GRDD Law is proud to be a sponsor of this year’s Raising the Stakes for Hope & Recovery event, benefitting PRS, Inc., (www.prsinc.org). PRS is a nonprofit helping those living with serious mental illness or facing life crises in our local community. Their annual Kentucky Derby tradition. Raising the Stakes for Hope & Recovery Benefit will take place at the Hidden Creek Country Club in Reston, Virginia on Saturday, May 6, 2017, 5:00 – 8:30 pm. The event features watching the 143rd Run for the Roses as well as a grand silent auction, heavy hors d’ oeuvres, mint juleps, Derby hat contest and more.

Guests include PRS community partners and friends, elected officials, event sponsors, PRS Board of Directors and volunteers.

All proceeds support PRS’ life-saving and life-changing mental health, crisis intervention and suicide prevention services.

Tickets, sponsorships and more information available at:

https://prsinc.org/raising-the-stakes/

 

For more information, contact Meredith Hovan, mhovan@prsinc.org, (703) 531-6321

In Virginia, a business entity is permitted to operate under a name that differs from the legal name of the entity. For example, a restaurant business owned by “John Doe, Inc.” could choose to operate under the name “Johnny’s Diner”. This operating name is generically referred to as a tradename, but may also be referred to as a “DBA” (doing business as), or “A/K/A” (also known as), or “T/A” (trading as). The technical legal term for a tradename in Virginia is a “fictitious name”.

Virginia law requires any business entity (domestic and foreign) operating under a tradename in Virginia to register the tradename in the clerk’s office of the Circuit Court of the city or county where the business will be conducted. This is accomplished by filing and recording a notarized fictitious name form, signed by an authorized agent of the business (note that each Clerk’s office has its own form and procedure for filing the form). In addition, the business entity must record a certified copy of the fictitious name form in the Clerk’s Office of the State Corporation Commission. The purpose of the dual recordation requirement is to prevent fraud and deceit by providing the general public with both a local and statewide resource from which to discern the legal owner of the business. Following registration of the tradename, it is still a good business practice to inform the public of the entity behind the tradename, which can be done by putting the legal name of the entity on the company website, business cards, letterhead, and signature blocks of e-mails. In addition, all contracts should be signed under the name of the legal entity.

A business owner that fails to register a tradename can be sued personally for obligations of the business. In such an action, the creditor takes the position that the owner is the agent of an undisclosed principal, and therefore, is personally liable for the debts of the principal. In addition, a creditor may use the business owner’s failure to register a tradename as a theory to “pierce the corporate veil” of the business entity and hold the owner personally liable for the debt of the entity.

In most cases, the business owner will be able to avoid personal liability by subsequently registering the tradename and demonstrating to the Court that the creditor knew at all times it was engaging in a transaction with a business and not an individual. However, an owner can be exposed if the Court determines that the owner engaged in any deceitful business practices, or that the owner is attempting to utilize the limited liability protection of the entity for a personal transaction. Virginia law does not expressly provide that a business owner who fails to register a tradename is personally liable for the entity’s obligations, but liability can be created under certain circumstances. It is, therefore, important for business owners to take the extra step of registering tradenames at both the local and state level.

Business sales and combinations can take a variety of forms, and there is no standard method by which businesses are purchased or acquired. Each transaction is unique, with the form of the transaction depenBusiness sales and combinations can take a variety of forms, and there is no standard method by which businesses are purchased or acquired. Each transaction is unique, with the form of the transaction dependent upon the goals of the parties, the existing legal structures of the parties, and the tax consequences resulting from the transaction. The terms “merger” and “acquisition” are often used interchangeably in reference to the sale and combination of two business entities, but each term has a distinct legal meaning. The purpose of this article is to differentiate between the two terms – not to analyze the benefits and disadvantages of each type of transaction.

A true “merger” occurs when two business entities legally combine into a single business entity. This can be a newly formed legal entity, in which case the separate legal existence of the merging entities will terminate upon the consummation of the merger. Alternatively, one of the entities (the “surviving entity”) can survive the merger, in which case the separate legal existence of the other entity will terminate upon consummation of the merger. In Virginia, the merging entities are required to file a Plan of Merger and Articles of Merger with the Virginia State Corporation Commission that describes how the entities are being merged, how the merged entity will be capitalized, and how the merged entity will be managed. Typically, the owners of both entities will receive an ownership interest in the single entity that results from the merger.

An “acquisition” occurs when one business entity purchases either the assets or the equity of the other business entity, and both entities retain their separate legal existence. In an asset sale, the purchasing entity acquires some or all of the assets of the selling entity, but usually does not assume any of the liabilities of the selling entity. In cases where all assets of the selling entity are purchased, the selling entity typically terminates its existence shortly after the consummation of the sale and winding up of its affairs. In an equity sale, the purchasing entity acquires an ownership interest in the selling entity from the owners of the selling entity, and the selling entity becomes a subsidiary of the purchasing entity. The selling entity continues to exist and retains all of its assets and liabilities.

In practice, it is less common for two entities to legally merge than it is for one entity to acquire another entity. There are a lot of reasons for this, the most obvious of which is that it can be difficult for the two entities to jointly agree upon the future management of new entity when both sides retain an ownership interest in the entity. After all, the new entity can only have one President or CEO. In addition, a business combination usually only happens when the ownership of the selling entity desires to leave the business (not to continue in a joint business endeavor with the buyer). It is very common, however, for the purchasing entity to continue to operate the purchased business with existing personnel and in accordance with historical practices. This is one of the reasons why the word “merger” is oftentimes used incorrectly to describe an acquisition.

• Virginia Registered Agent
• Registered Agent Fairfax, Virginia

The previous two editions of the GRDD Law newsletter discussed the termination and dissolution of Virginia corporations and limited liability companies (LLC) (both referred to as “entities”). As discussed in those articles, the Virginia State Corporation Commission (SCC) will automatically terminate an entity’s corporate existence if the entity fails to pay its annual registration fees. This edition of the newsletter discusses the potential personal liability of the owners and managers of an entity that is so terminated.

Upon the termination of an entity, whether voluntary or involuntary, individuals who enter into agreements, commit negligent acts, or take any actions on behalf of the terminated entity can be held personally liable for resulting debts, liabilities and obligations created by such actions. This personal responsibility is different than the legal principle of “piercing the corporate veil”, because a terminated entity has no legal existence to pierce. Once the entity is terminated, the individual or individuals who are conducting business in the name of the entity are deemed to be sole proprietors or a partnership, as the case may be.

Notwithstanding the foregoing, Virginia law permits entities that have been automatically terminated by the SCC to “reinstate” their corporate existence within five (5) years of the termination by filing an application with the SCC and paying a reinstatement fee.

This brings us to the question posed by this article – following a reinstatement, do the owners/managers of the entity remain personally liable for the debts, obligations, and liabilities of the entity incurred during the period of termination?

Luckily for business owners, the answer is “no”. For both corporations and limited liability companies, if the entity is properly reinstated, then the corporate existence of the entity is deemed to have continued from the date of termination as if the termination had never occurred. Any liability incurred in the name of the entity after the termination and before the reinstatement is also deemed to be a liability of the entity, as if the termination of the corporation’s existence had never occurred. See Virginia Code § 13.1-754 for corporations, and Virginia Code § 13.1-1050.4 for limited liability companies.

In summary, allowing an entity to terminate could result in personal liability to the owners and managers, but this problem can be resolved by a timely reinstatement. However, once the entity is terminated, the name of the entity will become available to the public. If another person registers a new business entity with the same name following your entity’s termination and prior to reinstatement, the SCC will reject the reinstatement of your entity pending a required name change. That is just one of many problems that could result by allowing your entity to lapse.

Gross, Romanick, Dean & DeSimone, P.C. helps its registered agent clients avoid automatic termination by promptly delivering annual fee statements with clear instructions for paying the fees owed, and by following up prior to the termination date as may be necessary. The firm also assists clients with reinstatement applications and many other corporate and business needs. Please consider GRDD Law for all of your business legal matters, including acquisitions, reorganizations, employment issues, landlord/tenant matters, litigation and debt collection.

The process of dissolving and terminating a Virginia corporation or a Virginia limited liability company (each generically referred to in this article as an “entity”) was discussed in the January edition of this newsletter. As stated in that article, when a business owner desires to close an entity, he or she can elect to formally dissolve and terminate the entity, or simply fail to pay the annual fee owed to the State Corporation Commission (SCC) (in which event the SCC will automatically terminate the existence of the entity three (3) months after the final due date for the annual fee).

Clients often ask us : If the entity can simply be terminated by non-payment of the annual fee, why go through the formal dissolution and termination process, which is more expensive and time consuming?

One reason is that a formal dissolution and termination of the entity will result in receipt of an official Certificate from the SCC documenting the closure of the entity. For internal recordkeeping purposes and tax reporting purposes, it is useful to have such a Certificate on file. In cases where the owners agree to close the entity, and the entity has no debt, it makes economic sense to formally close the entity and pay the nominal filing fee. In such event, the entity can accomplish the termination in a single filing.

If the entity has debt, a formal dissolution and termination is a more complicated process, but is also recommended for business owners. In Virginia, the failure to maintain an entity in good standing can create a legal basis for creditors of the entity to “pierce the corporate veil” of the entity and hold its owners and officers personally liable for debts of the entity.  By formally dissolving and terminating the entity, the owners/officers reduce the likelihood that creditors will attempt to do so. In the formal dissolution process, each creditor must be notified of the dissolution, which will trigger an obligation on the part of each creditor to take legal action or else be barred from asserting a claim against the entity. This often results in creditors abandoning or reducing their claims, which may allow an otherwise insolvent company to avoid bankruptcy and formally terminate the entity’s existence.

For entities with multiple owners, the formal dissolution process also assures an orderly winding up of the affairs of the business and liquidation/distribution of any remaining assets to the owners. In some cases, it is necessary to involve the court and close the entity through a “judicial dissolution” in which owners and creditors can participate. This is often a last resort to resolve disputes between business owners. For example, one owner may petition the court for dissolution in order to prevent another owner from incurring additional debt or entering into contractual obligations on behalf of the entity. In rare cases, a creditor may force a judicial dissolution of the entity by filing a dissolution petition with the court

This article distinguishes between the terms “dissolution” and “termination” as they pertain to Virginia corporations and Virginia limited liability companies (generically referred to in this article as “entities”). These terms are often used interchangeably, but have distinct legal meanings. Dissolution is the winding up of the affairs of the entity in advance of the termination of the entity. Termination of the entity occurs when the entity ceases to legally exist.

The phrase “winding up of the affairs” generally means the payment of all debts, liabilities, and obligations of the entity, and the liquidation and/or distribution of any remaining assets of the entity to the owners of the entity. Creditors of the entity that will not be paid in full as part of the dissolution process must be notified of the dissolution so they may assert a claim against the entity.

Once an entity has elected to dissolve, the entity may no longer carry on any business affairs other than the aforementioned winding up. Once the affairs of the entity have been wound up (but not before), the existence of the entity can be formally terminated by filing Articles of Termination/Cancellation with the Virginia State Corporation Commission (SCC). Prior to filing these Articles, all required fees and penalties owed to the SCC must be paid; and, a corporation must have paid all its state taxes.

Most entities that go out of business do not go through a formal dissolution or termination process. The owners simply fail to pay the annual fee owed to the SCC, and the SCC automatically terminates the existence of the entity three (3) months after the final due date for the annual fee.

However, some business owners do elect to follow a formal dissolution and cancellation process in order to resolve creditor claims, to avoid bankruptcy, and/or to protect the owners from potential personal liability for debts of the entity. Furthermore, Virginia courts can force a dissolution upon the petition of an individual business owner, and oversee the winding up of the entity’s affairs. This is known as a “judicial dissolution”, which can be an expensive process, but is oftentimes the only viable way to break a deadlock between business owners.

In the next issue of this newsletter, we will discuss the benefits of formal termination versus automatic cancellation by the SCC.

If your entity is registered or qualified to do business in other states, then you must follow the rules of that state to terminate the existence of the entity in that state. In addition, final federal and state tax income and employment tax returns must be filed.