The 5 Biggest
Mistakes Made a New LLC Business - Virginia
Mistake #1
Doing business Before the LLC Business in Virginia is Formed
You are personally liable for
any business activities or transactions that take place before your
LLC business in Virginia is formed. A person can sue you years later for something you
did today. If your business becomes successful, those early
acts could cause you to be subject to a personal lawsuit.
Don't think it has not been done. With over 70,000 lawsuits
filed a day, this world is filled with people and their predatory
litigation attorneys looking for successful small businesses to
attack.
Many new business owners put off
the formation of their Virginia LLC while they work on the other details of
starting an LLC business. Virginia does not recognize an LLC
in Virginia until it is officially formed. Once you have decided to start a business, it
is a much smarter move to form a Virginia LLC at once and then have the
Virginia LLC engage in the other start up activities as opposed to you
personally. This is the best way to ensure liability
protection when running your llc business.
Another mistake Virginia
business owners make is thinking that once their formation documents have been sent into the
Virginia State Corporation Commission, their LLC business in
Virginia has been formed. This is
wrong! In Virginia, an LLC business is not formed until the Virginia State
Corporation Commission has processed the paperwork and entered the new
Virginia LLC into
the official LLC database. This process usually takes 7-10 days
depending on the workload of the VIrginia State Corporation
Commission. Virginia takes another 7-10 days to
actually issue and mail out the Certificate of Organization for
a Virginia LLC business. The Certificate of Organization is the birth certificate of
the Virginia LLC. Until you have it, you cannot show the world that the
LLC exists. For example, all banks will require a copy of the
Certificate of Organization before they will allow the LLC to have a
bank account. Always take into account this 15-30 day
formation period in your business planning.
Now, if you have found that you
waited too long and you now need to open a bank account to conduct
business or your business needs to sign a contract, hire an employee
or otherwise conduct business, the Virginia State Corporation
Commission does offer expedited
services to form an LLC in Virginia. The expedite services requires filing an additional form
and paying an expedite fee in addition to the filing fee they charge
for the filing itself. Plan for 4 business days before your
expedited Virginia LLC business is formed and the filing is completed.
In summary, once you have
decided to start an LLC business in Virginia, form your Virginia LLC right away. This will
ensure you have more liability protection and if will save you the
money and stress of having to form one on an expedited basis to
avoid losing business or delaying other start up activities.
Mistake #2
Failing to Actually Issue Ownership Interests in an LLC Business in
Virginia
Many business owners create a
Virginia
LLC but never actually issue ownership interests (known as
Membership Units) to the persons that are going to be owners of the
LLC business in Virginia (known as Members). It can be easy for you mistakenly think
that because you created the Virginia LLC, your are automatically the owner
of the LLC business. The Virginia State Corporation Commission
does not require that members be appointed as part of the formation
process.
The fundamental premise of an
LLC business in Virginia is that is its own separate entity. When a
Virginia LLC is formed by the Virginia State Corporation Commission, it does not have owners. Membership Units in the
Virginia LLC
business must be issued to the persons who will be the owners. This issuance
transaction needs to be in writing. The Virginia LLC Operating Agreement is
the typical place where the LLC issues shares to Members and usually
the Members agree to contribute a certain amount of money to the
Virginia LLC
business for those Membership Units (this money obligation is known as a
Capital Contribution).
Make sure that after your
Virginia LLC business is
formed, you complete this next step. It is vital to your LLC
business because an LLC once formed is a shell entity without any
ownership attributes until Membership Units are issued to Members.
Mistake #3
Failing to Create a Management Structure and Appoint Officers for
your Virginia LLC Business
A Virginia LLC business needs to have a
management structure. A management structure determines who has the
authority to make decisions on behalf of the LLC. There are two
management structures. A member-managed LLC is when the members
automatically have the rights to operate and manage the LLC
business. The second is a manager-managed LLC which creates a
corporate type structure. A Board of Managers is created and
persons who are appointed to that Board have the authority to run
the business. All LLCs should appoint the officers (President,
Secretary, Treasurer) of the LLC.
The best place to create a
management structure and appoint initial officers is in the Virginia LLC
Operating Agreement. Every Virginia LLC business should have an Operating Agreement
as this agreement creates the set of rules for your Virginia LLC. If you are
a single member LLC, this becomes even more important because you
run a higher risk of losing liability protection if you ignore your
entity as a separate entity.
Remember, your Virginia LLC
business is a separate
and distinct entity and this is important to preserve the layer of
limited liability protection afforded by LLCs. If you do not comply
with the standard protocols for a Virginia LLC, a predatory attorney can try
to sue you personally and say that you should be personally liable
for the LLC activities because you did not treat the LLC as an
entity separate and apart from yourself.
Now, the Virginia Limited
Liability Company Act does have default management provisions that apply if
your Virginia LLC does not have a Virginia LLC Operating Agreement, but those laws are
always changing and they can be difficult to apply. Plus, if you
have other Members, then disputes can arise as to what voting
requirements, profit allocations and other rules apply. The
Virginia laws may include provisions that you do not want for your
Virginia LLC business. Another great benefit of an LLC is that the Members can decide
amongst themselves how they operate their LLC. Use a well drafted
Virginia LLC Operating Agreement for your LLC and get all of your Members to sign
the Operating Agreement.
Mistake #4
Failure to Get Investment Obligations in Writing for your Virginia
LLC Business
The Virginia Limited Liability
Company Act requires that all agreements by a Member of an LLC
business in Virginia to
contribute money to the LLC must be in writing. An oral agreement
is not enforceable under Virginia law.
If you are planning on starting
a new LLC business in Virginia with other persons, you will likely get together and
decide on how much of the business each of you will own and on what
obligations each of you are agreeing to with respect to that
business. Obligations usually include how much money you are each
going to contribute to the business and what kind of services and
time commitment each of you will devote to the business.
At the beginning of a Virginia business,
these conversations take place and everyone agrees. An important
discussion is how much will the LLC business in Virginia require in money before it
can generate its own cash to operate the business. This amount is
known as start-up capital.
A typical conversation goes like
this:
Anne: “John, we are going to need $20,000 over the next
year to start this business. If we are going to each work equally
and you agree to put in $ 5,000 of the capital, I agree to issue to
you 25% of the ownership of the business.”
John: “Anne, that sounds fair. We will each work
equally in the business but because you will be contributing $15,000
and I will contribute only $5,000, the 75%-25% allocation makes
sense. Now, I am looking at our budget and most of the money will
not be required until 5 months from now when we will move into
office space and need to pay our vendors for products purchased- I
will contribute my $5,000 then- is that okay?”
Anne: “Sure, as long as we are in agreement as to
amount, I can front the initial expenses until the 5th
month and then the LLC will need your $5,000.”
Then John and Anne form their
Virginia LLC and starts their Virginia LLC business. . . forgetting to ever document the
agreement among LLC owners (known as Members) in any written
agreement. Five months later, Anne asks John to contribute $5,000
and he says he does not feel like he should contribute this money
because he has worked more on the business than Anne or. . . perhaps
he decided to invest the money elsewhere at that point.
This is a common situation that
multi-member LLCs find themselves in often. Any monetary or
services obligations should be set forth in writing. This is an
ultimate requirement for a Virginia LLC business.
Mistake #5
Thinking that a Virginia LLC Business is a Foolproof Layer of Liability Protection
Yes, it is established that a
Member of a properly formed and maintained Virginia LLC is not liable for the
debts, obligations and lawsuits of the LLC business merely by being a Member
of the Virginia LLC. But, in a realistic business context, persons who are
Members are usually not passive owners of the LLC. They are
also active managers and operators of the Virginia LLC business.
In today's litigious world, all
businesses should be run through a limited liability entity such as
an LLC. The LLC liability protection is a significant
protection vehicle. However, the LLC layer of protection does
not extend to all potential liabilities that can arise in the midst
of running an LLC business in Virginia.
For example, you may be in a
company car driving to see a client when you are in an accident.
You will be personally liable for that accident regardless of the
fact that, at the time, you were working on behalf of your Virginia LLC
business. The LLC laws do not cover personal negligence. Your
Virginia LLC
should always have insurance to cover these types of business
related accidents. Do not ever think that the LLC is enough to
protect you in these circumstances.
Similarly, there are some laws
that hold you liable regardless of whether you are operating through
an LLC. The most obvious one that might apply is if you are a
licensed professional. Doctors, lawyers, accountants, real estate
brokers and dentists, for example, are always personally liable for
acts of malpractice. If you are a licensed professional, make sure
you get the proper insurance.
Also, there are certain tax,
environmental and securities laws that you can be held personally
liable for if your Virginia LLC is in violation of those laws and you were
the responsible manager. Do your homework in performing the
administrative and other tasks of your Virginia LLC business and retain the proper
professionals to advise you when appropriate.
Finally, you cannot use your LLC
business in Virginia to engage in fraud or hide behind the Virginia LLC to protect yourself when
you engage in fraudulent or unlawful acts. If you break the law or
try to defraud others, the law will hold you personally accountable.
* * *
In summary, the Virginia LLC is a
wonderful vehicle for providing Members of a Virgnia LLC business with limited liability
protection. But, in order to preserve that protection, you cannot
just form a Virginia LLC and then forget it exists. Make sure you do the
necessary things to honor your LLC as a separate entity and also
know that the Virginia LLC should not be your sole means of protection- get
insurance when it makes sense and always invest in the required
knowledge for operating your business which includes getting the
right help when needed in your business!
