How to Form an LLC in Virginia!

All LLCs formed in Virginia must include one of the following in their name: “limited company,” “limited liability company,” “L.C.,” “LC,” “L.L.C.,” or “LLC.”

Names cannot imply that the LLC is another type of entity (such as a corporation), and the name must be distinguishable from the name of every other entity formed or authorized to transact business in Virginia.

An “organizer”, which can be anybody, must file articles of organization with the State Corporation Commission of Virginia, who will issue a certificate of organization. The Articles of Organization must include: the LLC name, the name and address of the registered agent, whether the Agent is an individual (they must be a member, manager, member/manager of an entity that is a member/manager, or a lawyer) or company, and the address of the LLC’s principal office.

The articles of organization can be filed in paper or online form, and must be accompanied by a $100 filing fee.

Virginia LLCs may adopt an operating agreement to govern their internal affairs. All members must agree to the operating agreement, although it does not need to be in writing. Additionally, all members must agree to any amendments, unless the operating agreement says otherwise.

EIN: If your Virginia LLC has more than 1 member or is going to hire employees, you need to obtain an EIN from the I.R.S. for taxes.

Annual Reports: Unlike most states, Virginia does not require LLCs to file annual information reports. However, they must pay a $50 annual registration fee to the State Corporation Commission.

Virginia’s growth and productivity make it a popular place to form an LLC.  The Virginia LLC Act gives LLC members contractual freedom to customize their allocation of profits and losses and management powers, it protects both majority and minority members, and it enables members to protect their control of an LLC.

Virginia is a Leader in Innovation and Growth

The U.S. Chamber of Commerce has called Virginia “the emerging East Coast economic superstar.”  It ranks Virginia first in median family income, “science, technology, engineering, and mathematics” job concentration, and high-tech share of all businesses.  It also ranks Virginia third in “growth, productivity, and livability,” which was determined by considering long-term and short-term job growth, state gross domestic product growth, job productivity and income growth, and livability.  From 2009 to 2012, it has added over 128,000 jobs, including 41,000 professional, scientific, and technical-service jobs.

The U.S. Chamber of Commerce cited several reasons for Virginia’s growth and productivity.  The state has a low tax and regulatory environment, is close to Washington D.C., and has a highly educated workforce.  In addition, the Port of Virginia is the only port on the East Coast that is deep enough to handle large modern vessels.

The Virginia LLC Act states that it should be interpreted to give “maximum effect to the principle of freedom of contract and of enforcing operating agreements.”  The Act gives LLC members contractual freedom to customize their capital contributions and their shares of profits and losses.  An LLC’s members can specify a method for allocating profits and losses in an LLC agreement that is greater or lesser than their portion of capital contributions.  This gives members contractual flexibility to tailor their income and risks of loss to further their big-picture asset management plans.

In addition, an LLC agreement may establish classes of membership interests with different rights, powers, and duties, including voting and non-voting interests.  Likewise, an LLC agreement may establish classes of managers with different rights, powers, and duties, including voting and non-voting powers.  This facilitates everything from complex, multi-million dollar business deals to succession planning in family businesses and estate planning by gifts of non-voting interests.

Formation

The Virginia LLC Act does not require LLC members to be listed with the State Corporation Commission of Virginia.  A “person” may organize an LLC, and the person does not need to be a member of the LLC.  An LLC’s members may therefore have an entity or person who is not a member file the LLC’s articles of organization with the State Corporation Commission of Virginia.

Dealing with Business Partners

The Virginia LLC Act protects both majority and minority members.  The Act protects majority members by allowing them to determine whether, and under what conditions, to allow contracts and transactions between an LLC and one or more of its managers or members.  The Act provides that “[e]xcept as provided in the articles of organization or an operating agreement, a member or manager may lend money to and transact other business with the limited liability company and, subject to other applicable law, has the same rights and obligations with respect thereto as a person who is not a member or manager.”  This gives members certainty in business planning and the ability to take advantage of mutually beneficial opportunities.

The Act protects minority members by giving a manager the duty to act with good faith business judgment in the best interests of the LLC.  Moreover, the Act allows an LLC agreement to provide “dissenter’s rights” to a class or group of members in connection with major transactions or events.  These transactions or events include amendments to an LLC agreement, merger with another entity, conversion of an LLC to another kind of entity, sale of all or substantially all of the LLC’s assets, and transfer or domestication of an LLC from Virginia to another state.

Preventing Unwanted Business Partners

The Virginia LLC Act protects membership interests from members’ creditors.  An LLC agreement may provide that a membership interest cannot be assigned.  Even if a membership interest is assigned, the assignee cannot participate in the management of the LLC, become a member, or exercise any non-economic interests of the assignor.  The Act provides that “[t]he only transferable interest of a member in the limited liability company is the member’s share of the profits and losses of the limited liability company and the member’s right to receive distributions.”  The assignee may become a member only by a majority vote of the non-assigning members.

Furthermore, the Act provides that if a member assigns or transfers “all or substantially all of that member’s membership interest, other than a transfer for security purposes or a court order charging the member’s interest,” the member may be dissociated by a unanimous vote of the non-assigning members.  A member may also be dissociated without a vote if the member makes an assignment for the benefit of creditors, becomes a debtor in bankruptcy, or fails to contest the appointment of a receiver or trustee over all or a substantial part of the member’s property.  The dissociated member then has only the rights of an assignee.

Creditors Only Get Passive Rights, Not Control Rights

And if a creditor obtains a charging order against a member’s membership interest, it “constitutes a lien on the judgment debtor’s transferable interest,” and “the judgment creditor has only the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled in respect of the interest.”  These provisions are the “exclusive remedy by which a judgment creditor of a member or of a member’s assignee may satisfy a judgment out of the judgment debtor’s transferable interest.”  This enables members to protect their control of an LLC.

A Virginia LLC must list a Virginia registered agent for service of process.  A commercial registered agent service may act as a Virginia registered agent.

One unusual aspect of Virginia is the severity of the penalty the state charges foreign (non-Virginia) LLCs that transact business in Virginia without qualifying for authority to do business by obtaining a “certificate of registration” from the State Corporation Commission of Virginia.  The penalty is that “each member, manager or employee of the limited liability company who does any of such business in the Commonwealth knowing that a certificate of registration is required and has not been obtained shall be liable for a penalty of not less than $500 and not more than $5,000 to be imposed by the Commission, after the limited liability company and the individual have been given notice and an opportunity to be heard.”  The fee for an application for registration, however, is only $100.  Foreign LLCs should be certain to apply for registration, therefore, if they transact business in Virginia.

Because of the advantages of forming an LLC in Virginia, over 35,000 new LLCs are formed in the state each year.
Should you wish to have more flexibility and protection, you may instead form a Delaware LLC even if you operate in Virginia.  What are the advantages of a Delaware LLC?  (Delaware LLC Advantages).  We can then help you file an application for registration to do business in Virginia with your Delaware LLC (Form Delaware LLC).