The Benefits of an S Corporation for Small Businesses in Virginia
Figures from the U.S. Census Bureau show that Virginia’s per capita disposable income remains slightly higher than the U.S. average, placing it in 12th place at $41,255. With a median household income of $76,398, the almost 770,000 small businesses in the state enjoy brisk trade.
Many small businesses in the state prefer to declare their LLC or corporation into an S Corporation for the competitiveness offered by its pass-through tax benefits. Therefore, any legal business entity in Virginia can choose the tax status of an S Corp with the IRS after completing its company formation.
S Corporation Benefits for Virginia Small Businesses
Any LLC or corporation that chooses the S Corporation designation from the IRS becomes a pass-through entity for federal tax purposes. The status is easy to acquire if a business meets the requirements and completes Form 2553 of the Internal Revenue Code’s Subchapter S when applying for an EIN.
Taxation Benefits
In Virginia, an S corporation does not pay federal taxes at the corporate level. Instead, the business income or loss passes through to the shareholders who report these on their personal income tax returns. Therefore, business losses can offset income from other sources, reducing the person’s tax and giving their business a better chance of survival.
Reduce Self-Employment Taxes
Another huge benefit of an S Corp is that the owners or stakeholders can draw a salary. Essentially, they become business employees and draw salaries but also receive dividends. While the owners pay FICA taxes on their salaries, they do not pay them on the rest of their distributions, reducing their self-employment tax. Salaries are also a tax-deductible expense for the business.
If the business owner had a default LLC, they would pay income and FICA taxes on all their profits and distributions, creating a heavy tax load.
Other Benefits
S corp status also allows the business owner to contribute to a 401(k) or health insurance with their pre-taxed money.
S Corp Disadvantages
A business run as a sole proprietorship or general partnership cannot seek S Corp status. Therefore, the enterprise must incorporate into a formal structure.
S Corps Require Some Effort
In Virginia, this means that the company must hold an organizational meeting after incorporating to adopt the bylaws and officers, always meeting the Virginia business laws. Furthermore, the business must record meeting minutes and keep them for three years.
S Corp Expenses
Besides ensuring that a business meets the requirements of an S Corp in Virginia, there are not many disadvantages. For example, some people consider the extra accounting costs a burden, but if the business can save at least $2,000 annually from its S Corp tax status.
The accounting expenses and fees for incorporating are offset by the tax savings and are both deductible as business expenses.
S Corp Limitations
S Corporations do have share and shareholder limitations. For example, only one type of share is allowed, and the company can only have up to one hundred shareholders. In addition, unlike other business forms, an S Corp cannot have foreign nationals as shareholders, and the business owner cannot be another corporation, LLC, or partnership.
When is an S Corp the Best Business Strategy?
According to the professionals at TRUiC, the proper business structure is vital to the success of a business. Therefore, they advise business owners to consider the benefits and restrictions before deciding on the Virginia S Corp tax designation.
Moreover, TRUiC believes that an LLC is the best business structure for a company wanting to form an S Corp because it is easier to maintain than a corporation. Corporations offer businesses several benefits that S Corp status negates, so it’s not the best option.
LLC Formation and S Corp Status Steps in Virginia
As mentioned earlier, electing S Corp status requires that you form your LLC first. Virginia is a business-friendly state that allows you to create an LLC in a few easy steps. These are: name your LLC, decide on your registered agent, pay the filing fee, and file the articles of organization.
You are now ready to meet the final two S Corporation requirements. First, meet with the other shareholders, create the company operating agreement, and agree on the S Corp status. Then, finally, request an EIN from the IRS and fill in Form 2553, electing the S Corp status.
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Virginia makes it easy to seek S Corp status in the state since it doesn’t impose additional taxes or paperwork for the designation. If the tax savings offset the extra expenses required for the business formation and the accounting, then an S Corp is worth considering in the state.
