You may have heard the slogan “Virginia is for lovers.” But Virginia is also for businesses.
Virginia, in fact, is an exceptional place to run a business. In its annual reports on America’s top states for business, CNBC ranked Virginia the #1 state five times, an honor that no other state has achieved.
If you’d like to start a business in Virginia, or if you have a sole proprietorship that you want to make an official Virginia legal entity (such as an LLC, corporation, or partnership), here are some things that you’ll need to know:
Deciding on a Business Entity
One of the first steps you’ll need to take is to decide on what kind of business structure you’d like your business to have. This is an important decision that will affect how your business will be taxed and what legal protections you’ll have from personal liability.
The most common types of business entities for small businesses in Virginia are sole proprietorship, partnership, limited liability company (LLC), and corporation.
A sole proprietorship is the simplest type of business entity, but it doesn’t provide personal protection from claims against your business, it’s not a separate entity for taxation, and it doesn’t provide the credibility for your business that you may get with another type of legal structure.
Establishing a general partnership is somewhat similar to a sole proprietorship, except that it has more than one owner. Like a sole proprietorship, it’s easy to set up, but doesn’t provide personal liability protection and doesn’t have the tax advantages you may get with a corporation. Also, as the number of partners increases, decision-making by consensus can become difficult.
A limited liability company (LLC) generally provides protection against personal liability. It gives your business more credibility than a sole proprietorship, which may make it easier to get bank loans and conduct business with vendors and other companies. Opting to register an LLC in Virginia is simpler to set up than a corporation and has a much more flexible structure (in terms of formation and management).
A corporation is the most complex business entity, but it may be your best choice if you want to attract investors. A corporation is the only type of business entity that can sell ownership shares by offering stock.
Each type of business entity has its own set of advantages and disadvantages. It’s a good idea to talk to a lawyer or accountant for advice on which structure would be best for the business activities that you are planning to conduct.
Obtaining Business Licenses and Permits
Virginia doesn’t require that your business obtain a statewide general business license. But you may need local business licenses or specialized state licenses and permits, depending on what type of business you own, what activities your business engages in, and whether it has employees.
State licenses or permits may be required for:
- Business activities that may affect people’s health and safety or have an impact on the environment.
- Businesses engaged in building and construction.
- People in professions or occupations that require licenses. See Virginia’s Department of Professional and Occupational Regulation site for a list of these professions and occupations and links to information on how to obtain the required licenses.
Statewide business licenses and permits are issued by different state agencies. You can find a list of agencies on the official Virginia website.
To find out if you need any local licenses or permits, contact the licensing department in the city or town where you will be operating your business.
Get an EIN
You must have an Employer Identification Number (usually called “EIN”) from the IRS if your business will have employees or if the business will be taxed separately from you. You can apply for an EIN online, and there is no fee.
If you have a sole proprietorship or a single-member LLC with no employees, you can use your Social Security Number when you file your taxes instead of an EIN.
Even if you’re not required to use an EIN, it can be a good idea to obtain one. You may need to provide an EIN to open a bank account in the name of your business or to apply for a bank loan. Other companies that you do business with may require an EIN to process payments.
File and Report Taxes
How you report and file your business’ taxes will depend on what business entity you have chosen for your company.
Owners of sole proprietorships, partnerships, and LLCs (unless the LLC is set up as a C corporation) report their business’ income and losses on their personal tax returns. This is known as “pass through taxation.”
Corporations, on the other hand, are separate tax entities and must file separate corporate tax returns.
A tax professional can advise you on what you need to do to pay taxes and can also provide advice on how to set up your accounting systems to get your business off to a great start.
You’ll have to register with the Virginia Department of Taxation (DOT) if:
- You plan to sell goods in Virginia and/or
- You plan to hire employees.
If you sell goods, you’ll need to pay sales tax, and if you hire employees, you’ll have to pay employer withholding taxes. You can register for either or both of these taxes online or by filling out Form R-1.
Get Insurance
Insurance can protect you from unexpected disasters that might otherwise wipe your business out financially. What types of insurance you need and how much will depend on what type of business you own, whether you have employees, and other factors.
The types of insurance that businesses in Virginia may need include:
- Commercial property insurance
- General liability insurance
- Insurance usually required if you have employees: unemployment insurance, disability insurance, and workers’ compensation insurance
- Professional liability insurance
- Motor vehicle insurance
An insurance agent can be a big help in sorting out your insurance requirements and options.
Open a Business Bank Account and Establish Credit
Setting up a bank account for your business that is separate from your personal bank account has several advantages:
- A separate bank account makes it easier to keep track of your business’ income and expenses.
- It makes filing taxes easier.
- If you have an LLC, having a separate bank account helps demonstrate that your business is separate from your personal finances, and that you should therefore be protected from your LLC’s liabilities.
- It may be easier to obtain a business loan if your business has its own bank account.
- In some cases, a separate business bank account may be legally required.
Having good credit is important for the smooth operation of your business. You can establish your business’ credit by:
- Getting a business credit card.
- Paying all your business bills on time.
Conclusion
Starting a new small business or establishing a legal entity for your sole proprietorship is a big – and exciting – step. Doing so in Virginia, with its exceptional business climate, will help ensure that your business gets off to a fantastic start.
It may seem like there’s a lot you have to do to get your business off the ground. But take the steps one at a time, and before you know it, you’ll be the proud owner of a Virginia business, with all the advantages that your business’ new legal status will bring.
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Joe Lyons
