Forming an LLC in Virginia can provide a number of business and legal benefits.
Freedom of Contract
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.
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.
Privacy for Owners
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.
Benefits for 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.
Protections Against Unwanted Parties
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 Cannot Obtain Controlling 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.
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.
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