How to Start an S Corporation in Virginia
Virginia’s largest source of revenue comes from farming, the military, high-tech industries, and quite a few Fortune 500 companies, including Amazon. However, the state is known for its business-friendly environment and the incentives that attract small businesses.
With a population of just over 8.5 million, SBA figures show that Virginia boasts 766,826 small businesses that provide 1.6 million jobs. In addition, Virginia has a meager unemployment rate, the lowest in the U.S., leading to a very competitive job market and stringent tax laws.
Many businesses choose to start an S Corp in Virginia to take advantage of the tax benefits provided by this pass-through tax designation. However, many prospective business owners don’t know that an S Corp is not a legal business structure. To choose the S Corp tax designation, they first need to ensure their business meets the requirements, and then they need to form an LLC or Corporation in Virginia before choosing the tax status by filling in a form with the IRS.
Most small businesses don’t generate enough profits to make an S Corp advantageous. A company can save about 17% tax on its distribution income if it can pay the business owner or shareholders a market value salary and make substantial distributions to them every year.
Under these requirements, the business owner is taxed as an employee, paying income tax and FICA taxes on their salary. After that, their distributions are subject to income tax according to their tax bracket.
However, the business must be able to cover the payroll costs and meet the S Corp requirements.
Both LLCs and S Corps have pass-through taxation, but it does differ. When you create an LLC, you, the owner, pay FICA and income tax on all the profits and distributions. As the owner of an S Corp, you pay FICA and income taxes on your salary. Your distributions are only subject to income tax, saving you money.
A business must meet several requirements before it applies for S Corp status. These include a limit of up to 100 shareholders and that it can only issue one type of stock. Additionally, the shareholders can only be private individuals that are American citizens or permanent residents.
LLC vs. Corporation – Which Structure to Prefer for an S Corp
TRUiC, the business information company, offers this advice for anyone thinking of applying for a Virginia S Corp after forming their company:
The S Corp status annuls the benefits of forming a corporation. Prefer an LLC formation for your business before seeking the S Corp designation because it has fewer maintenance requirements.
Furthermore, it is always best to research the facts and ask for professional help before deciding that an S Corp offers you the most benefits.
Before starting a Virginia S Corp, you need to choose your business structure and file it with the state. The procedure is straightforward, and you can do it yourself, but several business service providers offer these services at a reasonable cost if you don’t have the time.
Before creating an LLC, you need to find a unique name by following the state guidelines and choosing a registered agent. You can now follow the steps to file the Articles of Organization with the State Secretary and pay the filing fee. The next step is to create its Operating Agreement.
Finally, you need an EIN and S Corp designation to start your business. These are available directly from the IRS. The EIN is your company’s identification number, and you get it for free from the IRS with an online application. While filling in the EIN application, a link takes you to Form 2553. Fill it in and submit it to complete your S Corp filing with the IRS.
Virginia is known for its favorable business environment. Therefore, once you file for S Corp status with the IRS, the only condition required to maintain the tax status is an organizational meeting to formalize its bylaws under the state laws. In addition, the actions and decisions of meetings must be recorded and kept for at least three years. You are now ready to run your Virginian S Corp and reap the tax benefits.