Thanks to its strong workforce and education system, Virginia remains highly competitive and one of America’s top states for business. The U.S. Bureau of Labor Statistics figures shows that the state has the third-highest concentration of workers in science, technology, engineering, and math. The state also has a lower unemployment rate than the national average.
Many business owners in the state take advantage of the S Corporation tax election with the IRS, helping them avoid the double taxation of corporations and the higher self-employment taxes of LLCs. S Corporations have pass-through taxation, meaning that the owners pay tax on their profits and losses at a personal level.
Electing S Corp Status in Virginia
In Virginia, any business with a formal structure can opt to have S Corp status by filing Form 2553 with the IRS. Once a company opts for S Corp status on the federal level, the state does not require a separate tax filing.
Electing the S Corp tax designation requires careful consideration to ensure it is best for your business because it is not always beneficial to all companies.
Copyright: TRUiC
Considerations Before Forming a Virginia S Corp
TRUiC provides business owners with actionable tools and guides for new and old entrepreneurs. For example, they suggest that for a small business owner, the business must have at least $60,000 in net earnings and annual distributions of $20,000 annually for the company to benefit from electing S Corp status. Here TRUiC shares the points you need to consider when forming an S Corp in Virginia:
S Corps are only allowed to have up to 100 shareholders who must be U.S. residents and individuals. In addition, the shareholders cannot be a corporation, LLC, partnership, and some trusts. This limitation does not exist for other business forms. However, S Corps can only issue one stock class.
Limited liability:
The shareholders of S corporations have limited liability from paying damages for legal rulings or debt collection related to their business. This means they have protection for their personal assets, not corporate ones.
Tax Benefits
Owners of S Corps become business employees, earning a salary that matches market standards for others doing the same work. In addition, since they are employees, owners are eligible for profit-sharing and retirement plans, group insurance plans, etc.
S Corps avoid double taxation, much like an LLC, but the owners are not subject to self-employment tax on distributions. Instead, the owners of an S Corporation pay self-employment tax on their predetermined salary and personal tax according to their tax bracket.
An LLC owner using the default LLC taxation places all company profits on their personal tax return, paying personal and self-employment tax on the whole amount.
Maintaining the S Corp
Businesses operating as S Corps in Virginia must meet the state’s requirements. These include holding an organizational meeting after incorporating to draw up the Operating Agreement, electing the board of directors, adopting the bylaws, and appointing officers. After that, the company must keep records of the corporate bylaws and meeting minutes.
Forming a Virginia S Corp
Any business wanting to form an S Corp in Virginia must create an LLC or corporation before electing S Corp tax status with the IRS. They do this when requesting an employee identification number (EIN). Since S Corp status negates some of the benefits of a C Corps, an LLC is the best business formation for choosing the status.
Forming an LLC
Forming an LLC in Virginia is easy and cheap. However, if you are too busy getting your business off the ground to do it yourself, a business service provider makes it even easier.
Start by choosing a name and registered agent for your business. The next step is to file the Article of Organization with the state and pay the filing fee. You are now ready to create the Operating Agreement.
Electing S Corp Status
The next step is for the business to request an EIN from the IRS. At this stage, follow the IRS link to Form 2553 and complete it. It is this easy to elect the S Corp status for your enterprise.
Bottom Line
Choosing S Corporation status in the competitive state of Virginia gives your business several advantages. First, the tax savings made with the tax status’ unique pass-through taxation can assist your business growth. Furthermore, S Corps have the added benefit of perpetual existence and a better perception from the public, vendors, employees, and investors.
