Income Taxes on Business Income in Virginia

April 13, 2006

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In Virginia, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Corporations. Domestic corporations (corporations organized in Virginia) and foreign corporations (corporations organized in a state other than Virginia) are subject to a Virginia income tax. The corporate income tax rate is 6 percent of Virginia taxable income on the state level. In addition, qualified areas in Virginia are authorized to levy a local income tax, so be sure to check with your local government.

S corporations. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

In Virginia, the law extends this favorable tax treatment to state corporate income tax liability and S corporations will not be subject to the corporate income tax.

Partnerships. If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Virginia taxable adjusted gross income their distributive share of partnership income.

Limited liability companies (LLCs). Virginia law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Virginia are classified as partnerships for Virginia tax purposes. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Virginia taxable adjusted gross income their distributive share of LLC income.

If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Virginia tax purposes.