How to Start an S Corp in Virginia
The state of Virginia may be small, but it’s a mighty force when it comes to business. It’s home to more than 700,000 small businesses, which account for approximately 99% of all businesses within the state. If you plan to start a business, Virginia is one of the nation’s most welcoming and business-friendly environments.
Choosing to set your business up as an S corporation (S corp) — whether you want to provide agriculture services, start a small restaurant, or open a retail shop — could save you money at tax time. Read on to learn how to form a Virginia S corp and what you must do to keep your business compliant with all state laws and guidelines.
Not in Virginia? Check out our other How to Start an S Corp guides to learn more.
Recommended: If you have at least $60,000 in net earnings, an S corp may offer tax advantages. Let Northwest start your S corp today.
Factors to Consider Before Starting an S Corp in Virginia
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by an LLC or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Virginia S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form a Virginia S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Virginia
Starting a Virginia LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Northwest to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Virginia.
Be sure to choose a name that complies with Virginia naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Virginia LLC:
- Your name must include the phrase “limited liability company” or “limited company” or one of their abbreviations (LLC, L.L.C., LC, or L.C.).
- Your name cannot contain any word, abbreviation, or combination of characters that states or implies the LLC is a corporation or a limited partnership.
- Your name cannot include the words “bank” or “trust” unless the LLC will be engaged in the banking or trust company business, or it is clear from the context of the remaining words that it will not be engaged in such business.
- Your name cannot include the words “engineer,” “architecture,” or “land surveying,” or any variation of those words unless the LLC will be lawfully engaged in those services or it is clear from the context of the remaining words that it will not conduct such business.
- The words “United States,” “national,” “Federal”, and “reserve” may not be included in the name of a business entity that is engaged in the banking, loan, building and loan, brokerage, factorage, insurance, indemnity, savings, or trust business.
- Your name must be distinguishable from any existing business in the state. This includes Virginia reserved names
You can find more information by reading the Business Entity Name FAQ on the State Corporation Commission website.
You can also read the Virginia state statute about LLC naming guidelines for more information.
2. Is the name available in Virginia? You can use the business entity search on the Virginia State Corporation Commission website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Virginia Registered Agent
You must elect a registered agent for your Virginia LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Virginia LLC Articles of Organization
The Virginia Articles of Organization is used to officially register an LLC.
File Your Virginia Articles of Organization
OPTION 1: File Online With the Virginia State Corporation CommissionFile Online
- OR -
OPTION 2: File Form LLC1011 by Mail
State Filing Cost: $100, payable to the State Corporation Commission (Nonrefundable)
State Corporation Commission
P.O. Box 1197
Richmond, VA 23218-1197
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Virginia LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Keep Your Virginia S Corp Compliant
After you set up your Virginia S corp, you must ensure it remains in good standing with the state. Virginia requires your business to follow all state and local laws and guidelines, file an annual report, and pay all required Virginia state taxes each year.
Virginia S Corp Annual Report
Virginia requires all businesses to file an annual report with the Virginia State Corporation Commission. These reports are due every year on the last day of the month in which you registered your business as an S corp. Your annual report should list the current contacts and important people in charge of your business as well as verify the other information remains up to date.
There are no fees associated with filing the annual report in Virginia, but you must pay an annual registration fee of $50 for your business to remain active. If you fail to file your annual report, your business will no longer be in good standing with the state of Virginia.
Visit our Virginia Annual Fee and Report guide for a step-by-step overview of the filing process.
Virginia S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Virginia S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Virginia Income Taxes
Virginia has a graduated income tax that varies based on your income, ranging from 2% to 5.75%. A graduated income tax means business owners pay a percentage based on their earnings. If your business has a low-earnings year, for example, your percentage will fall at the lower end of the percentage range. This allows you to save a significant amount on your taxes when you need it most so you can reinvest the savings in your business.
Here’s how Virginia businesses can calculate their graduated income tax rate:
- If you make less than $3,000, your income tax rate is 2%.
- If you make $3,001 to $5,000, your income tax rate is $60 plus 3% for any earnings that exceed $3,000.
- If you make $5,001 to $17,000, your income tax is $120 plus 5% for any earnings that exceed $5,000.
- If you make over $17,001, your income tax is $720 plus 5.75% for any earnings that exceed 17,000.
Virginia Sales and Use Tax
The sales and use tax rate in Virginia is 5.3%. Some cities and counties throughout Virginia have their own sales and use tax in addition to the state sales and use tax. Visit the Virginia Department of Taxation website for more information.
Additional State Taxes
Virginia has numerous state-specific taxes your business may need to pay. Examples of such additional taxes include:
- Soft Drink Excise Tax
- Cigarette and Tobacco Products Tax
- Egg Excise Tax
- Motor Vehicle Wholesale Fuel Sales Tax
- Litter Tax
Visit the Virginia Department of Taxation website for more information.
Virginia Local Taxes
Some local municipalities in the state may have their own taxes for which they’ll require your business to file and pay. Check with your local government to ensure your business complies with local laws and guidelines.
Start a Virginia S Corp FAQ
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Virginia is home to businesses that represent a range of industries — all of which can include S corps. You can elect S corp status for a company you start in the prominent technology industry, for example, as well as for a small storefront that services food and beverage processing clients. Your business just needs to ensure it meets the federal requirements to become an S corp.
The best state for you to start your S corp is the one where you plan to have your primary operations. With its low income tax rate, great location, and small business-friendly environment, Virginia offers a great place to form an S corp that can save you both money and stress.