The corporate structure is more complex than other business structures. It requires complying with more Virginia statutory regulations and tax requirements. It may require more accounting and tax preparation services than the sole proprietorship or the partnership.
A corporation is formed in Virginia by filing Articles of Incorporation with the Virginia State Corporation Commission. The Code of Virginia requires the Articles of Incorporation for a Virginia corporation to have certain information set forth in the Articles. Attention to detail here is important in order to avoid unnecessarily high filing fees AND recurring annual fees. If the Articles of Incorporation meet all necessary requirements, then a Certificate of Incorporation will be issued as of a specific date and that date is when the corporation becomes a legal entity.
The Virginia State Corporation Commission does allow for the formation of a Virginia corporation online.
There is a sample Virginia Articles of Incorporation form available on the Virginia State Corporation Commission website, but we caution that the form is not sufficient for business clients who have more than one owner
Taxation of Corporation
The corporation becomes an entity that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. If you organize your business as a corporation, you are not personally liable for the debts of the corporation. When you form a corporation, you create a separate tax-paying entity. Unlike sole proprietors and partnerships, income earned by a corporation is taxed at the corporate level using corporate tax rates.
For tax purposes, corporations are divided into two categories. Regular corporations are called C corporations. A C corporation files Form 1120 or 1120-A, U.S. Corporation Income Tax Return. If a shareholder is an employee, he pays income tax on his wages, and the corporation and the employee each pay one half of the social security and Medicare taxes and the corporation can deduct its half. A corporate shareholder pays only income tax for any dividends received.
A Subchapter S corporation is formed in the exact same way as a regular corporation and has the same corporate structure as a regular corporation. There is a limit on the number shareholders and on the type of shareholders that an S Corporation may have. Also, while S corporations file a corporate income tax return called IRS Form 1120S, the entity generally does not pay taxes at the entity level other than certain capital gains and passive income. Instead, similar to a partnership, the profit and loss of the S Corporation is passed on to the shareholders. It is important to remember that the net income of an S corporation is taxable to its shareholders regardless of whether the profits have been distributed to the shareholder.
In order to become an S Corporation, the corporation must file an election on Form 2553, Election by a Small Business Corporation, in which all the shareholder agree to make the S Corporation election.