Start an S Corporation in Virginia

Virginia S corporations are business entities that have chosen a unique tax status with the IRS. But how does S corp status work, and is it right for your small business? We’ll cover what to expect and how to start an S corporation in Virginia.

S Corporation in Virginia: Key Takeaways

• S corporations have pass-through taxation while maintaining their business structure as C corps or LLCs.

• S corporations are limited in the shareholders they can have and can only issue one class of stock, among other restrictions.

• To become an S corporation in Virginia, business owners must file Form 2553 with the IRS, electing S corp status. 

What Is an S Corporation?

Even though the term “S corporation” sounds like it should be grouped with “C corporation,” which is often called a “business structure” along with the partnership, sole proprietorship, and limited liability company (LLC), an S corp is something entirely different.  

An S corporation is a tax classification electable by business entities that meet specific requirements and file Form 2553, an S corporation election. An LLC or a C corporation can choose S corp status because it’s a federal tax classification independent of the business entity’s business structure.

Tax Considerations for an S Corporation in Virginia

Business owners file for S corp status for tax purposes. What might those purposes be?

Virginia Tax Treatment of S Corporations

How are Virginia S corporations taxed? In general, they adhere to the federal tax treatment. S corporations are not exempt from the standard sales, use, and other relevant state taxes in Virginia, but they can choose whether to pass their income through to their shareholders’ tax returns or pay corporate tax.[1]

Virginia Franchise Tax for S Corporations

Virginia has a franchise tax, but it’s only for banks; it’s not a standard business tax on capital that some states charge to all corporations.[2] Given that banks are ineligible for S corp status, an S corporation in Virginia wouldn’t have to pay a franchise tax.

Pass-Through Taxation

An S corporation in Virginia is taxed as a “pass-through” entity. Generally, instead of paying corporate income tax, the shareholders in an S corporation pass the corporation’s income tax obligations to their personal income tax returns. This provides a way for owners of C corporations to avoid the usual “double taxation.” 

Self-Employment Tax

Some LLC members might save on self-employment tax with S corp tax treatment. Members pay themselves a “reasonable” salary for their work for the company (it has to stand up to an audit). After that, they can allocate distributions free of self-employment tax. For highly profitable enterprises, this can save real money.

Requirements for Forming an S Corporation in Virginia

S corporation status isn’t available to all companies. The IRS has several requirements that all corporations must meet to become an S corporation.[3]

Shareholders

S corporations can have a maximum of 100 shareholders. Nonresident non-U.S. citizens, corporations, and partnerships can’t be shareholders. 

Business Type

An S corp must be eligible to be taxed as a corporation. For example, it must start as a C corporation or LLC. Financial institutions, insurance companies, and domestic internal sales corporations are ineligible for S corp status.

Stock

S corps can issue only one class of stock.

Filing as an S Corp in Virginia

Think your business should try for S corp status? Here’s a look at the process for filing an S corporation in Virginia.

Step 1: Choose a Business Name

Your business will need a solid corporate name representing your enterprise to your customer. To be accepted and registered by the government of Virginia, your business name must also:[4]

1. Contain one of the following words or abbreviations: “company” (“co.”), “incorporated,” (“inc.”), “limited” (“ltd.”), or corporation (“corp.”).

2. Be distinguishable from other registered business names in the state. 

You can verify name availability with Viriginia’s business name search here. The state reduces your name to a “core name,” stripping it of prepositions, articles, spaces, and corporate identifiers. It compares it to core names throughout the state.

When you have a great name that’s available in the state records, make sure to carry out these additional tests and steps:

• Check web domains, social media handles, and trademarks to ensure your business can carve its marketing niche.

• Reserve your name for 120 days by filing a name reservation on the Virginia state corporation commission’s online filing system. The filing fee is $10.

Step 2: Appoint Directors and a Registered Agent

You are required to have a registered agent located in Virginia. They are your business’s point of contact for legal matters. A Virginia registered agent receives legal documents if you’re sued, called to court, subpoenaed, or involved in any legal proceeding. They should be experienced, reliable, and trustworthy in a crisis.

There are specific requirements for being a Virginia registered agent: 

• Individuals must be residents of Virginia and be either one of a corporation’s initial directors or a member of the Virginia State Bar. 

• LLCs, C corp, or nonprofits must be registered to do business in Virginia.

• Corporations can’t be their own Virginia registered agent.

Based on these requirements, finding a Virginia registered agent that is a corporation rather than an individual is substantially more straightforward.

Swyft Filings provides thousands of businesses with a dedicated and affordable registered agent service. When you choose us as your Virginia registered agent, you’ll only hear from us when needed. We’ll keep your documents secure and available online at any time, not stuffed in a drawer.

S Corp Directors

A Virginia corporation is required to have a board of directors that meets at least annually. You can be the director of your own company. The S corporation’s shareholders appoint directors. They may or may not be involved in the business’s day-to-day operations. Still, they are responsible for the corporation’s oversight and direction.

You are required to list initial directors in your Virginia Articles of Incorporation. Generally, you should work toward recruiting a solid group of competent and motivated directors to keep your business running.

Step 3: File Articles of Organization

This form makes your business an official registered entity in Virginia. Here’s the info you’ll need to have at the ready to fill it out online:

1. The business name

2. The number of shares the corporation can issue and a specific designation for each class of stock you’re issuing

   1. Remember, S corporations can only issue one kind of stock

3. The name and address of your Virginia registered agent, with details on how this choice meets the state requirements

4. The names and addresses of the initial directors and incorporators[5]

The filing fee is $25 plus $50 per 25,000 shares issued up to one million. You’ll add $2,500 to your filing fee if issuing more than one million shares.

Virginia LLCs have a similar document called Articles of Organization (known in some states as a Certificate of Formation).  

New Virginia businesses don’t owe franchise tax (unless they’re banks), but they are required to keep this information up to date in an annual report by the end of the anniversary month of their incorporation.[6]

Step 4: Create S Corp Bylaws

The bylaws of your S corp detail the rules you will follow as you run the business. These legally codify an order of operations to your corporation that is not legally required, but it is highly advisable.

All owners, whether shareholders or LLC members, must sign your S corp bylaws. LLCs have a similar document called an Operating Agreement.

Corporate bylaws cover topics such as the composition of the board, its frequency of meetings, elections, and term limits; general hiring procedures; roles and responsibilities of officers, shareholders, and directors; the business’s purpose and success metrics, among many other factors.

Step 5: Apply for an Employer Identification Number

Your Employer Identification Number (EIN) is the number that identifies you to the IRS, like a social security number. You can get your EIN for free HERE.

You’ll need it for withholding employment taxes and paying quarterly estimated income tax to the Federal government. Your EIN is also essential for other business operations, like opening a bank account and securing business licenses and permits.

Step 6: File Form 2553 for S Corporation Election

The only way to receive S corp status for your business entity is to file Form 2553, an S corporation election, to the IRS. This form must be signed by the S corporation’s shareholders and filed within two months and 15 days of the beginning of the tax year that you wish to be taxed as an S corp.

LLCs filing for S corp status past that deadline must file Form 8832, an additional IRS form, simultaneously with Form 2553.

Virginia S Corp vs. Virginia LLC

In Virginia, LLCs and S corporations are both pass-through entities. So why would a limited liability company go through the trouble of filing for S corp status? Here, we break down the nuances.

Advantages of Starting an LLC in Virginia

Limited liability companies can have infinite shareholders (called members); they have pass-through tax status and are not plagued by double taxation; and they have limited liability protections comparable to a corporation. This potent combination meets the needs of many small business entrepreneurs.

Disadvantages of Starting an LLC in Virginia

Virginia LLCs can be harder to buy and sell because they are incorporated based on their membership rather than the issuance of stock. In addition, their inability to issue stock can hamper some companies’ investment and fundraising opportunities. 

If you’re making an excessive amount of money with your company, you may have a chance to limit your self-employment tax burden with S corp status.

Advantages of forming an S Corporation in Virginia

Compared to an LLC, there’s one distinct advantage to the tax treatment available to a Virginia S corporation. After receiving “reasonable” compensation for their work in their company, the shareholder of an S corp can take distributions on top of their earnings, free of self-employment tax.

By contrast, members of a Virginia LLC don’t have this option.

Disadvantages of forming an S Corporation in Virginia

S corp status comes with key restrictions that can hamper some business models. For example, an LLC can have over 100 shareholders, but an S corp can’t. S corporations come with a higher administrative burden for tax purposes. Hence, an S corporation election isn’t worth it without significant tax savings.

Ready to File for S Corp Status in Virginia?

Forming an S corporation in Virginia is a complex process. Now that you’ve thought seriously about your small business filing for S corp status, you’ll want to know about high-quality filing services like Swyft Filings that are available to wipe out all of the paperwork and get your S corporation running without hassle or costly setbacks.

We’re here to ensure you meet the S corp limitations and deadlines, choose the proper business structure, and complete all the filing as quickly as possible.

Frequently Asked Questions

What is an S Corporation in Virginia?

An S corporation is a Virginia company that has elected S corp status with the IRS, invoking subchapter S in the Internal Revenue Code.

Does Virginia recognize S corporations?

Yes, Virginia taxes S corporations as pass-through entities and allows shareholders to choose whether to pay taxes at the personal or entity level.

What is the turnaround time for filing for S corp status with the IRS?

According to the IRS, S corporation elections have an estimated turnaround time of 60 days.

What is the difference between an S corp and an LLC?

An S corp is any corporation that has elected S corp status. An LLC refers to a business structure.

What are the requirements for an S corporation in Virginia?

Virginia S corporations are limited in the shareholders they can have and who is eligible; they can issue just one class of stock; banks, insurance companies, and financial institutions are usually ineligible; among other limitations.

Are taxes for LLCs and S corps the same?

While S corps can allocate distributions to their shareholders after they pay reasonable compensation for their work, LLC members owe self-employment tax on all of their earnings.

What is the S corp tax rate?

The tax rate for S corps depends on the personal tax returns of its shareholders.

How do I dissolve an S corporation in Virginia?

File articles of dissolution with the state, follow the procedures in your bylaws, and pay all of the taxes you owe.

Bibliography

1. Virginia Department of Taxation. “Pass-Through Entities.” Accessed April 6, 2023.

2. Virginia Department of Taxation. “Bank Franchise Tax.” Accessed April 6, 2023.

3. Internal Revenue Service. “S Corporations.” Accessed April 6, 2023.

4. Commonwealth of Virginia State Corporation Commission. “Business Entity Names.” Accessed April 6, 2023.

5. Commonwealth of Virginia State Corporation Commission. “Instructions to Form SCC619 - Articles of Incorporation of a Virginia Stock Corporation.” Accessed April 6, 2023.

6. Commonwealth of Virginia State Corporation Commission. “Annual Reports.” Accessed April 6, 2023.