Are you thinking about opening a business? Perhaps you have an avocation that you want to turn into a profitable enterprise, you are a self-employed service provider, or you contract with the government. If you have no other employees, you can run your business as a “sole proprietor” without any formal business form, with all income tax reporting handled on your annual personal income tax return, using Schedules Cand SE.
If you have, or plan to have, employees, or if the nature of your business causes concern that you might be personally liable for acts performed in the business, consider creating a formal business entity. Two choices frequently adopted by start-up small business are a Limited Liability Company (LLC) or a Small Corporation (S-Corp)
Once you establish an LLC or a corporation, you have separated your personal assets from the assets of the business. If your business is sued or if it is unable to meet its bills, normally only the business assets can be taken for debts or in a court judgment. Your personal assets such as your home and savings will not be available to business creditors.
There are several tax benefits available to formal business entities that are not available if you are classified as a sole proprietor. Some business expenses can be deducted more rapidly by a business than by an individual. You can be an employee of your S-Corp, and only the amount you receive as salary is subject to social security and Medicare payroll taxes; other distributions are still subject to income tax.
Because formal business entities are separate from individual, they can be left to your beneficiaries when you die. Some multi-generational families own a family compound or vacation home in a Family LLC. Shares are issued to family members and formal rules exist in the by-laws covering how each member contributes to the upkeep, and how the property is to be used. Each individual member can leave shares to descendants, preserving the management and ownership structure.
To establish an S-Corp or an LLC in Virginia, you’ll need to identify a unique name for your business, one that is not already in use and one that is not took close to a name already in use. The State Corporation Commission (SCC) maintains an online database that you can check for existing business names. The SCC also has the necessary forms available online to prepare the Articles of Incorporation (S-Corp)or Operating Agreement (LLC). Within these documents you must identify your Virginia resident agent, the person designated on public records as the contact point for the business. You should file the correct documents with the correct filing fee, and if all is in order, you will receive a Certificate of Incorporation (S-Corp) or Certificate of Organization (LLC). You can apply online for an Employer Identification Number(EIN) with IRS. If you have decided to establish an S-Corp, it is necessary to make the S-Corp electionwith IRS within a few weeks of establishing the business. A single member LLC will be treated like a sole proprietor, accounting for business income and expenses through the annual personal income tax return.
This will get you started; you also need to consider by-laws, an organizing meeting followed by annual meetings, issuing shares, annual payment of fees, local business licenses and tax and other record keeping matters.