When it comes to doing business, you will have to constantly make decisions to determine the next step for the company. If you are starting to see growth, there may be a bit of excitement and wanting to plan new things to expand the reach of the products or services. While this may offer opportunities, it may also come with certain challenges. One of the challenges a growing company may encounter is an increase in tax rates. Given that the company has started earning more, a business owner may also face complexities during the tax season. In such cases, some companies choose to register a Virginia S Corp.
Understanding What It Is
Before learning the process of forming an S Corp, understand first what it means. Generally, the term stands for the subchapter S corporation. Others may also know it as a small business corporation.
Keep in mind that it is not a business entity structure. Instead, it is a tax status.
An S Corp is similar to a traditional corporation (C Corp). However, there is a difference in the manner of taxation. If you choose to elect subchapter S corporation status, the federal government will treat it as a partnership in terms of taxation. The company will not be paying federal income taxes. The tax liabilities for the business profits and losses will be passed through to the owners of the entity. Additionally, the company will be treated as a single entity no matter how many shareholders organized it.
In order to better understand it, here are its main features:
- avoid double taxation
- pass-through entity tax treatment
- has limited liability protection
- does not have more than 100 owners at a time
- has only one type of stack
- has transferable stock
- is a domestic business entity
- has US citizens only as owners
- has no business entities as owners or directors
Additionally, keep in mind that not all businesses can be a subchapter S corporation. According to the Internal Revenue Service (IRS), the following types of general corporations cannot obtain this tax status:
- Insurance companies taxed under subchapter L
- Domestic International Sales Corporations (DISC)
- Certain affiliated groups of corporations
Forming a Virginia S Corp
Choosing this tax status can help a business save money on payroll and income taxes. However, make sure that the necessary process is followed. To get started, here is a simple step-by-step guide that a business owner can follow:
Step 1: Come up with a distinguishable name. One of the most important factors to consider is the name of the business. Not only will it have to reflect a company’s values, but it should also represent the brand that you want to establish. Make sure that all the state guidelines are followed.
First, make sure that it is distinguishable. Do not use a name if another entity in Virginia has already taken it. To find out the availability of the desired name, conduct a business entity name search in the database of the Corporation Commission. If it is available, you have the option to reserve it for 120 days. File an Application for Reservation of a Business Entity Name with the commission and pay the $10 fee.
Second, include a proper designator. If you decide to form an LLC, then use the phrase Limited Liability Company or any of its abbreviations. If you want to start as a C Corp, then include the word Corporation, Incorporated, Limited, Company, or any of their abbreviations.
Step 2: Select a registered agent. No matter what the business entity structure is, a registered agent must be appointed. You can nominate a person or a third-party company to serve as the agent in Virginia. They will accept all legal notices and business mail on behalf of the company. Find out more about the qualifications by reading this article.
Step 3: Submit formal paperwork. To formally register a business, a business owner will have to file formal paperwork with the Corporations Commission. If they form an LLC, use the Articles of Organization form and pay $100. Meanwhile, corporations should submit a completed Articles of Incorporation and pay the corresponding fee. The minimum amount is $75, but it will be higher if the corporation has more than 25,000 shares. The maximum cost is $2,525, which is for companies with more than 1 million shares.
Since you plan on electing subchapter S corporation, make sure that the formation documents comply with the language required by the federal law. If you need help with the paperwork, then it may be best to work with a reliable third-party organization like DoMyLLC.
Step 4: Apply for an Employer Identification Number (EIN). Once the business has been registered with the state, you will have to obtain an EIN from the IRS. Accomplish Form SS-4 and submit it to the said agency. The application can be done online and is free of charge.
Step 5: Issue stock. If a corporation is formed, you will have to issue stocks to the shareholders in return for their capital contributions. The board of directors will be in charge of doing this. The amount of stock will be based on the company’s Articles of Incorporation. Make sure to properly record all issuances in a stock ledger.
In Virginia, the corporate stock has no par value by default. Par value does not refer to the actual value of the stock. It refers to the minimum dollar amount which a share can be sold for. For example, if the par value is $1 per share stock, it cannot be sold for .50 cent.
For corporations planning on being an S corp, it is necessary to take note of the limitations that the federal law imposes when it comes to the capital structure and nature of shareholders. Do not violate any of the following to ensure that the company qualifies for the tax status:
- The company cannot have more than 100 owners at a time. In certain cases, spouses, some family members, and their estates may qualify as a single shareholder. Check the requirements to avoid any complications.
- Only individuals, estates, certain trusts, and other entities that are exempted from federal income taxes can serve as shareholders.
- The company cannot have a shareholder who is a nonresident alien.
- The company is only allowed to have one class of stock.
Step 6: Prepare initial documents. Aside from the formation paperwork, a corporation should also prepare initial documents. That includes the bylaws that will set the rules on how to manage the operations of the business. This does not have to be filed with the state since it is not a legal requirement. However, having one will establish the rules governing the business and help in proving the legitimacy of the company.
As for an LLC, it may have to prepare an operating agreement. This paperwork is an internal document that sets out the rights and obligations of the members. It also includes the regulations and processes for the management of the company’s operations.
Step 7: Elect the tax status. The last step to take is the election for the tax status. To do this, file a completed Form 2553 with the IRS. Have the initial shareholders sign the form. After sending the application, the IRS will evaluate the company to see if it is eligible for the tax treatment.
Business entities that successfully elect subchapter S corporation status have to hold annual shareholders meetings. Someone should also maintain records of the said meeting.
Aside from federal income tax treatment, the Virginia business entity will also be treated as an S corporation in Virginia. So, even if it starts as a corporation, it will be a pass-through entity in the state.
Electing as an S corporation in Virginia can protect the company and provide flexibility. However, there is a multi-step process that must be completed. That includes compliance with state obligations and accomplishing federal requirements. So, you need to understand the processes to avoid encountering any issues.
For some entrepreneurs, handling all these tasks can be a bit much. It may also take a lot of time. So, the best option for them is to hire a third-party organization. You can do the same. With the help of our team of experts at DoMyLLC, you can have a hassle-free experience.
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