Corporations & LLCs
Our firm creates and also provides advice to existing companies and other forms of business entities. In Virginia, a limited liability company (LLC) is a flexible and popular form of business organization that provides its owners with limited liability. The LLC has features that resemble both a partnership (or sole proprietorship) and a corporation. These main features are limited liability and pass-through taxation (which means no “double taxation”). Owners of LLCs are called members – members can be individuals or even other companies. If properly established, an LLC is straightforward to maintain and ideal for small companies, including companies with only one owner.
1. Limited Liability for Owners. The primary benefit of an LLC is limited liability for its owners. Provided they do not commit illegal or negligent acts while running the business, owners do not risk losing their personal property as a result of a lawsuit or if the company’s debts become too large to handle. People may attempt to sue or collect debts from a business but in most cases such actions will not lead to the seizure of an LLC’s owner’s personal assets. For legal purposes, the business is distinct from its owners, even if the owners are the ones who operate it. Therefore, in most cases the owners are not personally liable even if the business fails. This legal principle encourages entrepreneurship because it allows for profit potential while limiting risk for actions and debts of the company.
2. Tax Benefits. Another important feature of LLCs involves tax benefits. With a corporation, profits are taxed and then dividends or bonuses are also taxed. By contrast, an LLC’s income and deductions attributable to each member are reported on each owner’s respective tax return. In addition, the LLC’s income generally retains its character in the hands of the members, for example as capital gains or as foreign sourced income. LLCs also permit their members to claim their proportionate share of deductions such as those related to startup costs and advice, as well as benefits paid by the company (such as health insurance premiums). Speaking with a knowledgeable accountant when creating an LLC will also save money and time as the business grows. Reputable business attorneys can refer you to an accountant if you do not already have your own. You should ask detailed questions, including whether your personal situation may require you to pay self-employment tax on your share of LLC profits.
3. The Importance of Well-Drafted Documents. A contract among an LLC’s owners called an operating agreement defines voting rights, responsibilities, procedures for buying or selling member shares in the business and even specifying how to later sell or dissolve the business. Although it is legally permissible to have an LLC without a written operating agreement, this is often a recipe for trouble and it is much easier and less expensive to avoid problems by documenting things upfront than to attempt to fix or define them later. If you are interested in starting an LLC you should hire an experienced business attorney to assist you with the process, especially drafting your LLC’s operating agreement and related legal documents. If you have already started a company it would be advisable to ask a business law attorney to review your company documents to help you comply with applicable laws and regulations. Professional fees frequently save more money than they cost.