Key Takeaways

  • A Virginia S corp avoids double taxation by passing profits to shareholders, who report them on personal tax returns.
  • To elect S corp status, file IRS Form 2553; no separate Virginia filing is required.
  • Virginia S corps must comply with federal requirements and state-level formation and reporting obligations.
  • Formation steps include naming the corporation, designating a registered agent, and filing Articles of Incorporation.
  • There are ongoing compliance requirements like annual reports, record-keeping, and franchise tax responsibilities.
  • S corps offer benefits like limited liability, better audit protection, and potential payroll tax savings.
  • Shareholder and officer restrictions apply under S corp rules.

Virginia S Corporation

A Virginia S corporation is a business entity in Virginia that is designated as an S corporation for tax purposes with the IRS. An S corporation is a C corporation that has taken S corporation election with the IRS, which will give it distinct tax advantages, the main one being pass-through taxation.

Pass-through taxation means that profits and losses related to the S corporation are not taxed on the corporate level but passed through to the individual owners and taxed on the personal level. Thus, double taxation is avoided with this method, and this is in many cases the main reason why business owners choose the S corporation for their business.

How to Start a Virginia S Corp

To form a Virginia S corp, you must first create a Virginia corporation by filing the Articles of Incorporation with the Virginia State Corporation Commission (SCC). Afterward, you can elect S corporation status with the IRS.

Steps to Form a Virginia S Corporation:

  1. Choose a Name: Your business name must be unique and include a corporate designator like “Inc.” or “Corporation.” Use the Virginia SCC Name Check tool to confirm availability.
  2. Designate a Registered Agent: This can be an individual or entity authorized to receive legal documents on behalf of the business. The agent must have a Virginia address.
  3. File Articles of Incorporation: Submit this document to the SCC, either online or by mail. The filing fee is $75.
  4. Create Corporate Bylaws: These internal rules define how your corporation operates and are required for maintaining compliance.
  5. Hold an Organizational Meeting: Elect directors, appoint officers, and adopt bylaws at this initial meeting.
  6. Apply for an EIN: Obtain an Employer Identification Number from the IRS, required for tax purposes and opening a business bank account.
  7. File IRS Form 2553: To elect S corp status, submit this form within 75 days of incorporating or the start of your fiscal year.

S Corporation Election in Virginia

S corporation election can be made by filing Form 2553 with the IRS. This should be done within two months and 15 days of the start of a corporation’s tax year. When this election is made on the federal level, most states honor it on their level as well. Virginia is one of these and does not require a separate state filing or tax treatment different from that which is given on the federal level.

Additionally, it is also important to note that an S corporation election is not a permanent decision. You can revert to a C corporation if you file a request with the IRS, although you will have to maintain the calendar fiscal year as required of S corps and you will not be able to return to S corporation status for another five years. Thus, it is important to carefully consider what tax designation is best for you. You may want to consult an accountant, tax advisor, or attorney on this issue.

Pros and Cons of a Virginia S Corp

Advantages:

  • Avoids Double Taxation: Earnings are passed directly to shareholders and taxed at their personal rates.
  • Liability Protection: Shareholders' personal assets are protected from most business debts and legal claims.
  • Payroll Tax Savings: Profits distributed as dividends rather than salary may reduce self-employment tax liability.
  • Investment Appeal: Offers corporate structure and credibility, which may help attract investors.

Disadvantages:

  • Ownership Restrictions: Limited to 100 shareholders, all of whom must be U.S. citizens or residents.
  • Stock Class Limits: S corps can issue only one class of stock, which may limit fundraising flexibility.
  • IRS Scrutiny: Distributions and compensation must be carefully managed to avoid triggering audits.
  • Complex Compliance: Compared to LLCs, S corps require more detailed recordkeeping and formalities.

S Corporations in Virginia

Before one takes the S corporation election in Virginia, there are a number of points one should consider, such as:

  1. Shareholder limitations. S corporations are limited to 100 shareholders and these shareholders must be U.S. residents and cannot be other corporations, LLCs, partnerships, some trusts, or non-U.S. residents. Other business forms do not have such limitations.
  2. Limited liability. Shareholders of S corporations have limited liability from damages from legal rulings or debt collection related to their business. Corporate assets can be affected, but personal assets are usually protected.
  3. Ease of raising capital. S corporations can raise capital more easily than some business types because they can sell stock to do so, although they are limited to only one stock class.
  4. Taxation benefits. Aside from avoiding double taxation, S corporations are also audited less often than partnerships and sole proprietorships.
  5. Fringe benefits. Owners of S corporations who work for the business are considered to be employees and are considered eligible for profit-sharing and retirement plans, group insurance plans, and bonus and stock option plans.
  6. Perpetual existence. S corporations are not affected by the departure of an owner or owners as LLCs are. In theory, an S corporation can exist forever.
  7. Perception. S corporations, and corporations in general, are generally seen as being more impressive operations than partnerships or a sole proprietorships. Vendors, investors, prospective employees, and others may be more inclined to work with an S corporation than some other entities.

Converting an LLC to a Virginia S Corp

Content:

If you operate an LLC in Virginia, you may elect S corp tax treatment without changing your legal structure. Here's how:

  1. Ensure Eligibility: Your LLC must meet S corp requirements, such as having no more than 100 U.S.-based individual members.
  2. Elect S Corp Status: File Form 2553 with the IRS, signed by all members, to be taxed as an S corp.
  3. Adjust Payroll and Taxes: Owners who provide services to the company must receive reasonable compensation as employees.
  4. Consult a Tax Advisor: Transitioning to an S corp may save on self-employment taxes but introduces new filing and payroll obligations.

Alternatively, you can convert your LLC to a corporation in Virginia and then file for S corp status, but this involves more complexity and additional state paperwork.

Maintaining an S Corporation in Virginia

Organization and management requirements for S corporations in Virginia are governed by Virginia law, which requires that S corporations hold an organizational meeting after incorporation. In this meeting, a board of directors will be elected, bylaws will be adopted, and a secretary, president, and other necessary officers will be appointed.

To maintain your status as an S corporation after this, you are required to keep certain corporate documents in Virginia. The two most important ones are:

  • Corporate bylaws. These formalize the S corporation’s operating procedures, management, and structure. Such bylaws must be in accordance with all Virginia laws.
  • Meeting minutes. These keep a record of actions and decisions made in meetings of your shareholders and directors. Such records must be kept for a minimum of three years, but they need not be filed with the state and they can be kept with your corporate papers.

Annual Reporting and Compliance Requirements

Maintaining a Virginia S corp goes beyond formation. Corporations must adhere to several ongoing obligations:

  • Annual Report: Due by the last day of the month in which the company was formed. The report must be filed online with the Virginia SCC.
  • Annual Registration Fee: Corporations pay a fee based on the number of authorized shares. For example, 5,000 or fewer shares incur a $100 fee.
  • Franchise Taxes: While Virginia doesn’t impose a franchise tax specifically on S corps, businesses are subject to general corporate tax obligations and may have to pay additional local business taxes.
  • Registered Agent Maintenance: Your registered agent information must remain up to date. Changes require filing a Statement of Change form with the SCC.
  • Business Licenses: Depending on your business location and industry, you may need state or local licenses or permits.
  • Recordkeeping: Maintain accurate records, including meeting minutes, shareholder information, and corporate resolutions, as required by both Virginia law and IRS guidelines.

Frequently Asked Questions

  1. Do I need to file anything with Virginia to become an S corp?
    No. Virginia recognizes the federal S corp election and doesn’t require a separate state-level filing.
  2. How much does it cost to start a Virginia S corp?
    You’ll pay a $75 fee to file Articles of Incorporation with the SCC. Additional costs may include registered agent services and business licenses.
  3. Can an LLC be taxed as an S corp in Virginia?
    Yes. You can elect to have your LLC taxed as an S corp by filing IRS Form 2553, provided you meet the eligibility requirements.
  4. Are Virginia S corps subject to state corporate income tax?
    Generally no, since S corps are pass-through entities. However, they may still be subject to local taxes and employer taxes.
  5. What happens if I miss the S corp election deadline?
    You may request late election relief by submitting an explanation with Form 2553, but it's not guaranteed—timeliness is critical.

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