plan. This does not need to be overly formal or complicated but you should think through the basics – what you are going to sell, who you’re going to sell to, how you’re going to fund the new business, etc. – and ideally write the details down for future reference.
Once you have that done, you can focus on getting the new business started. Getting the process done in the correct order can really help avoid headaches and “do overs” later.
Here is the generally accepted correct order of steps to follow:
1. Form your company’s new entity – whether that is an LLC, a corporation, or a benefit corporation. The reason to do this first is that all of your future contracts, whether they are leases for commercial space, contracts with suppliers, or your initial customer contracts, should be in the name of your entity. Whether you choose an LLC, a corporation, or a benefit corporation, we can help you get it set up correctly with the maximum legal benefits.
2. Prepare your company’s initial ownership and management documentation. For corporations, that’s by-laws and organizational meeting minutes. For LLC’s, it’s an Operating Agreement. These documents protect you and legally establish the ownership of your new business.
3. Obtain a tax ID from the IRS. You’ll need the tax ID (an Employer Identification Number issued by the IRS) to open a bank account. You can apply for your tax ID online through the IRS web site but be aware that you should not apply for it until you have your LLC or corporation approved by the State Corporation Commission.
4. Open a commercial bank account in the name of your LLC or corporation. NEVER co-mingle personal money and business money – it’s a bad idea for many reasons.
5. Get your county or city business license. Most (but not all) counties and cities in Virginia require you to have a local business license prior to (or shortly after) starting business. Check with your county or city government on how to get this done.
6. Get your state tax payment information submitted. If your business involves collecting state sales tax from your customers, for instance, you will need to comply with the Virginia laws on remitting sales tax to the state. You can register with the Virginia Department of Taxation online.
When you follow the order above, things should flow smoothly as your new business starts.
Following up on our discussion of what a PLLC and a PC are, the next logical question is: “when do I have to form as a PLLC or a PC?”
Certain professions, when they choose to form as a separate entity, are required by their regulatory Boards to form as a PLLC or PC. Examples include medical doctors, lawyers, and certified public accountants.
Other professions have the option to either form as a PLLC/PC or as an LLC/corporation based on the wishes of the owners. Examples include professional engineers, occupational therapists, audiologists, and nurses.
You can see a list of all of the different professions that potentially can be a "professional" entity in the Virginia Code.
So if your business involves providing a heavily regulated service (hint: likely if you need a license to practice your profession) then the first thing you should do is to check with your profession’s regulatory Board to see if they require you to operate as a “professional” version of an LLC or corporation or give you the choice to do so.
You may have heard of a PLLC, PLC, or a PC or seen them appended to the end of a company name and wondered what they are. If so, this is the article is for you. PLLC (or PLC) stands for "professional limited liability company" while PC refers to a "professional corporation." Both are separate legal entities, separate from their owners (members for a PLLC/PLC and shareholders for a PC). In Virginia, they are the form of entity required for certain heavily state regulated professions where either state law or the regulatory bodies of the specific profession require their practitioners to form as a PLLC or PC. Examples of such professions are medical doctors, lawyers, certified public accountants, professional engineers, architects, and certain other health care providers and practitioners of the healing arts.
The key difference between PLLC’s/PC’s and a normal LLC/corporation is that the PLLC and PC do not provide the owners with limited liability protection for their own acts of professional malpractice related to the services they provide. This means that if your doctor commits an act of medical malpractice while treating you, they cannot hide behind the veil of limited liability protection when you make a claim against them. This is for public policy reasons to protect the general public from harm.
So you may be asking yourself, why would a doctor, lawyer or CPA form an entity at all if they are not able to get limited liability protection like other businesses? For two reasons: (1) the prohibition on limited liability protection only applies to acts of professional malpractice. If you slip and fall in your doctor’s waiting room that is not medical malpractice – that’s just negligence and your doctor would be personally protected from that claim. And (2) for the tax benefits that operating as an entity allows (namely, the S corp. election).
The laws and rules regarding PLLC’s and PC’s are extremely state-specific so be sure to check your particular state’s laws, especially if you’re outside of Virginia. And if you would like to create a PLLC or a PC correctly, we can help (just use our LLC order form or corporation order form).
What’s the difference between “registering” in Virginia and “incorporating” or “organizing” in Virginia?
If you're not immersed in it every day like we are, certain terminology can be confusing. One of the questions we frequently get is regarding the difference between registering your business in Virginia and incorporating or organizing your business in Virginia.
Business entities (corporations, limited liability companies, benefit corporations, non-profit corporations, etc.) are formed under state laws and not Federal law in the United States. This means that every business entity has a "home state" under which laws it is formed. Even though your company it formed under a certain state's laws, it can still operate in other states subject to complying with those other state's laws first. So when we talk about "registering" your business in Virginia, we are typically referring to getting permission (called "authority" in Virginia) to do business in Virginia for your existing out of state company. For example, you may have a Maryland LLC that is going to be doing business in Alexandria, Virginia or Arlington, Virginia (right across the state line) and you'll need Virginia's permission to do so. Or maybe you're a Tennessee corporation that wants to cross from Bristol, Tennessee to Bristol, Virginia to take a job. Again, the permission of Virginia to transact business across the state line is needed.
On the other hand, when talk about "incorporating" or "organizing," we're typically referring to the initial set up of your new business. It usually makes the most sense to incorporate (if you're forming a corporation) or organize (if you're forming an LLC) in the state in which you are physically located. That will be your "home" state for purposes of legal existence. Although, as discussed above, you're able to take your business to whichever other states you want.
So, if you have a company already formed in another state and want to come in to Virginia to do business, then you'll be registering your existing business by filing an Application for a Certificate of Authority to Transact Business in Virginia. If you're starting a new business in Virginia, you'll either be incorporating (for a corporation) by filing Articles of Incorporation or organizing (for an LLC) by filing Articles of Organization. In all cases, you'll need a Virginia registered agent service, which is where we can help.
If you are (or have) formed a Virginia limited liability company then you may be wondering what an Operating Agreement is and whether you need one. An Operating Agreement is simply a contract between the owners of a limited liability company and the LLC itself. It is the one LLC document that:
- Identifies the owners of the Virginia LLC
- States how much of the limited liability company each owner owns
- Describes how the LLC will be managed and how decisions will be made
- Discusses how new owners may be admitted to the LLC, and most importantly…
- Describes the process for how an LLC owner may leave the LLC, ideally without causing the dissolution of the LLC.
One of the nice things about starting your business in Virginia is that a Virginia Operating Agreement can be customized to fit your exact situation and tailored to how you want to run your new business.
While the law does not require you to have an Operating Agreement, be aware that if your Virginia LLC does not have an Operating Agreement then the Virginia Code (specifically the Virginia Limited Liability Act) will make all of those decisions for you. And you may not like the result, especially in the situation where an owner wants to leave. So you should consider having an Operating Agreement that puts you in control of what happens with your company.
If you're starting a new Virginia business then the two basic forms of business entity available to you are the corporation and the limited liability company (LLC). A common question is "what are the differences?" In Virginia, there are actually important similarities between a corporation and an LLC so it's useful to discuss those similarities first.
Virginia LLC's and Virginia corporations share three important attributes:
- The owners of a Virginia corporation (shareholders) and a Virginia LLC (Members) are not liable for the debts and obligations of the business. In other words, the owners have limited liability protection and, with a few exceptions, their assets are not at risk if there is a problem with the business.
- Better tax treatment is available for a Virginia corporation and a Virginia LLC through the small business tax election, better known as the "S corp." election. This election, which is available to LLC's, too, despite the shorthand name, allows for the legal avoidance of some of the self-employment taxes assessed against business profits.
- Portions of a Virginia corporation (shares) or a Virginia LLC (membership interest) are freely transferable, either in part or in whole. This means you can sell part of the business while retaining an interest for yourself or you can transfer 100% control to pass on the business seamlessly (aka as a going concern).
So how do Virginia corporations and Virginia LLC's differ? In a few different ways:
- The filing fees are different. All Virginia LLC's pay a flat fee of $100 upon formation and $50 per year regardless of how they are structured or how many owners there may be in the LLC. A corporation, on the other hand, pays a filing fee and renewal fee that depends on the number of authorized shares of stock of that corporation, starting at a minimum filing fee of $75 and a minimum annual renewal fee of $100. In the long run, an LLC is cheaper to keep in good standing.
- There can be less formality with an LLC compared to a corporation. An LLC can waive annual meetings in its Operating Agreement while a corporation is required by law to have annual shareholder meetings and board of directors meetings and keep meeting minutes of those meetings (even when there is only one owner).
- There is more privacy with a Virginia LLC compared to a Virginia corporation. There is no public listing of the members (owners) of a Virginia LLC and assuming you appoint a third party as your registered agent, your personal name and address may not be available publicly. A Virginia corporation must disclose the names and addresses of their directors and officers and update those names and addresses every year on an annual report form.
It’s important to look at your business plan and weigh the pro’s and con’s of these differences to make the right choice for you.
A Virginia registered agent, also commonly referred to as a Virginia resident agent, is the official contact point for your company and receives communications on behalf of your business from the Virginia State Corporation Commission and other state agencies. Your registered agent also receives service of process, whether that is a lawsuit involving your company, a garnishment of wages for one of your employees, or a subpoena. The role of the registered agent is to make sure you receive those documents and communications as quickly as possible.
It is very important that your Virginia registered agent is responsible, diligent, knowledgeable, and responsive because your company is deemed to receive anything that has been delivered to your registered agent, whether they forward it to you or not. This means that if you are sued and the lawsuit is served on your registered agent, the court will consider you to have knowledge of the lawsuit and the time to respond starts ticking (in most cases, 21 days from the date of service of process in Virginia). If you don’t know about the lawsuit and don’t respond within the time limits, you won’t get the opportunity to defend yourself and you’re facing a default judgment that can be difficult, if not impossible, to undo. At the very least, it’s going to be an expensive effort, the expense of which far exceeds whatever you may have paid your registered agent for a year of service.
Many of our clients have come to us after experiencing the frustrating and expensive situation of not receiving their documents from their previous registered agent. Sometimes this resulted in them have little or no time to defend a lawsuit. And sometimes this resulted in them losing their authority to transact business in Virginia, risking a deal, a license, or protection from individual liability. In all cases, they have been frustrated by not receiving a service they paid for either because their previous registered agent was located far from Virginia and took a long time to receive and forward documents, or because their resident agent had a whole nation of clients to try to keep track of, or because their registered agent was offering a “free” or very low cost service and simply could not afford to be responsive and diligent. For these reasons, it’s very important to you and your business that you pick a quality Virginia registered agent that will provide the level of service and assistance that you deserve. This is why we are here and why we only focus on providing registered agent service in Virginia – our clients are our number one priority and we do everything possible to protect them.