TRUiC Details the Formation Requirements for an S Corporation in Virginia
Small businesses in Virginia remain a dynamic force in the job employment market since they form 99.55 of all companies in the state. As a result, U.S. Bureau of Labor Statistics figures shows that the state had a net employment gain of 21,724 jobs in the third quarter of 2021, significantly improving the previous quarter’s 7,565 job gains.
Despite stringent tax laws on food establishments and the hospitality industry, Virginia is a business-friendly state with very few regulations for registering a business.
Formation Requirements for a Virginia S Corporation
An S Corp is not a business structure but a tax designation that reduces a business’s tax burden. Before you choose the S Corp tax designation with the IRS, you must first form an LLC or corporation in Virginia.
TRUiC is known for its free business formation guides, business tools, and legal templates, making it easy to find all the details required to open a business in any state. In the following sections, TRUiC details the formation requirements for a Virginia S Corp, making it a seamless process for you.
Considerations Before Choosing S Corp Status
Not every business is suited to the pass-through taxation of an S Corp because of several restrictions. For example, sole proprietorships and partnerships cannot elect the tax classification.
An S Corp is a pass-through taxation entity, but the taxation occurs at the shareholder level and not at the business level in most states, including Virginia. Therefore, the business saves on self-employment taxes on the business distributions. However, sometimes the default tax of an LLC or corporation remains the best because the company must pay the owner or shareholders a reasonable salary and make suitable annual distributions. Furthermore, the tax savings must outweigh the extra accounting costs.
Therefore, you need to understand if the advantages of an S Corp are better than just proceeding with the default LLC tax by researching and getting professional advice.
Deciding on the Best Structure
Electing S Corp status is not only restricted to a new business. Even existing businesses can elect it, but they must first create a formal business structure.
TRUiC suggests that an LLC is the best business structure for an S Corp in Virginia. An LLC provides limited liability protection for a business but is also easier to maintain than a corporation. Furthermore, the advantages of forming a corporation are negated by the restrictions that S Corps have.
IRS Requirements for S Corp Status
A business must meet several requirements before electing S Corp status with the IRS. These include that it is a domestic corporation with up to 100 shareholders and issues one class of stock.
Furthermore, the shareholders cannot be foreign residents, only U.S citizens or permanent residents. Finally, shareholders cannot be other companies, only private individuals that all agree on the S Corp status.
S Corps must create an LLC Operating Agreement to outline ownership and member duties in Virginia. They must also record minute meetings, keeping them for at least three years.
Forming A Virginia S Corp
The formation requirements for a Virginia S Corp are straightforward, according to TRUiC. First, you either form an LLC or corporation with the state and apply for the S Corp status from the IRS when requesting the business EIN.
To form a Virginian LLC, you need to fill in an application with the Secretary of State naming the LLC, provide the details of your chosen registered agent, and file the Articles of Organization with the filing fee of $100. If you are too busy, business formation services also offer this service.
There are only two final steps left in the process. The first is to create the LLC Operating Agreement, and then you are ready to apply for the business EIN from the IRS. During this process, you also fill in Form 2553, which allows you to elect S Corp status according to Subchapter S.
Last Thoughts
A business-friendly environment and several local incentives make Virginia a popular state for small business startups. However, despite some of its obscure tax laws, businesses in the state can opt to elect S Corp status, helping them enjoy the pass-through taxation benefits that minimize self-employment taxes. After all, paying less tax means more profits, making it easier for businesses to survive.
