Business Startups FAQs
Build your business on a smarter foundation.
What are the filing fees charged by the State Corporation Commission to form a Virginia corporation or LLC?
The registration fees to form a Virginia corporation will vary depending upon the number of shares the corporation is authorized to issue, but in most cases, the fee is $75. The registration fee to form a Virginia limited liability company is $100.
What is an assumed name filing?
This is also known as a “d/b/a” or “doing business as” filing. If you plan to do business under a trade name that is different than the legal name of your business entity, then you are required to file a Certificate of Assumed Name with the clerk of the circuit court in the city or county where you are doing business. The filing fees vary by locality, but are generally under $20. You are then required to obtain a certified copy or “Copy Teste” from the court clerk and then file that document with the State Corporation Commission. The SCC filing fee for this document is $10.
How quickly can a new LLC be formed in Virginia?
The Virginia State Corporation Commission debuted an electronic filing system in 2011 that makes it possible to form a new LLC online in a matter of minutes. Just because the technology exists to facilitate a quick LLC formation, does not mean you should form LLCs in a careless, haphazard fashion. Just a few preliminary issues to consider when structuring a new LLC include:
- Is my chosen name for this LLC available in Virginia (i.e., is it confusingly similar to another Virginia entity already in existence)?
- What address should I list as the principal address for the LLC?
- Do I want to serve as my own registered agent or do I want to outsource registered agent duties to Eric Perkins?
- Do I want to limit the business purpose(s) of this LLC or preserve as much flexibility as possible?
- Who will own the LLC and how will ownership be divided?
- Will owners be contributing cash, property, or services in exchange for their ownership interests in the LLC?
- How do I want to structure the management and voting rights for the LLC?
- What will we do if additional capital is needed to keep the business operational (also known as the dreaded “capital call”)?
Why do they call a single-member LLC a “disregarded entity”?
The IRS treats a single-member LLCs as if it was a sole proprietorship, in other words, it disregards the existence of the LLC for federal income tax purposes. This means that the LLC itself does not file an income tax return. All LLC income, profits, deduction, and losses pass through the entity and get reported on the individual income tax return of the owner. This concept confuses people because while the IRS views the single-member LLC as a disregarded entity, the LLC continues to exist under state law for purposes such as providing asset protection to the owner and being able to sign contracts, own property, etc.
Does an LLC pay income taxes?
In most cases, no, at least not directly. One of the advantages of LLCs is a concept called pass-through taxation. This means the LLC itself does not pay federal income tax, its owners do. Income, profits, deductions and losses “pass through” the LLC and get reported on the owners’ respective tax returns. The default rules for LLCs provide that:
- The IRS will treat a single-member LLC like a sole proprietorship; thus the LLC will be a disregarded entity for federal income tax purposes. All income, profits, losses, and deductions will get reported on Schedule C of the owner’s Form 1040 individual income tax return.
- The IRS will treat a multiple-member LLC (an LLC with two or more owners) like a partnership; thus the LLC will enjoy pass-through tax treatment. The LLC will pay no entity-level tax, and all income, profits, losses, and deductions will flow through to the owners to be shared pro rata based on their respective ownership percentages in the company or as otherwise agreed by the owners.
- Things can get more complicated because the IRS allows LLCs to opt out of the default classifications and elect to be taxed as either an “S” corporation (which has become increasingly common in recent years) or as a “C” corporation (not so common). This special tax election is memorialized on IRS Form 8832.
Why would a business owner want an LLC to be taxed as an “S” corporation?
A primary reason a business owner would cause an LLC to elect to be taxed as an “S” corporation is to save on self-employment taxes (social security and Medicare) if the owner is actively involved in the business activities of the LLC. If the LLC is taxed as sole proprietorship or a partnership (the two default classifications for an LLC), an owner active in the business will owe self-employment tax on 100% of his or her share of the LLC’s net income. With an “S” corporation, an owner active in the business can shield some portion of that income from self-employment taxes by taking income out of the company as a dividend or profit distribution. Dividend income is not subject to self-employment tax. On the other hand, as a general matter, the IRS will require an owner active in the business to pay himself a “reasonable salary,” a calculation that depends on facts and circumstances. There are several disadvantages of having an LLC elect to be taxed as an “S” corporation, so you should carefully weigh the relative pros and cons with your legal and tax advisors before making any final decisions.
Does a single-member LLC need its own Federal Employer Identification Number (EIN)?
Yes, even though a single-member LLC is by default viewed as a disregarded entity by the IRS, it should go ahead and obtain its own EIN to demonstrate that the separate legal existence of the LLC is being respected and to utilize for payroll tax accounting and administration (as opposed to using an individual owner’s social security number). If the single-member LLC elects to be taxed as either a “C” or “S” corporation, then having its own EIN would be appropriate in that circumstance as well.
Does an LLC need a written Operating Agreement?
While not legally required under Virginia law, all LLCs should have a written Operating Agreement to provide clarity for the LLC and its owners, demonstrate that proper business entity formalities are being followed, and to maximize the flexibility and freedom of contract benefits made available to business owners and investors under the Virginia Limited Liability Company Act.
Oops! I forgot to pay the annual fee to the SCC and I was notified that the existence of my LLC has been terminated. Can I bring it back to life?
Yes, if the mistake is caught within five years, a terminated LLC can be reinstated retroactive to the date of termination through a simple filing (Articles of Reinstatement) and paying a reinstatement fee. Inadvertent LLC terminations happen all the time, but it can have drastic consequences to the LLC and its owners.
Are entrepreneurs still using corporations for small business startups?
Absolutely. Corporations continue to be widely used as a structure for small businesses in many retail and service industries. Corporations have been around a long time, business people are comfortable with corporate terminology and many concepts of corporate law have been tested in the courts over the years. The Virginia Stock Corporation Act is regularly updated to keep up-to-date with trends in the business community, so Virginia corporations today can enjoy much of the flexibility and benefits offered by LLCs and other types of business entities.
Don’t corporations require a lot more paper work than LLCs?
To a degree, yes, but the paper work burden is not significant, and under the Perkins Law Corporate Startup flat fee service package, all the necessary corporate formation paper work is included.
Are Shareholder Agreements required under Virginia law?
No, these agreements are not legally required, but they are very important for the stability and success of any business and the relationship among its owners. When I help a business startup get off the ground, I strongly urge the owners to memorialize in writing their agreement on a variety of issues ranging from voting and management arrangements to buy-sell or ownership transfer provisions. For more information as to why these agreements are so important, click here [link to Ten Things Business Owners Should Know About Buy-Sell Agreements).
Are corporations required to file annual reports with the State Corporation Commission?
Yes, but the report is a simple, standardized form that takes little time to complete (and can now be filed electronically). Basic corporate information such as principal address, names and address of corporate officers and directors are all that is required. The annual report required by the SCC is nothing like the voluminous annual reports that large, public companies are required to file with the Securities and Exchange Commission.
Oops! I forgot to pay the annual fee to the SCC and I was notified that the existence of my corporation has been terminated. Can I bring it back to life?
Yes, if the mistake is caught within five years, a terminated corporation can be reinstated retroactive to the date of termination through a simple filing (Articles of Reinstatement) and paying a reinstatement fee. Inadvertent corporate terminations happen all the time, but it can have drastic consequences to the corporation and its owners.
Is there a limit on the number of shareholders a Virginia corporation can have?
Under the Virginia Stock Corporation Act, no. However, it is important for business owners to understand how other laws might impact their business structure and operations. For example, the Internal Revenue Code imposes eligibility requirements on who can be a shareholder of an “S” corporation and also imposes a limit of 100 shareholders. Federal securities laws require any corporation with more over 2,000 or 500 accredited shareholders and $10 million in assets to file required reports under the Securities Exchange Act of 1934 as a public reporting company.
Should I approach my personal relationships and finances in a business-like fashion?
Absolutely. Our personal relationships and interactions in today’s society are evolving much faster than traditional legal concepts of marriage, estate planning, child guardianship, etc. can possibly hope to keep up. In so many situations, you can reduce uncertainty, stress, and heartache with a little planning and simply memorializing your objectives through a written agreement. Whether you are looking to memorialize terms of cohabitation, joint ownership of a home, or guardianship arrangements for a child, Perkins Law can help you identify and address these important issues in a business-like manner that will better position you to navigate many of life’s turning points such as death or the dissolution of a close relationship.
My family is giving me money to fund my business startup, do I need to put anything in writing?
Startup financing from “friends and family” is very common, but usually handled very poorly. The more these transactions are handled and documented in a business-like fashion, the more likely both the business and personal relationships will be to survive. Term sheets, promissory notes, security agreements, personal guarantees—the documentation will vary depending upon the size and structure of the deal—should be carefully drafted and executed. These transactions do not have to be complicated or expensive, but they are critically important.
What is “ADR” and should ADR language be included in my business contracts?
The term “ADR” refers to alternative dispute resolution—methods of resolving disputes outside of court. In my experience, resorting to litigation is generally a horribly inefficient way of resolving problems. Litigation is expensive, time-consuming, and stressful. Business owners should never underestimate how much of a distraction a lawsuit can be and the devastating impact it can have on your business and personal life. In some cases, litigation is inevitable and necessary, however, in most business contracts, it makes sense to include provisions outlining a process for resolving disputes outside of the judicial system.
Mediation and arbitration are the two most common forms of alternative dispute resolution. Both offer opportunities for disputing parties to avoid litigation and resolve their differences in a private, informal atmosphere. There are lots of substantive and subtle distinctions between mediation and arbitration, and there are no guarantees that either will be successful. Sometimes you end up in court no matter what you do. The point is that ADR can save time and money and should at least be considered when structuring a business transaction or negotiating a contract. Advance planning and documentation can reap meaningful dividends in the long run.
Can anyone serve as registered agent for a business entity?
Not just anyone can serve as registered agent. Under Virginia law, only the following are eligible to serve as registered agent:
- An individual owner or officer of the company who is a resident of Virginia.
- An attorney licensed to practice in Virginia.
- A third-party company registered to conduct business providing registered agent and other corporate services in Virginia.
Is it difficult to change a registered agent designation for a Virginia corporation or LLC?
Not at all. The process can be done online through the Virginia State Corporation Commission’s web site. There is no filing fee.
Why might I want Eric Perkins to serve as registered agent for my business entity?
Business owners might choose to have Eric Perkins serve as registered agent in Virginia for their LLC or corporation for the following reasons:
- They want to reduce the risk of losing mail from the SCC or having their corporate or LLC existence terminated for failure to timely file an annual report or pay an annual fee.
- They are not thrilled with the prospect of the local sheriff showing up at their home or place of business to serve process on their business entity in the event a lawsuit is filed against the company.
- They see the value of outsourcing ministerial entity maintenance responsibilities to an experienced business attorney—not a corporate filing service—who will be readily available to answer questions on all their entity maintenance concerns.