More and more people across the U.S. want to quit their jobs to become entrepreneurs. Hence, new business applications across the U.S. remain high, and Virginia’s vibrant economy is no exception. The latest figures from the Office of Advocacy of the U.S. Small Business Administration show that Virginia has 783,977 small businesses, constituting 99.5% of all enterprises in the state.
Important Factors Startups Consider
Aspiring business owners consider several factors before deciding to invest in a business in their state. These include the tax climate, market potential, the state business environment, labor costs, and the overall business climate.
Some states offer a more favorable business environment, especially concerning taxes and licensing requirements. As the state with the 13th largest gross domestic product, Virginia’s revenues come primarily from the military, agricultural activities, and several high-tech industries.
Virginia’s business-friendly environment and incentives offered by local governments have assured that despite some vague tax laws, small businesses employ 1.6 million people, or 47.1% of all employees.
Starting a Virginian S Corporation
Despite not imposing any tax on the agricultural products of small-scale farmers, Virginia’s stringent tax laws include a 5% tax on cafes and restaurants (4% state tax and a local tax of 1%). However, when ordering take-outs, the tax on food falls to 2.5% (1.5% state tax and 1% local tax).
Every new business in Virginia must immediately register with the state Department of Taxation, and those planning to have employees must also register with the Virginia Employment Commission.
Finally, every LLC in Virginia must have a registered agent and file their Article of Organization with the Virginia State Corporation Commission. Business owners that elect an LLC or Corporation as the legal structure of their business can also select S Corp tax status. Sole proprietorships cannot opt for this form of taxation.
S Corp – An IRS Tax Classification
An S-Corporation or S Corp is not a business structure but a tax classification that helps relieve the tax burden for small businesses. However, since S Corps have several restrictions, they are not always the best tax structure for a business.
S Corps have pass-through taxation, meaning that taxes are paid by the shareholders and not at the business level. As a result, the owner or shareholders become employees, receiving a reasonable salary, and the business saves money on the self-employment taxes paid on the business distributions. S Corps don’t have a corporate tax rate. Instead, the owners pay personal income tax on the business profits according to their income tax bracket.
Meeting S Corp Requirements
Not all businesses can save on taxes by electing S Corp status. A company must meet the requirements and restrictions that say it can only issue one stock class and have no more than 100 shareholders. Furthermore, only domestic LLCs or corporations owned by private individuals that are U.S. citizens or permanent resident aliens qualify for this tax designation.
Finally, the business must earn enough profits to make annual shareholder contributions and pay the owners a reasonable salary. A business owner must ensure that the tax savings outweigh the costs.
Determining Reasonable Salary and Distributions
According to TRUiC, the business information company, a Virginia S Corp needs at least $20,000 in distributions annually. Additionally, the business owner’s salary cannot be less than the market standards for someone doing the same job.
Forming the Business and Choosing S Corp Status with the IRS
Getting a Virginia S Corp started requires forming an LLC or Corporation first. In the state, an LLC must have a Virginia registered agent and file the Articles of Organization. In addition, the business must register with the Virginia Department of Taxation and the IRS.
When getting an EIN, the business tax identity number, from the IRS, the owner completes form 2553. Through this process, the business elects the S Corp status.
Virginia’s healthy economy makes it an appealing state for small business owners. In addition, the pass-through taxation of an S Corp helps small businesses grow thanks to the money they save on self-employment taxes. However, S Corps have closer IRS scrutiny and additional fees because of the LLC formation and payroll fees. Yet, the tax status is an excellent strategy for a business that can meet the restrictions and requirements and wants to save on taxes.