I am fortunate to meet with a wide variety of people in my practice. Often, I discover that many of these people have started their own businesses. Having an entrepreneurial streak, I feel excitement for my clients that are carving out a piece of the American dream for themselves when starting new ventures. However, my excitement often turns quickly to disappointment when I ask them which attorney set up their business for them and their response is either: 1) “my CPA did it for me;” or even worse, 2) “I set it up on the Virginia SCC website myself – it was super easy and only took me five minutes.”
CPAs are extremely useful, and in many cases, indispensable. I know that I depend on my CPA to keep both my personal and business tax planning and finances running smoothly. However, CPAs are not legal practitioners and creating a business entity falls squarely within the definition of the practice of law. The Virginia State Bar regulates the practice of law in Virginia and the Supreme Court has defined the nature of the practice of law for the Commonwealth (see www.vsb.org/pro-guidelines/indexphp/unauthorized-practice-rules/ ). By statute, any person practicing law without a license is guilty of a misdemeanor. However, you can represent yourself pro se without an attorney and you can go on the Virginia State Corporation Commission’s website (www.scc.virginia.gov) and within five minutes create the registration and pay the fee to begin an LLC.
As my grandmother would often tell me (especially when she was upset with me), the road to hell is wide and paved with good intentions. There is a very real difference between ‘registering’ and LLC with the State and ‘creating an LLC entity’. The CPAs and your own 5 minutes of website work only accomplish the first. They do not create an operating entity that can be relied upon for legal protection.
‘Piercing the corporate veil’ occurs when a Court holds the Members of the LLC (or the Shareholders of a Corporation) personally responsible for the debts and liabilities of the business entity. There are two things that will give your LLC the legitimacy it needs to withstand its veil from being pierced and personal liability being attributed to you as an owner: 1) proper organizational documents upon the entities creation; and 2) proper and continued company maintenance each year of the company’s operation.
Upon its creation, aside from registering the LLC with the VA SCC, some basic company documents must be created. At JGB we provide our LLC clients with the following initial organizational documents: 1) Articles of Organization, 2) SCC Certificate, 3) Operating Agreement, 4) Member Transfer Ledger, 5) Member Certificates, 6) Subscription Agreements, 7) Organizational Meeting Minutes and Banking Resolutions, 8) Registered Agent Appointment Affidavit and Acknowledgment, 9) Solvency Certificate, 10) Operations Manual, and 11) EIN (if necessary). These documents construct the paper castle from which the LLC will operate moving forward. If the LLC is sued, a plaintiff’s attorney will immediately subpoena these items and if you cannot provide them, they will be able to pierce the corporate veil and attach the lawsuit to you personally.
As far as continued maintenance, the LLC must take certain actions and document those actions to show that you are treating the LLC as a legitimate company and it is not merely an extension of you personally. These involve not just filing for your LLC renewal with the Commonwealth of VA and paying your $50 fee; but also, having annual meeting with minutes where you record and ratify all major business decisions for the year.
On June 2, 2016, in A.G. Dillard, Inc. v. Stonehaus Construction, LLC, the Supreme Court of Virginia set forth the standard that all Virginia Courts should use when determining whether to pierce the corporate veil of an LLC. In doing so, the Supreme Court positively confirmed that which had only been assumed prior to this case; the same standard applies to piercing the veil of an LLC that applies to piercing the veil of a traditional corporation in Virginia, which include the following principals: 1) the veil may be pierced where there is a lack of separation between the entity and the owner, 2) the veil may be pierced when the owners used the entity for the purpose of evading personal obligations, perpetrate a fraud or crime, commit an injustice or gain an unfair advantage, and 3) the veil may be pierced when the company is deliberately undercapitalized and cannot meet its obligations.
The bottom line is this; people create LLCs to limit their personal liability from their business activity. If you want this type of protection, then the law says you need more than just “LLC” after your name; you need to operate as a legitimate, separate and distinct, appropriately capitalized business with the correct organizational and maintenance documents. You will not get the desired protection if you just rely on registering your LLC with the VA SCC online.
If you have concerns or questions about your business operations, do not hesitate to contact your JGB attorney for help.