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LIMITED LIABILITY COMPANY

One type of entity to consider when forming a business or making an investment is the limited liability company.  A limited liability company is a separate legal entity, distinct from its members, that has the power to conduct business in its own name.  These powers include, but are not limited to, the power to sue and be sued, acquire and dispose of real and personal property and hold title thereto, enter into contracts, and borrow and lend money.  Advantages associated with a limited liability company include limited liability of the members, characterization of the limited liability company as a pass-through entity for taxation purposes, and flexibility in drafting the provisions of the operating agreement which govern the affairs of the limited liability company.              

The owners of a limited liability company are referred to as members and may be natural persons or entities.  The members of a limited liability company also may manage the business affairs of the limited liability company.  Alternatively, the limited liability company may be managed by one or more managers (who may, but need not, be members) and who may also be natural persons or entities. 

FORMATION

In the Commonwealth of Virginia, one or more persons and/or entities may form a limited liability company by filing articles of organization with the State Corporation Commission.  The articles of organization are required to set forth the name and principal office of the limited liability company, the name and address of the initial registered agent, and specific information about the identity of the registered agent (such as whether the registered agent is a resident of the Commonwealth of Virginia).  The existence of the limited liability company begins at the time the State Corporation Commission issues a certificate of organization (with limited exceptions).

Although a limited liability company is required to pay an annual fee to the State Corporation Commission, a limited liability company is not required to file annual reports.  Therefore, the names of the members and/or managers of the limited liability company remain private.  The only additional documents which a limited liability company may be required to file are articles of amendment (to amend the articles of organization) and articles of cancellation (to wind up and dissolve the limited liability company). 

Conversion to a Limited Liability Company

An existing partnership may convert to a limited liability company by filing articles of organization which contain statutorily required disclosures about the former partnership or limited partnership.  In addition, a corporation may convert to a limited liability company, and a limited liability company may convert to a corporation, if all statutory requirements concerning conversion are satisfied.  Mergers are also permitted among Virginia and foreign limited liability companies, partnerships, stock corporations, and business trusts. 

OPERATING AGREEMENT

A limited liability company usually has an operating agreement which governs the affairs of the limited liability company and the operation of its business.  The Virginia Limited Liability Company Act will govern the terms of the relationship between the members and/or managers if the limited liability company does not have an operating agreement or if the operating agreement fails to address a particular issue.  In the Commonwealth of Virginia, a limited liability company is an extremely flexible form of business entity since many of the default provisions of the Virginia Limited Liability Company Act may be varied through a well-drafted operating agreement. 

The following are some provisions of the operating agreement which may be tailored to fit the needs of the limited liability company and its members and/or managers (however, this is not an exhaustive list):

• How profits, losses, and distributions will be allocated among the members
• What will happen to the interest of a member when a member dies, becomes incompetent, or resigns
• Events which will cause the dissolution of the limited liability company

LIMITED LIABILITY

Much like the shareholders of a corporation, the members of a limited liability company generally have limited liability for the debts and obligations of the limited liability company.  However, members who actively participate in the management of the limited liability company may be liable for their actions in such management capacity.  In addition, a bank or other creditor of the limited liability company may require that one or more members guarantee various obligations of the limited liability company.

TAXATION

If the limited liability company has two or more members, then it can elect to be treated, for taxation purposes, as a partnership or as an association taxable as a corporation.  If the limited liability company elects to be treated as a partnership for taxation purposes, the limited liability company itself would not pay income taxes.  Instead, the share of each member in the profits and losses of the limited liability company will be included on such member’s tax return.  Generally, a single-member limited liability company will be treated as a disregarded entity for purposes of federal taxation; therefore, the ownership of assets, receipt of income, and incurrence of expenses will be attributed directly to the sole member.

TRANSFERABILITY OF INTERESTS IN A LIMITED LIABILITY COMPANY

Unless otherwise provided in the operating agreement or the articles of organization, a member may assign, in whole or in part, the right of such member to receive a share of the profits, losses, and distributions of the limited liability company.  However, operating agreements often restrict the right of a member to transfer some or all of the rights which such member has in the limited liability company (including the right to vote and to participate in the management and affairs of the limited liability company).  Generally, a person or entity who has been assigned an interest in a limited liability company will not become a member of a limited liability company (with all of the rights of a member) unless admitted as a member by the required number (as determined by statute) of existing members.  However, the operating agreement or articles of organization may set forth an alternate procedure for how a person or entity who has been assigned an interest in a limited liability company will become a member.

TERMINATION

Generally, a limited liability company may not be dissolved and terminated by a member except in accordance with the terms of the operating agreement.  Moreover, a limited liability company will not necessarily dissolve and terminate upon the death, incapacity, dissolution, termination, or bankruptcy of a member, unless so provided in the operating agreement.  If the limited liability company does not have an operating agreement or if the operating agreement is silent, the Virginia Limited Liability Company Act will govern the dissolution, winding up, and termination of the limited liability company.

© 2010 GANDERSON LAW, P.C.