LLC vs S-Corp | What Entrepreneurs Need to Know in Virginia

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LLC vs S-Corp in Virginia

When starting a small business in the Virginia, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Virginia. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Virginia. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Virginia

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Virginia?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Virginia?

Unlike a limited liability company (LLC) or other business structures, Virginia S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Virginia

Creating a business in Virginia requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Virginia Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Virginia does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Virginia.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Virginia

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Virginia is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Virginia. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Virginia are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Virginia are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Virginia to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Virginia with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Virginia State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Virginia, it costs $50, which can be paid to the WA Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $100 to the Virginia Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Virginia have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Virginia LLC: An LLC can have any number of owners, called members, from starting Virginia Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Virginia S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Virginia LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Virginia.

Virginia S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Virginia LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Virginia S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Virginia LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Virginia Operating Agreement.

Virginia S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Virginia LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Virginia: LLC or S-Corp?

Filing an LLC or S-Corporation in Virginia requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in Virginia, you must submit the Articles of Organization to the Virginia State Corporation Commission. Your Articles of Organization must include information about your Virginia LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Virginia S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Virginia: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Virginia depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Virginia LLC Cost for detailed information.

Virginia S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Virginia LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Virginia?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Virginia. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in Virginia.

FAQs

What are the differences between an LLC and an S-Corp in Virginia?
LLCs and S-Corps both offer limited liability protection, but LLCs have more flexibility in management and taxation while S-Corps have more strict ownership requirements.
How do I form an LLC or S-Corp in Virginia?
To form an LLC or S-Corp in Virginia, you need to file articles of organization or incorporation with the State Corporation Commission and obtain any necessary licenses and permits.
Which structure is better for a Virginia-based startup?
The choice between an LLC and S-Corp depends on various factors such as the nature of the business, the number of owners, and tax implications. Consulting a business attorney or accountant could be helpful.
Which structure offers more flexibility for managing the company?
LLCs generally offer more flexibility in management as they do not have strict ownership or management requirements as S-Corps do.
Can an S-Corp benefit from Virginia tax rates and exemptions?
Yes, an S-Corp is a pass-through entity for taxation purposes, and Virginia has taxes and exemptions that may apply.
What are the annual fees for an LLC or S-Corp in Virginia?
LLCs pay a $50 annual registration fee in Virginia, and S-Corps pay a $25 annual registration fee plus corporate income tax.
Can an LLC and an S-Corp have the same business name in Virginia?
Yes, but it is recommended that they differentiate themselves in their name to avoid confusion.
Can I change my LLC to an S-Corp or vice versa in Virginia?
Yes, but it requires filing the necessary paperwork with the State Corporation Commission and meeting IRS requirements.
What are the Virginia requirements for a board of directors in an S-Corp?
An S-Corp must have a board of directors with at least one member, but there are no specific Virginia requirements for naming additional members.
Are Virginia LLCs or S-Corps required to have bylaws?
Virginia LLCs are not required to have bylaws, but it’s advisable to have written operating agreements. S-Corps are required to have corporate bylaws.
Can Virginia LLC members have different ownership percentages?
Yes, members of an LLC can have different ownership percentages based on their contributions or agreement.
Can an LLC or S-Corp in Virginia convert to a different entity type in the future?
Yes, it’s possible to convert within certain IRS and State Corporation Commission requirements.
What happens if an LLC or S-Corp in Virginia doesn’t meet state compliance standards?
The Secretary of State in Virginia may revoke the business’s authority to conduct business, and the business can incur fines and penalties.
Do Virginia LLCs or S-Corps need a registered agent?
Yes, both LLCs and S-Corps must have a registered agent with a physical address in Virginia to receive legal notices and documents.
Can I use a PO Box for a registered agent in Virginia?
No, a registered agent must have a physical street address for the service of process.
Do Virginia LLCs or S-Corps need to file any annual reports?
LLCs have to file an annual report, but S-Corps do not have to provide an annual report to the State Corporation Commission.
What tax forms should an S-Corp file in Virginia?
S-Corps need to file Virginia Form 500 by the 15th day of the third month after the close of their fiscal year (March 15).
How are LLCs taxed uniquely in Virginia as compared to S-Corps?
LLCs and S-Corps are both pass-through entities and taxed similarly in Virginia, but LLCs have more tax flexibility options.
Do both LLCs and S-Corps need to obtain a federal Employer Identification Number (EIN)?
Yes, both require an EIN issued by the IRS.
How can owners of an LLC or S-Corp protect their personal assets in Virginia?
Owners can form an LLC or S-Corp with limited personal liability to protect their assets against business debts and lawsuits.
Are Virginia LLC or S-Corp founders required to obtain insurance?
LLCs and S-Corps in Virginia should consider liability insurance, workers’ compensation insurance, and other insurance policy options as necessary for their businesses.
Can a Virginia LLC use members’ names in the business name?
Yes, Virginia LLCs may include members’ names in the business name.
Do S-Corps need to hold shareholder and board meetings in Virginia?
S-Corps have to file annual reports but do not require holding shareholder or board meetings annually.
Can Virginia S-Corps issue different classes of stock?
Generally, no Virginia S-Corps cannot issue different classes, but exceptions may apply.
How long does it take to form an LLC or S-Corp in Virginia?
It can take typically one to two days to get an LLC or S-Corp approved in Virginia, but it may take up to two weeks if there are complications.
How do I dissolve an LLC or S-Corp in Virginia?
An LLC or S-Corp in Virginia can voluntarily dissolve after following the required procedures with the State Corporation Commission and accounting for all necessary tax obligations.
What is an LLC in Virginia?
An LLC is a limited liability company, which is a legal structure for businesses that separates personal and business liabilities.
What is an S-Corp in Virginia?
An S-Corp is a corporation that has elected to be treated as a pass-through entity for tax purposes.
Can a Virginia LLC elect to be taxed as an S-Corp?
Yes, a Virginia LLC can elect to be taxed as an S-Corp if certain requirements are met.
How many owners can a Virginia S-Corp have?
An S-Corp can have up to 100 shareholders in Virginia.
Can a Virginia LLC have one owner?
Yes, a Virginia LLC can have one owner, which is called a single-member LLC.
Can a Virginia S-Corp have foreign shareholders?
Yes, a Virginia S-Corp can have foreign shareholders, but there are some restrictions and requirements.
Are there any formation fees for LLCs in Virginia?
Yes, there is a fee for filing articles of organization with the State Corporation Commission.
Are there any formation fees for S-Corps in Virginia?
Yes, there is a fee for filing articles of incorporation with the State Corporation Commission.
Can an LLC in Virginia have a non-Virginia address?
Yes, a Virginia LLC can have a business address that is located outside of the state.
Can an S-Corp in Virginia have a non-Virginia address?
Yes, a Virginia S-Corp can have a business address that is located outside of the state.
Does a Virginia LLC need an operating agreement?
Although it is not required by law in Virginia, it is highly recommended that you create an operating agreement to avoid potential disputes with other members.
Does a Virginia S-Corp need a shareholder agreement?
Although it is not required by law in Virginia, it is highly recommended that you create a shareholder agreement to avoid potential disputes with other shareholders.
How are Virginia LLCs taxed?
By default, Virginia LLCs are taxed as pass-through entities. However, LLCs can elect to be taxed as a corporation if desired.
How are Virginia S-Corps taxed?
S-Corps in Virginia are also taxed as pass-through entities.
Are there any state taxes that LLCs and S-Corps in Virginia have to pay?
Yes, Virginia LLCs and S-Corps must pay a state corporate income tax, as well as a minimum annual fee.
Is there a residency requirement for owners or shareholders of a Virginia LLC or S-Corp?
There is no residency requirement for owners or shareholders of Virginia LLCs or S-Corps.
What is the liability protection for owners or shareholders of a Virginia LLC or S-Corp?
Owners and shareholders of Virginia LLCs and S-Corps have limited liability, which means their personal assets are protected from business debts and liabilities.
Does Virginia have a franchise tax or annual fee for LLCs and S-Corps?
Yes, Virginia has an annual fee for all LLCs and S-Corps registered in the state.
How is ownership divided in Virginia LLCs and S-Corps?
Ownership in Virginia LLCs is divided into membership interests, while ownership in Virginia S-Corps is divided into shares of stock.
Does Virginia recognize both domestic and foreign LLCs and S-Corps?
Yes, Virginia recognizes both domestic and foreign LLCs and S-Corps.
Are there any specific requirements for LLCs and S-Corps in Virginia regarding how profits and losses are allocated?
No, Virginia does not require LLCs or S-Corps to follow specific rules on how profits and losses are allocated among members and shareholders.
Can Virginia LLCs and S-Corps choose different forms of taxation for state and federal purposes?
Yes, Virginia LLCs and S-Corps can choose different forms of taxation for state and federal purposes.
Can LLCs or S-Corps change their legal status and become the other entity type in Virginia?
Yes, it is possible for Virginia LLCs or S-Corps to change their legal status and become the other entity type, but there are certain requirements and procedures that must be followed.
Are there any restrictions on the types of businesses that can form an LLC or S-Corp in Virginia?
Virginia does not have any specific restrictions on the types of businesses that can form an LLC or S-Corp.
What is the process for dissolving a Virginia LLC or S-Corp?
Virginia LLCs and S-Corps must file a certificate of cancellation with the State Corporation Commission to formally dissolve their business.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Virginia will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Virginia and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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