A Virginia limited liability company (LLC) is a single- or multi-member business entity that provides the legal benefits of both a corporation and a sole proprietorship to its members.
Some of these benefits include limited liability regarding business debts and various controlled management options that help make LLCs easier to run than conventional business structures.
Additionally, LLCs can act as tax chameleons by changing their structure and shape to mitigate the tax burden placed on their members by the IRS and state tax agencies.
Because the IRS does not recognize LLCs as taxable entities, LLC owners must instead elect to be taxed under one of the other business taxation frameworks (for example, as a pass-through entity or a corporation).
In this article, we’ll cover several of the basic LLC tax filing requirements you should know about, as well as the various ways you can leverage your LLC’s status to lower your overall tax obligation.
Note, however, that this article only covers basic legal information, and should not be confused with legal or financial advice.
Always speak with an experienced professional if you have any questions about your specific tax obligations.
Virginia LLC Tax Filing Requirements: The Basics
As a combined legal entity resembling both a corporation and a sole proprietorship, LLCs can choose to file their taxes in a variety of different ways depending on what elections are made and how many members the LLC has.
The biggest tax advantage that comes with registering an LLC is that, from a federal standpoint, LLCs are consider to be “disregarded entities” that file “pass-through” taxes throughout the year.
Depending on the elections (“choices”) made by the LLC and the number of members involved, the IRS will treat an LLC as either (1) a corporation, (2) a partnership, or (3) a part of the LLC’s owner’s tax return (a disregarded entity).
Put simply, the owner(s) of the LLC can choose to report their income to the IRS in one of two ways:
- Pass-Through Taxation — As a disregarded entity, the default state of most LLCs is to pass the tax burden for any reported income through the entity and onto the members. This means that while the LLC must still file a tax return, it doesn’t pay any taxes on income. Instead, the responsibility of paying taxes on any income falls to the members who own the company.
- Corporate Taxation — Alternatively, LLC members can opt to file taxes as if they were a corporation. Rather than following pass-through taxation, the members can elect that a separate tax return be filed on behalf of the business entity, creating additional financial distance between the business and the owners.
The main advantage of electing to be taxed as a corporation is that the owner doesn’t have to account for all of the business income on their personal tax return, and can instead retain their earnings in their business at a lower corporate tax rate than if they pass all the income through as their own income.
They also don’t have to pay self-employment tax on income gained as the owner of a corporation.
The primary disadvantage of being taxed as a corporation is that you will effectively be taxed twice: first for the LLC/corporation’s net earnings and second for any dividends you receive as an owner.
For this reason, most business owners choose to elect to file as pass-through entities, either in the default sense (as a disregarded entity) or as an S corporation (to avoid self-employment taxes).
Some businesses with multiple members even elect to create separate LLCs owned by the individual members which are taxed as S corporations that then own the respective share of the larger pass-through LLC as a way of limiting tax obligations and avoiding double taxation, thus receiving the best of both worlds.
As you can see, though, how you elect to have your business taxed is a complicated and incredibly case-specific topic, so it’s highly suggested that you speak with both an accountant and an attorney as soon as possible to help solidify your expectations and responsibilities regarding your business’s taxes.
IRS Default Designations for LLCs
To expand on the previous section a little, here is a basic rundown of the default designations the IRS chooses to run with for each of the different taxation structures:
- File as a Single-Member LLC — If you are the singular owner of an LLC, the IRS will treat your tax status as a disregarded entity unless you elect otherwise. In this way, your tax status will resemble a sole proprietorship’s, and any profits and losses are counted towards the owner’s income tax return.
- File as a Multi-Member LLC — If the LLC has more than one member, the IRS will default your tax status to that of a partnership. In this scenario, the partnership will have to fill out Form 1065, U.S. Return of Partnership Income and account for each partner’s share of income, deductions, and credits.
- File as a C Corporation — If you would like the IRS to tax your LLC as a C corporation, you can fill out and submit Form 8832, Entity Classification Election with the IRS to make this election. You will then have to file a separate income tax return for your corporation in addition to the one you file individually.
- File as an S Corporation — If you would like the IRS to tax your LLC as an S corporation, you’ll need to fill out Form 2553, Election by a Small Business Corporation. Since S corporations are pass-through tax entities, you will then have to submit additional paperwork to account for any income and expenses on your personal tax return.
Other Tax Considerations for Your LLC
Self-Employment Tax Basics
The members of an LLC are not consider to be employees, and thus no contributions to Social Security and Medicare are withheld from their paychecks.
As a result, most LLC owners are required to pay self-employment taxes to account for these contributions directly to the IRS.
The rules surrounding self-employment taxes are a bit complex, particularly when combined with the different ways you can elect to have your LLC taxed, so it’s wise to speak with an accountant before you make any choices to review how your structure will affect your personal tax obligation.
Generally speaking, however, LLC members are subject to self-employment taxes on their annual tax returns and must pay twice as much employment tax as regular employees, as most employee employment taxes are matched 1:1 by employers.
For example, most LLC members are subject to a 15.3% self-employment tax on income up to an annual threshold, and then 2.9% for income above this threshold amount.
This threshold usually hovers around the low six-figures, with the 2021 threshold being $142,800.
Property Tax Basics
Any LLC that owns property or real estate must pay property taxes on these assets. In general, this means paying taxes on any real property, tangible personal property, and intangible personal property owned by the business:
- Real property covers any land and buildings owned by the business.
- Tangible property includes any physical objects of considerable worth, such as cars, office equipment, and machinery.
- Intangible property covers property that is not material in nature but still holds considerable value, such as if a business purchases an expensive brand to use as a part of its business.
Note that these taxes are often levied at the state level, meaning that the individual state you operate in will have laws relating to whether or not you have to pay taxes on tangible and intangible property related to your business.
Real property is taxed in all 50 states.
Employment Taxation Basics
As an employer, you are subject to filing for state and IRS taxes for your employees. Specifically, this means withholding and paying employee income taxes to the relevant state and government agencies.
Note that this also includes paying your state’s unemployment insurance taxes, among other tax obligations.
Sales Taxation Basics
Establishing a business that sells goods to customers requires the collection and payment of sales taxes. To do this, you must register with the Department of Taxation (DOT) and make periodic sales tax payments throughout the fiscal year.
You are required to submit periodic sales tax returns to the DOT as documentation of these sales tax collections.
Keep in mind that each state regulates the sales tax on goods.
This means that if you are an LLC selling goods in other states, your sales tax will change to reflect the sales taxes of each state.
Additionally, you are responsible for filing all proper sales taxes with each state in which you conduct business and sales.
Consult with a qualified attorney before conducting sales in other states.
If the state requires you to be registered in order to legally conduct sales, you should fulfill those requirements before your business commences.
Virginia LLCs must navigate a complex system of laws and regulations in order to pay their taxes at the federal, state, and local levels.
In order to maintain the limited liability of your business, you must ensure that you meet all relevant legal requirements.
To summarize, LLCs are not recognized by the IRS as taxable entities, and are instead taxed as sole proprietorships or partnerships (both of which are pass-through tax entities) unless the LLC’s members elect to be taxed in a different way.
The pros and cons of being taxed as a pass-through entity or corporation will change depending on your specific situation, so it’s wise to speak with both an attorney and an accountant to find the best way to lower your overall tax burden.
In general, however, the decision ultimately comes down to how the LLC’s members wish to report their income to the IRS, as this decision will have a large effect on their individual tax obligations.
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