Many states have simplified the process of forming a business entity. In many jurisdictions the formation of a limited liability company or “LLC” can be completed either on-line or by filing a single page form along with the payment of a filing fee. Although the filing of the formation documents is quite easy there are many long-term considerations one should take into account during the organizational process.
A new LLC, like a partnership, will be treated as a “pass-through” entity for tax purposes, i.e., income or losses pass through to the LLC members (unless an organizer of an LLC makes an alternative election with the Internal Revenue Service to be taxed as a corporation). For new business owners the ability to deduct early losses may seem like a positive facet of the LLC but there are other factors one should consider.
LLC Membership, employee equity, and taxes
Many corporations offer employees stock options as part of their compensation package. When employees receive LLC equity (a “membership interest”) as compensation it entitles them to share in the value of the equity in the company. Unless the organizer of the LLC elected a different tax scheme, the LLC will file tax returns as a partnership, and everyone who is an equity holder will receive a K-1 tax schedule which will disclose a lot about the company’s finances. Many founders would probably not want to give company employees this kind of detailed information. Additionally, The Bipartisan Budget Act of 2015 changed the IRS partnership audit rules. Effective as of January 1, 2018 underpayment of taxes will be imputed at the partnership level, i.e., current partners owning interests in a partnership are liable for the underpayment of taxes even if the subject years of the audit occurred before their admission to the partnership.
LLC restrictions on the sale of membership interest
Without sufficient provisions in an LLC’s operating agreement governing restrictions on the transfer of LLC membership interest, members may find themselves in business with someone they do not know or who might cause problems for the company. “Permitted Transfer” provisions will expressly permit certain transactions but disallow others. In addition, the operating agreement should include provisions on “Involuntary Transfers”. These are transfers that occur by operation of law such as those resulting from death, divorce, or bankruptcy.
Difficulty raising equity with a LLC
Venture capital groups or “VC groups” may be hesitant to look at an LLC for investment. If a VC group is already structured as a pass-through entity itself, the group may be wary of investing in another “pass though” entity that could leave the VC stakeholders with an unwanted tax bill. Add employee/members to the mix along with inadequate or non-existent provisions regarding transfers of membership interest and many VC groups may walk away. Who wants to buy into a company where valuation is difficult to measure, and the full nature and extent of ownership cannot be documented?
It should be clear that the path that looks the easiest is not without consequences. If you are organizing a start-up or considering becoming a member in an LLC make sure you obtain competent counsel in Business Law to discuss, your business goals, liability concerns, and operational matters.
*This information is designed to provide general information, is not intended to constitute legal advice and should not be utilized as a substitute for professional services in specific situations. If legal advice or other expert assistance is required, the services of a professional should be sought.
When forming a company or changing the organization of your current business, it is important to know the different options available to you. The legal entity that you are operating will determine what tax structure you will comply with and your legal liability as a business owner, among other things. This post will give you a general overview of three types of companies: corporations, partnerships, and limited liability companies (LLCs).
Incorporating your business gives you the highest level of personal liability protection available. However, it also comes with greater corporate responsibilities, particularly in regard to taxes. There are two types of corporations: c-corp and s-corp.
Both are distinct legal entities separate from its owners (“shareholders”), which protects their personal assets. Both require articles of incorporation, a registered agent, elected directors, issued stock certificates, and by-laws. Corporate responsibilities include annual shareholders meetings, periodic director meetings, recorded minutes, detailed financial reports, and separate income tax returns. In both cases, personal liability protection can be forfeited if corporate formalities are not followed.
Where c-corps and s-corps differ is how they are taxed. C-corps incur double taxation; profits are taxed both at the corporate level and at the individual level. In an S-Corporation, corporate taxes pass through to the shareholders’ personal tax returns.
A partnership is simply when two or more people operate a for-profit business. There’s no fee or process for starting a partnership, though you may need to register a trade name. The drawback is that partners are personally liable for any business debts or lawsuits. A partnership agreement is also recommended to reduce conflicts. There are three main types of partnerships: general, limited, and limited liability.
In a general partnership, each partner is equally liable for the business and the actions of other partners. In a limited partnership, at least one general partner has full liability in the company while a limited partner is only liable for his or her own portion of ownership. In a limited liability partnership, each partner is only liable for his or her own actions. It is important to establish a partnership agreement that defines each partner’s role and responsibilities.
Limited Liability Companies (LLC)
LLCs offer the tax benefits and simplicity as well as limited personal liability protection. Requirements vary by state, but in Virginia, forming an LLC requires filing articles of organization, a registered agent, an annual $50 registration fee, and regulatory compliance. An operating agreement is not required, but its highly recommended to prevent or reduce conflicts. The only corporate responsibilities of an LLC are to file an annual report with the secretary of state and pay quarterly estimated tax payments.
Want more information?
For more general information on forming a company, QuickBooks has a set of short, informative videos that explain the differences between various business types.
Additionally, many of our attorneys are also business owners, and they have a deep understanding of both the practical and legal realities of forming a company. They can help with your business’ needs; contact us here.
Disclaimer: this blog does not constitute legal advice
Thinking about renting your home on Airbnb? Make sure to check your local laws!
Local laws and regulations often fail to keep up with the speed of market innovation, leaving jurisdictions scrambling to balance personal liberty and community safety. This is the case with Airbnb and other short term rental sites that allow homeowners to rent out their spare rooms or entire houses to travelers for a short period of time.
From its humble beginnings of San Francisco roommates Brian Chesky and Joe Gebbia renting out an air mattress in their apartment to help pay the rent to a global powerhouse disrupting the hospitality industry in under ten years, Airbnb has challenged governments around the world to rethink private property use. Some hosts are finding that their local zoning ordinances prohibit them from renting out their homes, while others are facing serious legal and financial consequences of less than ideal guest behavior.
So if you’re thinking of becoming a host on Airbnb or a similar services, municipal attorney Martin Crim has a few tips for you:
Check your local zoning ordinances
Before you begin hosting guests, check your local zoning ordinance for restrictions or requirements for short term rentals. For example, in the City of Manassas, short term rentals are allowed with restrictions on the amount of time a guest may stay. However, a few miles away in Fairfax County, short term rentals are prohibited unless your home is approved as a bed and breakfast.
Read your rental agreement / Homeowners’ Association rules
Even if your locality allows short term rentals, if you are a renter or have a Homeowners’ Association, you may be subject to additional restrictions or regulations regarding property use and guest occupancy limits.
Check with your local tax authority
Check with your local tax authority to ensure that the income you earn from renting out your property isn’t subject to any taxes beyond those handled by the service provider.
By far the most disastrous cases stemming from a short term rentals gone wrong have been those that occur when the homeowner wasn’t there. Don’t let a guest stay in your home completely unsupervised unless you are certain that they are trustworthy and will be respectful of your property, your neighbors, and any other entities involved.
The attorneys at Vanderpool, Frostick, and Nishanian, P.C. are here to help with your real estate, zoning, and land use matters – feel free to contact us!
Are you interested in operating a business out of your home? In the digital age, starting a business out of your garage or home office is more common than ever. However, most municipalities have very specific requirements for commercial use of residential property that many aren’t aware of until it’s too late. Best case scenario, you may already comply with local zoning ordinances and just need to register your home business. Worst case scenario, you may have to close your business or move it off-site. Here are some things to consider when operating a business out of your home:
What kind of business you have or want to operate
A typical zoning ordinance, such as the one in Prince William County, Virginia, distinguishes between “home occupations” and “home employment,” which have different approval requirements. They differ in how much impact they have on your neighbors and the neighborhood as a whole.
A “home occupation” refers to home businesses that have no impact on the residential development. There are no non-resident employees or customers coming to the residence and no signage on the property. Because there is no exterior evidence of the business for a home occupation, certificates are relatively easier to obtain than for a home employment. Learn more about the Prince William County home occupation certificate requirements here.
On the other hand, a “home employment” refers to a home business operated in a residence to which employees and customers may come. There are much stricter conditions for approval than home occupation, such as limited signage, operating hours, and number of customers allowed per day. Prince William home employment certificate requirements can be found here.
The rules of your Homeowner’s association
Once you know what type of home business you are operating, check to make sure this use is allowed by your home owner’s association. HOA covenants, rules, or bylaws may have specific restrictions regarding home occupation and/or home employment.
If your HOA does not allow you to operate a home occupation or employment, you may be able to receive an exemption to this rule under your HOA covenants. These are sometimes allowed for home occupation where there is a demonstrable absence of an impact on the neighborhood. A letter from your neighbors supporting your business is particularly helpful.
Your area’s local zoning ordinances
There are different regulations at the state and local government levels. At the state level, consider sales tax and various regulations on some types of businesses; at the local level, check zoning ordinances and business license requirements. To determine what your locality’s zoning ordinances will allow:
Check zoning maps online or in your local planning office for your zoning district
Research the zoning provisions for your zoning district. Look for:
Permitted uses, including accessory uses
Performance criteria – typically restrictions on impacts of home business
If your business falls outside of the acceptable conditions for your municipality, things get trickier, and you should consult an attorney well versed in zoning law.
While it is possible to run a home-based business without difficulty, it is important to be prepared to defend your business from criticism and opposition. We have attorneys at Vanderpool, Frostick, & Nishanian, P.C. who can help answer your questions regarding your land use, zoning, and municipal law concerns across Northern Virginia.
The following flow chart summarizes the land use controls that may affect your home business:
We’re here to help! Submit this form, and we will send you the applicable home business zoning ordinances for your locality.
Disclaimer: the resources provided in response to this form do not constitute legal advice nor does it establish an attorney-client relationship. This blog is provided by Vanderpool, Frostick, & Nishanian, P.C. for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. The information provided should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
In today’s business climate, businesses cannot afford to make mistakes. Yet there is one legal mistake that many small and medium-size businesses often make – they don’t have a buy-sell agreement in place. This can create several big issues. For example, without an agreement in place, a business owner may wake up one morning to find out that a stranger owns part of his business. An owner that is getting ready to retire may find out that he can’t force his company to buy his stock. And, perhaps most troubling, the majority owner of a company who wants to sell his or her business may find out the sale is vetoed by his minority shareholders.
These problems can all be avoided if a proper buy-sell agreement is in place. Who needs such an agreement? The answer to that question is easy – any small or mid-sized company that has more than one owner really needs a solid buy-sell agreement. It doesn’t matter whether you are a corporation, partnership or limited liability company. If there is more than one shareholder, partner or member, an agreement should be in place.
The agreement should cover a number of areas. For example, many companies provide stock to employees. Because many people are having economic trouble, they will try to sell this stock. Without an agreement, they are free to sell it to whomever they want. Or, let’s say they are fired. Just because they lose their job, they are not required to sell the stock back to the company. And a disgruntled former employee can create a lot of headaches as a minority shareholder, such as challenging the compensation paid to a majority owner.
The agreement should also address what happens when an owner retires, becomes disabled or dies. This is often a critical time for both the shareholder and the company. If an agreement is not in place, a minority shareholder may be able to block the purchase of the stock of the retiring or deceased shareholder. In addition, the agreement should include the necessary terms, such as drag-along rights, that make sure a majority owner can sell the business he or she has built. Statutes in many states and standard provisions in many governance documents, such as operating agreements, allow minority shareholders to block a sale of assets or stock, but these can be overcome with an appropriate buy-sell agreement.
The agreement should address several detailed items in addition to providing protection for the events described above. For example, if one of the triggering events occurs, must the corporation buy the stock or does it have an option to do so? How will the value be determined – by a preset agreed upon amount, by a formula, or by appraisal? How will the purchase be funded? Will the company be obligated to buy insurance or create a sinking fund? If the price will be paid over time, what are the terms, including the amount of the down payment, the length of the payout, and the interest rate? Will the remaining shareholders guarantee the payout?
On a final note, the use of form buy-sell documents can be dangerous. A buy-sell agreement must be carefully tailored to fit the specific situation. In addition, it should be integrated with the business owner’s estate plan. Most importantly, it needs to be in place before an issue arises. A well drafted buy-sell agreement is a “must have” document for small and medium-sized businesses.
Business men and women have very specialized needs when it comes to wills and estate planning. We provide advice that integrates business and personal concerns and desires.
2. A “Don’t Steal My Business” Non-Compete Agreement
Employee loyalty is not what it used to be and today’s business information is mobile. This can create a lethal problem when a key employee leaves if a non-compete agreement is not in place.
3. A “Staying Alive” Business Succession Document
Many businesses die with their owners. Other business owners who have minority shareholders find out that they can not unilaterally sell their business even though they are a majority owner. A good succession business document can help solve these problems.