By Susann Nordvik

Entrepreneurship has long been a coveted aspect of the American Dream, and since the nation’s inception, business has developed many forms.  Originally all business was in the form of sole proprietorships, out of which grew general partnerships, limited partnerships, and chartered corporations, each business form carrying its own benefits and drawbacks.

During the latter half of the twentieth century, the limited liability company, or LLC, burst onto the scene, and over the last 40 years this novel structure has provided enormous benefits to small and large businesses alike.  While providing the previously corporation-only protections of limited liability to members, LLCs also provide operations and taxation flexibility previously unknown in the business world.  In fact, although each of the business forms offer benefits, the powerhouse entity that is the LLC combines the structural benefits of each form into a single, cohesive system of business governance.

What Is an LLC?

An LLC is defined as an unincorporated organization created under the Virginia Limited Liability Act.[1]  It is an entity that combines corporation and partnership (or sole proprietor) features. Like their corporate counterparts, LLCs are legal entities, and carry “person” status under the law.[2]  Therefore, the LLC is separate and distinct from its individual owners, known as members.[3]  Like shareholders in a corporation, members receive certificates indicating their membership interest.  However, as will be discussed below, the members of a member-managed LLC are a dynamic part of the organization, and not mere passive certificate-holders that look to a board of directors to set the business course.  At the same time, the flexibility of an LLC provides opportunity to operate in a less complicated way, and the LLC can utilize less cumbersome tax procedures.

How Can an LLC Benefit My Business?

One of the most important functions of the LLC is its separate entity status, which affords the members of the company the corporate-style protections against company debt.  Absent specific wrongdoing by an individual member, creditors of the LLC cannot reach the assets of the members or, in the case of a manager-managed LLC, the managers.[4]

LLCs provide taxation flexibility by allowing the LLC to be treated as either a corporation (C-corporation), or as a sole proprietorship (single member)/partnership (multiple member).  Likewise, the management structure can be adjusted to the needs of the particular business by allowing for the election of a partnership model,[5] a corporate model,[6] or a joint venture model,[7] and both natural persons and legal entities can be members of an LLC.

Adding to this flexibility, the members of an LLC are permitted to govern in accordance with the terms set by the Operating Agreement, without need of an annual meeting of shareholders.[8]  This means that the members, if permitted by the terms of the Operating Agreement, can meet informally, make business decisions by e-mail or over the phone, without need of a cumbersome process.[9]

How Is an LLC Structured?

As indicated above, the primary governing document of an LLC is the Operating Agreement.  This document, like corporate by-laws, sets the standards for how the LLC will conduct business, identifies the interests of the members, and can be used to modify statutory management defaults to customize your business’s management.  The Operating Agreement also sets the scope of each member’s interest, sets out duties of management and the relationship between the members, and provides a process for acquisition of membership interests in the event of disqualification, retirement, or death of a member.  There are many ways the Operating Agreement can be modified to suit your business model, so be sure to ask a qualified attorney about what options might be right for you.  The organization of the business itself is established by filing Articles with the State Corporation Commission for a nominal fee.

If I Have an Existing Partnership, Can I Convert to an LLC?

The Limited Liability Company Act provides a means to convert an existing partnership into an LLC.[10]  This allows the partnership to maintain the essence of the partnership business model while ensuring limited liability for both general and limited partners.

Can Membership Interests Be Transferred?

Subject to the procedure and limitations set out in the Operating Agreement, a member can sell, assign, and transfer their interest like any other item of personal property.[11]  However, it is important to note that in a multiple member LLC, the other members likely have a right of first refusal regarding the membership interest, and/or a right to approve the admission of a new member into the business.

Additionally, if you have personal creditors, your interest in the LLC may be reached by your creditor through the perfection of a security interest or the entry of a Charging Order by a court.[12]

All in all, the LLC provides an efficient vehicle for any person or group who wants to operate a business without the cumbersome taxation structure and formalities of a corporation, or the liability concerns present in a sole proprietorship.  If you have any questions about organizing an LLC or any other business entity, do not hesitate to contact one of the qualified business attorneys at the firm, or other qualified counsel.

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[1] Virginia Code, § 13.1-1000, et seq.

[2]  See Virginia Code, §§ 13.1-603 (defining person as a natural person and an entity); 13.1-1002 (adopting § 13.1-603 definition of person).

[3]  Virginia Code, § 13.1-1002 (defining member).

[4] Virginia Code, § 13.1-1019.  This provision states: [N]o member, manager, organizer, or other agent of a limited liability company . . . shall have any obligation for any liabilities of a limited liability company, whether such liabilities arise in contract, tort or otherwise, solely by reason of being a member . . . .”

[5]  Virginia Code, § 13.01-1022(A), (D).

[6]  Id.

[7]  Id.

[8]  Id. at subd. (E).

[9]  Virginia Code, §§ 13.01-1022(E), 13.01-1024(I).  It should be noted, however, that by adhering to more formal processes (known as “corporate formalities”), the membership can more readily insulate itself from claims that the LLC is a “sham” entity, or a mere “alter ego” of the individual members.

[10]  Virginia Code, § 13.01-1082(E), (F).

[11]  See Virginia Code, § 13.01-1038.

[12]  Virginia Code, § 13.01-1041.1.