Taxation of an LLC in Va is a common question for those starting an Virginia limited liability company. The good news is that if you know the rules and meet certain timing requirements, you can choose how your Virginia LLC will be taxed for income tax purpose.
TAX CHOICE #1: PASS THROUGH TAXATION
The first tax choice for an LLC in Va is to be taxed as a pass through entity. This means that the legal entity itself does not pay any income tax on its profits and gains. Instead the profits are passed through to the owners of the Virginia limited liability company and paid by the owners on their individual tax returns.
The process depends on whether the business is owned by a single member or by more than one member. With a single member LLC, the legal entity is disregarded for all tax purposes and the single owner reports the income on its return as if the business were a sole proprietorship. This is for taxes only. A single member LLC in Va still gets all the benefit of a limited liability company for all other purposes such as gaining limited liability protection.
For a multi-member business, the partnership tax rules of the Internal Revenue Code apply. Same end result where the owners pay the tax but there are some additional steps. The business must prepare an information return to file with the IRS and then send each member a tax form which is known as a K-1 which evidences his/her share of business profits and losses.
If you want this tax structure, this is the default tax structure which means there are no elections you or your LLC in Va need to make.
TAX CHOICE #2: C CORPORATION TAXATION
The second tax choice is to be taxed a C corporation under the Internal Revenue Code. C corporation taxation means double taxation which is why most small businesses who are limited liability companies do not opt for this choice. Double taxation means the entity itself pays a tax on its profits and then if the profits are distributed to its owners, the owners pay another tax on the same profits.
Nonetheless, an LLC in Va might find it advantageous to elect C corporation taxation. The C corporation tax rates may be lower than the personal rates of the owners. Also C corporation taxation can give a business some extra tax breaks when it comes to certain employee benefits.
It is always recommended you seek the advice of your business accountant if you are contemplating C corporation taxation.
TAX CHOICE #3: S CORPORATION TAXATION
The IRS even allows for an LLC in Va to be taxed as an S corporation if the business meets all the requirements to qualify for S corporation tax treatment.
S corporation taxation is very similar to pass through taxation (Choice #1) in that it is a single layer of taxation . There are different forms to file with the IRS. However, S corporation can be much more complicated because there is a laundry list of rules and restrictions the Virginia limited liability company must meet and maintain throughout its existence.
Many opt against this because if for some reason, they inadvertently fail to meet a requirement, they could lose the tax status and potentially significant liabilities can be created.
However, there is one possible advantage of S corporation taxation over pass through partnership or disregarded entity taxation and that is that an LLC in Va that has S corporation tax treatment may be able to pay less in self employment taxes. Talk to you accountant if this is something of interest as the rules can get complex.
An LLC in Va has the most tax choices over any other legal entity or business structure. While this was not always the case, the IRS provided for this in 1997. Since 1997, the Virginia limited liability company has become the most popular choice for small business owners.