With the beginning of a new year upon us, now is an excellent time to form a limited liability company (LLC). Although the LLC formation process may appear daunting, it is not. You can form a Virginia LLC by following these six steps:
1. Choose an LLC Name
The first step in forming an LLC is to choose a business name. Under Virginia law, your business name must contain the words "limited company" or "limited liability company" or an acceptable abbreviation ("L.C.," "LC," "L.L.C.," or "LLC"). After you select a business name, you must make sure that it is “distinguishable” from other names on file with the Virginia State Corporation Commission (SCC).
2. Prepare and File Articles of Organization
The next step is to prepare Articles of Organization, which sets forth: the name of your LLC, the name and address of an agent for service of process (the “registered agent” and the “registered office”), and the primary address for your business. Once completed, you must file the Articles of Organization with the SCC along with a $100 filing fee. It typically takes 2-3 weeks for the SCC to approve your Articles of Organization and to issue a Certificate of Organization.
3. Adopt an Operating Agreement
Although Virginia law does not require an LLC to adopt an operating agreement, I highly recommend that you do so for your business. An operating agreement is the functional equivalent of a corporation’s by-laws: it sets forth how your LLC will be governed and operated (e.g., management decisions, allocation of profits and losses, voting rights and procedures, “buy-sell” provisions, etc.). (Because of the importance and potential complexity of an operating agreement, you should retain an attorney to assist you.)
4. Obtain Required Licenses
Depending on the type of business you are forming, you may be required to obtain federal, state, or local licenses. The best way to determine what licenses or permits you may need for your LLC is to contact the clerk’s office in the city or county in which you plan to operate your business.
5. Get an Employer Identification Number
If you are forming an LLC with more than one person or if you intend to have employees upon formation, you need to apply to the IRS for an Employer Identification Number (also referred to as a Federal Tax Identification Number). Although you can apply for an Employer Identification Number online, I recommend that you first speak with a tax professional to understand any potential tax repercussions.
6. Open a Bank Account
The last step is to open a bank account. As the primary purpose of an LLC is to limit your personal liability for the financial obligations of your business, it is important to keep your business and personal finances separate.
By following these six steps, you will have your LLC up and running in just a couple of weeks. As you will want to do it right the first time, you should contact an attorney if you have any questions and avoid online incorporation services.
One question that I am frequently asked by prospective clients is whether it is best to use an online incorporation service like LegalZoom or to retain an attorney to incorporate a startup business. My answer is always the same: if you are looking to form a startup business -- such as a limited liability company (LLC), an S-corporation (S-corp), or any type of business entity -- your best bet is to retain an attorney instead of relying on LegalZoom or other similar online legal document preparation services.
Although LegalZoom is a viable alternative for the preparation of some legal documents, it is not the best option for entrepreneurs looking to start a new business. First, LegalZoom cannot provide legal advice. It can only provide “self-help services at your specific direction.” Most entrepreneurs looking to start a new business need individualized advice from an attorney. They not only need to understand the incorporation process, they also need assistance with a host of other legal issues that accompany starting a new business including the hiring of employees, reviewing and negotiating leases, and drafting business contracts.
Additionally, LegalZoom uses a standard online questionnaire to determine what should go into the incorporation documents that it prepares for you. However, given that incorporation documents (e.g., Bylaws, Operating Agreements, etc.) are the foundation for the operation of your business, an attorney is often needed to ask important questions regarding various business contingencies and intricacies. For instance, although I may start the process of forming an LLC with a basic set of questions to the client, I always have hundreds of “what if” questions based on the initial answers provided by the client. The client’s answers to my litany of additional questions are essential to my determination of what to include in the incorporation documents or whether other legal documents are necessary to effectuate the client’s goals.
The process of starting a new business is much like the process of building a new house: you want it done right the first time around! Although it may be tempting to cut a few corners and save some money with a legal document preparation service, it is worth your while to retain an attorney to ensure that you are building a solid foundation for your new business. For startups in Virginia, a great resource for obtaining basic information on the incorporation process can be found at the website for the State Corporation Commission.