You’re planning to start a business, or form a new entity to replace your existing sole proprietorship, and have researched the differences between a corporation and a limited liability company (LLC). You’ve learned the primary advantages and disadvantages of each and have decided that the LLC is a better fit for your company because of the elimination of the double-taxation problem and the more informal operating requirements it offers. You’re not alone. Since LLCs have been authorized in Virginia, they’ve become the entity of choice for Virginian entrepreneurs.
That said, there’s a third choice that offers many of the same benefits as an LLC that isn’t nearly as popular. The Virginia Business Trust (VBT) was established by the Virginia legislature in 2002 as another alternative to the corporation as a way of structuring your business to provide you personal protection from your business’s creditors.
In this paper we’ll lay out three advantages that structuring your business as a VBT has over structuring it as an LLC.
To explain what a VBT is, let’s start with what it isn’t. When we hear the term “trust” we often think of the “living trust”, the estate planning vehicle used to avoid probate and/or estate taxes. While the VBT and the living trust have some features in common, such as the transfer of property to a trustee for the benefit of another, the nature and purposes of the two types of trusts are profoundly different. By creating a living trust, you establish a fiduciary relationship between the trustee and the beneficiaries, but you haven’t created an independent legal entity. A VBT, on the other hand, exists as a completely independent entity from its owners just like a corporation or LLC do.
What sets a VBT apart from an LLC in Virginia is its “series” feature. (Effective July 2020, the Virginia legislature authorized the creation of Series LLCs in Virginia. Each series in the Series LLC, however, must be filed with the Virginia State Corporation Commission as though it were an individual company, and the same registration fee applies upon registration and annually thereafter for each series in the LLC. For the purposes of this discussion, there is no practical distinction between using a Virginia Series LLC and a structure of multiple LLCs to accomplish what the VBT can do as a single entity.) A single VBT can contain any number of series that are treated as independent companies within a single overarching VBT structure. This ability to establish any number of series offers VBT owners the ability to streamline their operations in the following ways:
A VBT offers multiple series for similar classes of assets. This is the most common use of VBTs, and is associated most often with real estate management or development companies. Let’s say you own three rental properties—Rental A, Rental B, and Rental C. You know that rental property is an asset as well as a liability risk: an asset because it has the potential to generate a stream of income, but a liability as well given the risk of people being harmed on your property. You have assets in addition to your rental properties that you want to protect, so you establish an LLC to own the rental properties. At that point, your personal assets are protected from any claims arising out of the rental properties.
The problem with this scenario, though, is that none of the rental properties are protected from claims against the other properties in the LLC. For example, let’s say you lose a slip-and-fall case arising out of Rental A. Both Rentals B and C are on the line to satisfy the judgment.
To avoid this problem you establish an LLC for each rental property. LLC A owns Rental A, LLC B owns Rental B, and LLC C owns Rental C. That will work, but now you’re running three separate LLCs (and likely a fourth as the holding company that owns the other three.) When you buy another piece of property, off you go to set up yet another LLC. When you sell a rental, you dissolve that LLC (or buy another rental to take the place of the one you just sold.)
That can get complicated very fast. The alternative is to form a VBT, then establish a separate series within that VBT to hold each rental property. Using the same example as above, you form the VBT, then establish Series A for Rental A, Series B for Rental B, Series C for Rental C, etc. When you buy a fourth property, you establish Series D for Rental D.
Here’s the primary difference: when you form an LLC, you’re interacting with the State with every formation and dissolution. Four rental companies would be five LLCs (counting the holding company). In contrast, establishing series is an internal process. You establish a single company with the State—the VBT, then every series that follows is an internal record-keeping process that doesn’t require a filing with the State. When you sell a rental, you dissolve the series. Internally. No State filing is required. (Keep in mind that internally you’ll still need to maintain the “separateness” of each series as though it were a separate business. Each one needs to have its own books, records, bank accounts, etc., but this would be required for each LLC as well.)
- A VBT offers multiple series for different classes of assets. Now suppose you’re in a different line of work—a physician. Your practice owns the building you see patients in, and you have some fairly expensive equipment as well. As a professional, you’re on the hook for malpractice claims. As a property owner, you’re on the hook for the condition of the property and the risks it poses to your visitors. As an equipment owner, you’re on the hook for the proper functioning of the equipment as well. With a single LLC (Professional LLC or PLLC in this case), all of your assets are at risk to satisfy any claim arising out of any one of the others.
As you might imagine, one solution would be to set up multiple LLCs to isolate the asset classes from each other’s risks. Your practice operates under the PLLC while renting space from the building LLC and renting the equipment from the equipment LLC.
For the same reasons given above, the VBT would be a superior option. With a single VBT filing, you would be able to establish multiple series that would be the functional equivalent of setting up multiple companies while maintaining the efficiency and simplicity of a single company filing.
- Costs of establishing and maintaining VBT series are less than the costs of LLCs. Currently, the costs for LLCs and VBTs in Virginia are the same: $100 to establish, and $50 a year thereafter. Over 10 years, the cost of establishing and maintaining the registration on four LLCs would be $2,200. Over the same period, establishing and maintaining the registration on a VBT with four series would be $550. While not a huge difference, the added flexibility for establishing and dissolving series within a single VBT over time as your circumstances change make the VBT a superior choice over the multiple LLC model for the same level of liability protection.
In summary, entrepreneurs who are contemplating starting a business, or who currently operate using the LLC entity, should explore the advantages of a VBT over an LLC. VBTs offer the advantages of isolating liability risks among similar asset classes and of isolating liability risks among different asset classes in a simpler, more efficient, and more cost-effective manner than LLCs.