Last Updated: October 4, 2024
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Considering launching an S corporation in Virginia? You’re looking at a wise choice for your business venture. An S corp, short for Subchapter S corporation, is a tax designation that can be a real game-changer, especially in Virginia. This setup allows businesses like yours to enjoy certain tax benefits that could save you money and simplify your tax filing process. In this guide, we’re exploring the essentials of starting an S corp in the Old Dominion State, breaking down the what, why, and how — making it all a lot less daunting.
Whether you’re running a limited liability company (LLC) or a standard corporation, opting for S corp status in Virginia could mean less in taxes on what you earn and avoid double taxation, where both your business and personal incomes get taxed. So, if you’re ready to give your business a boost while keeping tax complications to a minimum, stick with us as we explore the steps to establish your Virginia S corp, helping ensure you reap the benefits from day one.
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:
If your business entity falls within these parameters, you can apply for an S corp election.
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.
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.
For more details visit our “Start a Virginia LLC” page.
If you’d prefer to form a Virginia corporation, follow the instructions on our Virginia corporation page.
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:
OR
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.
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.
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.
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.
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.
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.
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.
If you have a C corporation, filing as an S corp has these advantages:
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.”
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.
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).
LLCs with S corp status can have drawbacks, though:
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.
Because of the “reasonable salary” restrictions, the IRS monitors LLCs filing as S corps more closely, increasing the likelihood of an audit.
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.
S corp status also has its downsides for C corps:
An S corp can’t have more than 100 shareholders, while a C corporation has no such restriction.
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 way corporations attract investors is to offer preferred stock, but the IRS doesn’t allow this for S corps.
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.
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.
Check out how to form and S corp in these states:
Are you ready to form an LLC with an S corp election? Our S corp service can help with that. Plus, we offer other services to help you run and grow your business and stay in compliance. Contact us today to get started and make your dream business a reality.
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“S corporation” refers to a special federal tax status that a limited liability company (LLC) or a corporation can apply for with the Internal Revenue Service (IRS). For C corporations (the default form of corporation), S corp status can allow them to avoid double taxation. For LLCs, it could be a way to save on self-employment taxes.
Not everyone is eligible for S corp election, though. We’ll go over the criteria you need to meet to apply. You can find out more about S corps and their pros and cons on our main S corp page.
No, Virginia doesn’t have a tax specific to S corps. You would just pay the same state taxes that an LLC or corporation would.
An LLC is a type of business entity, but an S corp is only a tax election an LLC or a corporation can make. See our LLC vs S Corp page for more information.
Applying for S corp status with the IRS doesn’t cost anything. However, if you need to set up an LLC or corporation first, you’ll need to pay a filing fee of $100 for an LLC and $75 for a corporation.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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