PASS THROUGH TAXATION



The first option for tax structure of an LLC in Va is pass through taxation. Under this option, the Virginia limited liability company itself does not owe any taxes. The profit of the business is calculated and then the members of the LLC pay the taxes on such profits. It is personal income to them and taxed at their individual tax rates.

The actual mechanism and procedure for paying taxes varies based on whether the LLC in Va has one member or more than one member. If there is only one owner, the IRS disregards the Virginia limited liability company as its own person and the single member pays for the taxes on the business income.

For an LLC that has more than one owner, the partnership tax section of the Internal Revenue Code governs the taxation. This section still provides for a single layer of taxation with the same end result where the members pay the tax on their own returns.

However, there are additional reporting requirements as compared to a single member LLC. The Virginia limited liability company must prepare an information return known as a Form 1065 and file it with the Internal Revenue Service. Each member receives a K-1 tax form from the business which sets forth the specific share of business profits and losses that he/she is entitled to.

CORPORATION TAXATION OPTIONS

An LLC in Va can also elect to be taxed as either a C corporation or an S corporation. There are certain forms and certain deadlines to meet. Generally, in order to make the election, the required election forms must be prepared and formed within 75 days of formation of the Virginia limited liability company.

The C corporation tax structure subjects the business to double taxation. The IRS taxes the LLC itself on any income the business makes and then if the profits are distributed to the members, the members will be subject to a second tax on the same income.

However, it is possible that an LLC in Va might find it better to be taxed under the C corporation structure.

If the business is going to have profits immediately, the applicable C corporation tax rate may be lower than the rate you would pay on your personal return and so you could end up paying less tax. If your business is going to have a stock option plan or will be providing significant employee benefits to employees, there may be additional tax deductions you can get under the C corporation rules.

An LLC in Va can also elect an S corporation taxation structure if the Virginia limited liability company and its owners meet all the conditions required to qualify.

S corporation taxation offers a single layer of taxation similar to partnership/pass through taxation.

It became popular for corporate entities because they do not have the option of regular pass through taxation.

Many owners of an LLC in Va do not choose S corporation taxation because of the onerous requirements and the fear that if one requirement is not met, even inadvertently as the business evolves, the business could be found liable for significant taxation and penalties.

There is one benefit of S corporation taxation over the default pass through taxation for a Virginia limited liability company. This benefit relates to self employment taxes. There is more opportunity in an S corporation tax structure to reduce overall self employment taxes owed by the business owners. Your accountant can advise you on the details and determine if there might be an advantage for your business.

SUMMARY

In 1997, the IRS made tax choice decisions easy for an LLC in Va. The owners can decide from one of three choices. This is one of many reasons why the Virginia limited liability company is now the most common legal entity formed for businesses in Virginia.