Many small business owners in Virginia, such as those who operate single-member LLCs (SMLLCs), may wonder if the limited liability company structure has any benefits over other business structures like a sole proprietorship or partnership.
SMLLCs have unique tax and legal advantages that should be considered before choosing another type of business entity.
The following are the benefits that an LLC Virginia can avail.
An LLC is a “pass-through” tax entity, which means that business income and losses usually pass through to the SMLLC’s owner(s) and are reported on their federal income tax return.
The owner can then deduct its share of either operating loss or taxable income from his gross income. This way, the LLC’s income and expenses are not reported on the owner’s return.
A sole proprietorship (SP), on the other hand, acts like a business “partnership” in which all of its income and expenses are reported on its owner(s) personal federal tax return. The SP’s profits are also subject to self-employment taxes, equal to about 15 percent of net income.
On the other hand, a partnership does not provide complete privacy since each partner must include their share of its taxable income or loss on their federal tax return.
An LLC offers owners limited liability protection against lawsuits, which means that an LLC’s assets cannot be used to satisfy debts, judgments, or legal claims of its members. This type of protection is unavailable for sole proprietorships and partnerships because their business assets are part of the owner’s individual property.
Ease in Transferring Ownership
An LLC in Virginia has unique rules governing how its ownership interests can be sold or transferred. Unlike SPs and partnerships, an LLC may provide rules in its operating agreement that allow for easy transfer of ownership interests.
This additional flexibility in the transferring process is not available with other business entities.
Easier Transfer After Death
Another benefit to forming an LLC is that it provides owners with the flexibility to transfer their interests after death quickly. For example, if an LLC owner dies, his ownership interest can be transferred to his heirs (such as a spouse or children) using his will or other estate planning documents.
This type of transfer is not available for SPs and partnerships.
Less Paperwork and Tax Forms
LLCs generally require less paperwork and tax forms than other business entities like limited partnerships (LPs) or S corporations (S Corps).
LLCs do not have to file special tax elections like an LLC, such as electing for the corporation to be taxed as a C Corporation, S Corporation, or partnership. Also, LLCs use the same short organization articles that are used for other types of Virginia business entities.
Fortunately, many small businesses can benefit from this flexible and desirable business entity that combines the protection of a corporate legal structure with pass-through tax features of a sole proprietorship or partnership.
The business entity choice should be made with the advice and guidance of a qualified attorney.
No Annual Reports Required
Unlike some other business entities in Virginia, an LLC does not require the owner(s) to file annual reports with the state. It means that LLC owners do not have to pay any filing fees or submit personal information like their social security number (SSN), contact details (address and phone), or tax identification number (TIN). An LLC does not need to submit any annual reports.
In contrast, corporations must file a biennial report, which requires the disclosure of names and addresses of corporate managers and officers and their SSN or EIN. The corporation’s initial registered agent for service of process is often required to disclose its SSN and address. Other business entities like LPs and S Corps must file their limited annual reports with the state only if required by the Secretary of State.
Minimal Paperwork for Annual Report Late Filing
LLCs are not subject to many of the rules and penalties imposed on other business entities, such as corporations, for filing annual reports late.
For example, LLCs are only barred from transacting new business in Virginia if their required reports are late or have not filed all reports required for the past three years.
It means that LLCs can be administratively dissolved if their annual report is not submitted within 90 days after the filing deadline without receiving additional penalties.
Foreign Owners Can Participate in Management While Avoiding Personal Liability
A foreign (“non-Virginia”) LLC may generally be formed without a Virginia parent LLC or a Virginia manager.
The type of structure allows the foreign LLC to avoid personal liability for its debts and obligations while still participating in the management of the Virginia LLC.
In this scenario, only one individual is required to manage both entities.
LLCs are not for everyone. They do, however, offer many benefits that make them an attractive choice for small business owners.