Virginia is for Business Founders. It is close to the nation's capital,has many affluent areas, and has a business-friendly climate. However, starting and running a business is not just about putting up a sign and selling a few goods and services. Each state, county, and town has separate regulations, taxes, and legal requirements you need to understand and follow. The federal government also has specific requirements, particularly regarding business structure and taxes.
Before you start a business, it's important to understand applicable tax and legal considerations. In the state of Virginia, most businesses will be subject to United States federal tax regulations and Virginia state law. Under state and federal law, a business needs to operate as a legally recognized entity for tax and regulatory purposes. One very common legal structure is a limited liability company (LLC). Each state regulates its own LLC requirements, but there are key similarities across the U.S.
Starting a Business in Virginia: A Guide to LLC Structure and Tax Rates
Contents
Is Virginia a Good State to Start an LLC?
Virginia is a great place to start a business and file an LLC due to its business-friendly climate, low tax rate, and stable government. CNBC rated Virginia as the state with the second-best business environment. And it has a consistently low corporate tax rate of 6%, which is very competitive and below the national average.
In Virginia and most of the U.S., a limited liability company’s legal structure protects its owners, who are also referred to as members, from being personally sued for the company’s debts or liabilities. LLCs are hybrids because they combine certain characteristics of corporations with those of a sole proprietorship or traditional partnership. LLCs don’t always need to pay taxes on their profits directly. Depending on the type of LLC, profits and losses can often “pass through” and are reported on the LLC owners’ and members’ personal tax returns.
LLCs are formal business arrangements that require Articles of Organization and binding legal agreements. They are typically easier to set up than corporations and provide more flexibility and protection. Any business can be an LLC, except for banks and insurance companies.
What Are Virginia LLC Tax Filing Requirements?
Virginia has specific legal and tax requirements for those seeking to set up and operate an LLC. Typically the first thing potential owners or members need to do is select an official name. The name must be unique and subject to a few minor restrictions.
Once the name is selected, the Articles of Organization can be formalized and filed with the state through the Virginia State Corporation Commission (SCC) along with related fees. These documents include the business’s purpose, the name of the LLC’s registered agent, and the names and addresses of the LLC’s members. The articles of organization also outline the powers, rights, duties, responsibilities, liabilities, and obligations of each member of the limited liability company.
Most of the documentation and registration fees are filed with the state of Virginia. However, additional paperwork and payments need to be submitted to the federal government to obtain an Employer Identification Number (EIN), which is used as a unique identification code within the Internal Revenue Service (IRS).
Is an LLC Free in Virginia?
An LLC is not free to set up in Virginia. There are a few small fees to pay. However, they are reasonable and only need to be paid once.
The Articles of Organization that form a limited liability company in Virginia cost a single upfront fee of $100 paid to the Virginia State Corporation Commission. This is the most important fee and needs to be paid by everyone establishing an LLC.
Additionally, if you’re going to operate your LLC under a Trade Name, also known as a Fictitious Name, Assumed Name, or Fictitious Business Name, you will need to pay $10 to file a DBA with the state or county. DBA stands for “Doing Business As” and means that you also legally operate your business under a different name in addition to your official LLC title.
You may also need to privately pay lawyers and accountants to help you set up your LLC or pay for special, separate government licensing such as a roofer’s license. However, the Articles of Organization and the DBA are the main fees you need to pay the state of Virginia when bringing your LLC into existence.
How Much Does an LLC Cost Per Year in Virginia?
There are additional fees each LLC must pay annually to maintain legal standing in Virginia.
Every limited liability company must pay the Virginia State Corporation Commission a $50 report fee. This fee covers the cost of maintaining up-to-date records on businesses and must be paid by all LLCs if they want to remain in good legal standing with the state.
There is also a potential $125 Virginia Registered Agent Fee that must be paid if the registered agent of your LLC is someone other than an owner or member of the LLC. A Virginia Registered Agent is a person legally registered with the State of Virginia who has been officially designated to receive legal documents on behalf of the LLC. Many LLCs avoid this fee by having an owner or member be the registered agent. However, LLCs that don’t have a Virginia address, have out-of-state owners, or want to keep their addresses off public record may want to hire and register a separate agent. The $125 fee goes to the State of Virginia. However, there may be an additional fee of $100-$300 paid privately to the hired Virginia Registered Agent or their service company.
What is the Tax Rate for a U.S. LLC Company?
The current Virginia corporate tax rate is 6%, and the U.S. federal corporate rate is 21%. U.S. LLCs are either taxed directly at the applicable U.S. and state rates or not at all. This depends on whether or not the LLC is set up as a pass-through or as a separate tax entity. Because limited liability companies contain elements of both partnerships and corporations, they can choose to report their taxes to the IRS and their registered state, in this case, Virginia, in one of these two ways.
LLCs partly exist to shield owners and members from personal liability. As a result, the LLC itself often doesn’t count as a separate tax entity but only as a protective legal shell. Therefore, under certain circumstances, profits can “pass through” the LLC tax-free and simply be reported on the owners’ or members’ tax returns as regular personal income. Depending on tax rates and other financial considerations, this may be advantageous since it avoids the double-taxation of first paying tax on corporate profit and then personal income. Selecting a pass-through option for your limited liability company means it’s treated as a “disregarded entity” by the IRS and state tax collectors because there is no legally taxable income. Most LLCs are run as pass-through “disregarded entities” because members and owners prefer to pay tax as part of their personal income.
LLCs can also choose to be taxed as corporations. Instead of allowing income to pass through, the LLC files a separate tax return. This creates additional legal and financial separation between the members and owners of the LLC, as well as the LLC itself. While it’s usually best to avoid double taxation, if the corporate tax rate is lower than the personal income tax rate, it’s advantageous to pay some tax at the lower corporate rate and the rest as personal income. There are certain restrictions on how much income can be reported in each category, so it’s usually best to discuss specifics with a licensed Virginia tax professional.
How Do I Pay My LLC Taxes in Virginia?
Since limited liability companies are financially flexible, there are a few different ways they can be set up. Each option has different requirements, advantages, and disadvantages for how the LLC tax should be paid. Here are the four most common arrangements:
Single Member LLC – If you are the only owner of your limited liability company, then you are a single member LLC. You will effectively be treated as a sole proprietorship, and any taxes will be paid as personal income.
Multi-Member LLC – If the limited liability company has more than one member, your LLC will be treated as a partnership by default. In this situation, the LLC will have to fill out Form 1065, U.S. Return of Partnership Income, and file each partner’s share of income and deductions.
S Corporation – S Corporations are pass-through limited liability companies that are not taxed separately. To operate an S corporation, you will need to file Form 2553, Election by a Small Business Corporation, and report the LLC income on your personal tax return.
C Corporation – C corporations are treated as separate tax entities. These limited liability companies are taxed in addition to personal income and require filing Form 8832, Entity Classification Election with the IRS.
Regarding payment procedures, taxes can be paid to the Virginia Department of Taxation by the LLC or any authorized person. There are electronic and paper payment options available, as well as a government website. Most LLCs will hire a tax accountant or attorney who will handle the legal and financial side of tax payment and manage the LLC’s paperwork filings.
Sources and Additional Reading
Fernando, Jason. “What Is an LLC? Limited Liability Company Structure and Benefits Defined.” Investopedia, Investopedia, 30 Sep. 2023, www.investopedia.com/terms/l/llc.asp. Accessed 11 Jan. 2024.
Horwitz, Matt. “How Much Does an LLC Cost in Virginia? (2023 Details) | LLCU.” LLC University®, LLC University, 4 Apr. 2023, www.llcuniversity.com/virginia-llc/costs/. Accessed 12 Jan. 2024.
Horwitz, Matt. “Virginia LLC Taxes (2024 Update).” LLC University®, LLC University, 5 June 2023, www.llcuniversity.com/virginia-llc/taxes/. Accessed 11 Jan. 2024.
Tingen, Jacob. “How to Start a Business in Virginia: A 10-Step Guide | Tingen Law, PLLC.” Tingen Law, Tingen Law, 16 Aug. 2019, tingen.law/2019/start-a-business-in-virginia/37630/. Accessed 12 Jan. 2024.
Tingen, Jacob. “Virginia LLC Tax Filing Requirements: How LLCs Pay Their Taxes | Tingen Law, PLLC.” Tingen Law, Tingen Law, 5 Sept. 2018, tingen.law/2018/virginia-llc-tax-filing-requirements/6252/. Accessed 11 Jan. 2024.
Trading Economics. “United States Federal Corporate Tax Rate.” Tradingeconomics.com, Trading Economics, 13 May 2019, tradingeconomics.com/united-states/corporate-tax-rate. Accessed 12 Jan. 2024.
Virginia Department of Taxation. “Business Tax Payment Options.” Virginia Tax, Virginia Department of Taxation, 2019, www.tax.virginia.gov/business-tax-payment-options. Accessed 11 Jan. 2024.
“Why Virginia | Virginia Economic Development Partnership.” Www.vedp.org, Virginia Economic Development Partnership, 2023, www.vedp.org/why-virginia#:~:text=Ranked%20as%20America. Accessed 12 Jan. 2024.