File a Virginia S Corp

Virginia S Corp Filing Requirements

In order for the IRS to accept your application for S corp election, you must meet the filing requirements of the Internal Revenue Code. Specifically, to qualify for S corporation status, an entity must:

• Be a domestic LLC or corporation
• Only have one class of stock
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders/members may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

If your business entity falls within these parameters, you can apply for an S corp election.

Considerations for Virginia S Corp Taxes

In an S corp, the business itself doesn’t usually pay federal income taxes. But what about Virginia income taxes?

For state income tax purposes, Virginia treats S corps the same way that the federal government does, as pass-through entities. However, S corps and other pass-through entities must file an annual Virginia income tax return on Form 502 or Form 502PTET. See the Virginia Department of Taxation website for more details.

How to Form an S Corp in Virginia

To start a Virginia S corporation, you’ll need to create either a limited liability company (LLC) or a C corporation if you haven’t already done so. Then, you’ll file an election form with the IRS.

Forming a Virginia Limited Liability Company

1. Choosing a business name
2. Getting a registered agent
3. Filing the Articles of Organization
4. Creating an operating agreement
5. Applying for an EIN
6. Apply for S Corp status with IRS Form 2553

For more details visit our “Start a Virginia LLC” page.

Forming a Corporation in Virginia

1. Name your Virginia corporation
2. Appoint Directors
3. Choose a Virginia Statutory Agent
4. File the Virginia Articles of Incorporation
5. Create Corporate Bylaws
6. Draft a Shareholder Agreement
7. Issue shares of stock
8. Apply for Necessary Business Permits or Licenses
9. File for an EIN and review tax requirements
10. Submit Your Corporation’s First Annual Report
11. Apply for S Corp status with IRS Form 2553

If you’d prefer to form a Virginia corporation, follow the instructions on our Virginia corporation page.

File form 2553 to apply for S corp tax designation

When your LLC or C corporation formation is accepted by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status. 

The IRS requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

One important note for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

Note that all of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

Keeping Your S Corp Compliant

If your S corp is a corporation, you’ll need to file an annual report, which is due the last day of the month your company incorporated. If the last day of the month is on a weekend or holiday, the Virginia State Corporation Commission must receive your annual report before the last business day of that month.

Regardless of S corp status, both LLCs and corporations in Virginia must pay an annual registration fee. For LLCs, the fee is $50 and is due on the last day of the month your business was organized or registered. For nonstock corporations, the fee is $25 and is due on the last day of the month your business was formed or registered. The fee for stock corporations is based on the number of authorized shares and is due the last day of the month your business was formed or registered.

If your S corp is a corporation, you’re required to have annual shareholder meetings at a time and place determined by your bylaws. You’re also required to keep corporate records, including minutes of meetings, a list of shareholders, and a record of any actions taken by the directors and the shareholders.

Pros and Cons of S Corp for Virginia LLCs and Corporations

While S corp status does come with a number of benefits for some businesses, making this election might not be right for everyone. Carefully weigh the pros and cons before deciding how you want to proceed. Consult a Virginia tax professional about whether an S corp election would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. A traditional LLC already has pass-through taxation, so the benefits of S corporation election for an LLC come from federal self-employment tax. We’ll explain.

Self-Employment Taxes 

The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is double the taxes they’d pay when working for someone else because their employer would pay half of them.

Dividing Salary and Profits

But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being employed by the LLC. Once they do that, they only pay taxes for Social Security and Medicare on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits and any other taxable income.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One provision to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $0.03 and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation”? While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something similar to what other people in your field are earning for similar work.

Advantages of S Corp Status for C Corporations

If you have a C corporation, filing as an S corp has these advantages:

Pass-Through Taxation

One big disadvantage for traditional corporations is called “double taxation.” When the corporation makes money, the IRS taxes those profits on the business level. And when those profits are ‌distributed to the shareholders, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation.”

Writing Off Losses

Just as business profits pass through to the owners of an S corp, so do the company’s losses. Unlike the shareholders of a C corporation, S corp owners can write off the business’s losses on their personal income statements. 

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act of 2017, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

Disadvantages of S Corp Status for LLCs

LLCs with S corp status can have drawbacks, though:

Stricter Requirements 

S corps have more limitations than a standard LLC. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.

Extra IRS Scrutiny

Because of the “reasonable salary” restrictions, the IRS monitors LLCs filing as S corps more closely, increasing the likelihood of an audit. 

More Accounting and Bookkeeping

Having an LLC that files as an S corporation generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to start. Your taxes will be more complex, as well.

Disadvantages of S Corp Status for C Corporations

S corp status also has its downsides for C corps:

Limited Number of Shareholders

An S corp can’t have more than 100 shareholders, while a C corporation has no such restriction.

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have corporations or partnerships as shareholders. 

One Class of Stock

One way corporations attract investors is to offer preferred stock, but the IRS doesn’t allow this for S corps.

More IRS Scrutiny

Because of the extra limitations S corps have, the IRS watches them more closely to see if they’re in compliance, meaning your corporation is more likely to get audited.

Virginia and Federal Resources

For additional information about how S corps are treated in Virginia and other important tax information, see the Virginia Department of Taxation website. The IRS website can also provide more information on the federal guidelines for S corporations. We recommend getting a trusted tax advisor. They can help you through legal and financial challenges, helping ensure compliance and tax efficiency.