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STARTING AND OPERATING A BUSINESS IN VIRGINIA Copyright © 2004, Michael D. Jenkins
CONTENTS OF THIS SECTION:
I. INTRODUCTION I. INTRODUCTION Virginia has a fairly typical tax and legal structure under which businesses must operate. Like most states, Virginia imposes an income tax on both individuals and on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Virginia in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. At present, the state's economy is very robust, in terms of the level of unemployment and other economic measures. For example, in September, 2004, the state's unemployment rate was only 3.2%, down significantly from 4.1% a year earlier. This compares favorably to a national unemployment rate of 5.4% for the same month. The average per capita income of Virginia residents is higher than the national average, and Virginia is also the northern-most state in the union that has a right-to-work law. To view the latest federal Bureau of Labor Statistics unemployment rate data for Virginia or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Virginia can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Virginia also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in Virginia can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. No separate tax form filing is required, generally, for a sole proprietorship, under the Virginia income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Virginia income tax and filing requirements for individuals. (c) Partnerships. As a rule, general partnerships in Virginia can be formed with no formalities, although it is highly advisable to have a written partnership agreement. Until recently, Virginia law required that every partnership, including a general partnership, register its partnership agreement with the clerk of the circuit court in which it did business. However, the Virginia partnership laws were replaced by a whole new set of partnership laws that went into effect on July 1, 1997, and there is no longer a mandatory filing requirement for general partnerships. The new law instead permits voluntary filing of a statement of partnership, which must be accompanied by a $25 filing fee. As discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Virginia law. Unlike a general partnership, a limited partnership must always have a written partnership agreement, and must file Form LPA-73.11, Certificate of Limited Partnership, with the State Corporation Commission, together with a filing fee of $100. Foreign limited partnerships must also register, on Form LPP-73.54, before being allowed to do business in Virginia, and must pay a registration fee of $100 as well. Subsequently, both domestic and foreign limited partnerships are also required to file an annual registration with the State Corporation Commission and pay an annual fee of $50. For information on limited partnership filing requirements, see the contact information for the offices of the State Corporation Commission, listed in Section VI(a). Limited liability partnerships (LLPs) are a new form of partnership permitted under the laws of Virginia. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Virginia state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. To form an LLP in Virginia, you must register your Virginia partnership and pay a filing fee of $100 to the State Corporation Commission, which is good for one year. Foreign LLPs, those created under the laws of another state, must register with the State Corporation Commission and pay a fee of $100. Every LLP doing business in Virginia, including both domestic and foreign LLPs, must renew its registration annually by filing an annual report and paying an annual fee of $50. In addition to registering and paying filing fees, every LLP in Virginia was previously required to carry $500,000 of liability insurance to cover malpractice, negligence, wrongful acts, and misconduct for which liability is limited under the LLP act. This financial responsibility requirement could also be satisfied by setting aside $500,000 in a segregated fund designated as being for judgments rendered against the partnership, either in cash or U.S. Treasury obligations, or a letter of credit or insurance company bond. Note, however, that the financial responsibility requirement was repealed for new LLPs that registered on or after July 1, 1997, and was repealed for all LLPs as of January 1, 2000. For more information on LLP registration, see the contact information for the offices of the State Corporation Commission, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Virginia, is that some states, like California and New York, only recognize certain types of professional partnerships as LLPs. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
Partnerships, as entities, are not subject to state income tax in Virginia. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are not generally required to file an annual tax information return with the state, but starting in 2004, all pass-through entities (partnerships, LLCs, and S corporations) are required to file information returns, reporting their income and a list of their owners. For details on Virginia partnership tax requirements, see Section IV(c). (d) Corporations. To form a corporation in Virginia, you must file articles of incorporation with the State Corporation Commission and pay a fee of $25 plus an added fee of $50 for each 25,000 shares of authorized stock (or fraction thereof, or a total fee of $2,525 if the total authorized shares are over one million. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Virginia, by filing an application for a certificate of authority and paying the same filing fees as a domestic corporation. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Virginia, see the contact information for the offices of the State Corporation Commission, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports each year, and a filing fee of $50 for the first 5,000 authorized shares, and an additional fee of $15 for each additional 5,000 shares, up to a maximum annual fee of $850. The fee is assessed by the State Corporation Commission each year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in Virginia must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income taxes in Virginia, see the contact information for the offices of the Virginia Department of Taxation, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Virginia recognizes S corporations for income tax purposes, where a federal S corporation election has been made, and treats them in a manner similar to the federal tax treatment. Nonresident shareholders of an S corporation operating in Virginia must pay state income tax on their share of the income that is from Virginia sources. S corporations in Virginia are required to file annual S corporation tax returns, on Virginia Form 500S. As in the case of other pass-through entities, an S corporation may apply to the Department of Taxation for permission to file a composite tax return on behalf of its nonresident shareholders, and to pay the taxes on their Virginia-source income of the S corporation on behalf of such shareholders. (f) Limited Liability Companies. Virginia, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Virginia may also choose to operate in the form of an LLC. In most states, LLCs are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the pass-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLCs under Virginia tax laws. To form an LLC under the laws of Virginia, one or more persons (who need not be members of the LLC) must file articles of organization with the Corporation Commission, which must be accompanied by filing fees of $100. Virginia state law allows formation of one-owner LLCs, which now qualify for treatment as sole proprietorships for federal tax purposes. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Virginia, by filing an application for a certificate of authority with the State Corporation Commission and paying a filing fee of $100. In addition to initial filing fees, all LLCs formed in or doing business in Virginia must pay annual registration fees of $50 to the Corporation Commission by September 1 of each year after the year organized or first registered in Virginia. Virginia, unlike some states, permits professional LLCs. For more information on filing articles of organization for an LLC, see the contact information for the offices of the State Corporation Commission, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues and other matters that you, or, for some items, your business attorney or CPA, should attend to before closing the purchase, to help prevent later, unpleasant surprises. These include matters such as:
Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Virginia has a bulk sale law, and you will need to comply with this law when you purchase assets of an existing business. Failure to do so will expose you to liability to any creditors of the seller who do not get paid off when the sale of the business occurs. Virginia's bulk sale law closely follows the bulk transfer provisions of the Uniform Commercial Code. The basic requirements, when purchasing the assets of business in a bulk sale, are as follows:
A buyer may be excused from the notice requirement and certain other of the above requirements if the number of claimants against the seller is 200 or more (excluding certain claims, such as wage claims and those of secured creditors), and if the buyer instead files a written notice of the bulk sale in the office of the clerk of the circuit court of the city or county where the seller's business is located. The Virginia bulk sales law has a number of exemptions, so that many transactions will not be subject to its highly technical requirements. For example, the bulk sale law does not apply to:
Compliance with the bulk sales law should be handled by a competent business attorney, as its requirements are quite specific and very technical in nature. Handling the legal aspects of a business purchase is one area where we do not recommend a do-it-yourself approach. Representing yourself in a business acquisition is, in our view, the legal equivalent of do-it-yourself brain surgery. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Virginia, you should obtain tax releases for unemployment and sales and use taxes from the state. If you wish to avoid liability for unpaid unemployment taxes of the seller, you should require that the seller obtain a release from the Unemployment Insurance Services Division of the Virginia Employment Commission, which will either advise you that all such taxes of the seller are current, or, if not current, of the amount of such tax you must withhold from the purchase price paid to the seller. Similarly, the seller can request a statement showing the amount, if any, of unpaid sales and use taxes owed to the Virginia Department of Taxation. You may also want to seek a ruling from the Department of Taxation as to whether the state sales tax will apply to the sales transaction itself, in which case, if the tax does apply, you will need to make provision that such tax is also paid to the state. In most cases, the sale of a business is exempt from sales tax as an "occasional sale," but this is a very technical issue in which the answer is not always clear. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating. In Virginia, you will generally succeed to the seller's experience rating if yours is a new business with no such experience rating of its own. If you already have employees when you acquire another business, your rating will remain the same initially, in general. Thus, unlike most other states, Virginia does not give the new business buyer a choice of succeeding to the seller's unemployment tax rate or electing to be taxed at the "new employer" rate. IV. VIRGINIA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Virginia has a fairly
typical tax structure for businesses, but its taxes are
relatively low, with an income tax rate of 6% on corporations
and a maximum income tax rate of only 5.75% on individuals.
The sales tax is also relatively low, at 5% (4% state, and 1%
uniform local taxes).
In addition, Virginia's sales tax law offers very broad
exemptions for purchases made by manufacturers, not only
for production equipment, but also for production supplies
and most kinds of related administrative and distribution
costs related to the manufactured products.
Employers also find Virginia an excellent place to locate,
as the state has a right-to-work law, as is discussed in
Section V(f). (b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or county and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. In Virginia, contact your local city or county Commissioner of the Revenue to find out what local licenses are required for your business. State governments have also traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Virginia has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. If you are starting a business in Virginia, you must register it with the Virginia Department of Taxation prior to commencing operations. Form R-1, Business Registration Application Form, should be filed with the Department of Taxation. The R-1 form allows you to register for one or all of the following taxes: Sales and Use, Employer Withholding, Corporate Income, Litter, Consumer Use, and Tire, and various other special taxes. No application fee is required. When you have registered with the Department of Taxation, you will be assigned a Virginia tax identification number. You should include your Virginia account number on your state tax returns, checks, and other information that you send to the department. For information on state licensing and business registration requirements in Virginia, see the contact information for the offices of the Virginia Department of Professional and Occupational Regulation and for the Virginia Department of Taxation, both of which are listed in Section VI(a). (c) Income and Franchise Taxes. Virginia has both an individual income tax and a corporate income tax, but does not impose a franchise tax on corporations, except on banks. The Virginia individual income tax is imposed at a maximum tax rate of 5.75%, on income over $17,000. Individual taxpayers generally pay state income tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership, S corporation, or LLC. The Virginia personal income tax return is Form 760, which must be filed with the Virginia Department of Taxation, by May 1st in the case of calendar year taxpayers. Partnerships, or entities taxable as partnerships, such as LLCs, are not subject to state income taxation in Virginia. Also, partnerships are not required to file partnership tax returns by the state of Virginia, generally. However, the Department of Taxation has the power to promulgate regulations to require filing of a copy of the federal partnership tax return, or to provide other information upon request, and beginning in 2004, may require all but the smallest pass-through entities (partnerships, S corporations and LLCs that are taxed as partnerships) to file "pass-through" returns, reporting the amount and character of their income, and a list of owners. Such returns are due by the 15th day of the fourth month after the end of the taxable year. A pass-through entity with nonresident owners may now request permission from the Department of Taxation to file a composite tax return on behalf of the nonresidents, and to pay the Virginia income taxes owed by such nonresidents on their behalf. Individual taxpayers doing business as sole proprietors, or who are partners in partnerships, or members of LLCs, are required to make payments of estimated Virginia individual income taxes, on Form 760-ES, if their net tax liability (not covered by withholding) exceeds $150, and if their Virginia adjusted gross income exceeds $5,000 ($8,000 for married couples filing jointly). Estimated tax payments are due in four installments, on the first day of May, and the 15th day of June, September, and January of the year following. To avoid penalties for underpayment of estimated tax, you must either pay in 90% of the current year's tax, or 100% of the previous year's tax, or qualify under certain other penalty exceptions. Corporations that do business in Virginia are subject to the state corporate income tax. The Virginia corporate income tax rate, on corporations other than S corporations, is a flat 6%. The state corporation income tax return is Form 500, which must be filed with the Department of Taxation by the 15th day of the fourth month following the end of the taxable year, or by April 15th in the case of a corporation whose taxable year is the calendar year. Corporations are required to make estimated tax payments of their state corporate income tax in advance, if their tax liability for the year can reasonably be expected to exceed $1,000. Estimated tax payments are due in advance, in four equal installments, on the 15th day of the 4th, 6th, 9th, and 12th months of the taxable year. The total estimated tax that must be paid in is usually equal to 90% of the actual tax liability for the year. However, if the preceding year was a full year of 12 months, the current year payments need only be equal to 100% of the prior year's tax liability, if less. Several other exceptions to the underpayment penalty are available. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis, unless the corporation can qualify under one of the exceptions to the underpayment penalties. Taxation of S corporations by Virginia closely follows the federal treatment. That is, income of an S corporation is generally not taxable at the corporate level, but its income, losses or credits are instead reported by the S corporation shareholders. S corporations are required to file annual information returns with the Department of Taxation on Form 500S. In Virginia, a limited liability company (LLC), is taxed in the same manner as a partnership, thus avoiding the possible double taxation of income that can occur with a corporation. Note that under IRS regulations, effective since 1997, an LLC is now able to elect to be treated as a partnership if it has more than one owner, or as a sole proprietorship if it does not, for federal tax purposes. Virginia law has been amended and now recognizes the validity of a one-owner LLC. Note that it is not always entirely clear whether an LLC is a "single-member LLC" LLC or not, where the "single owner" is a married couple who hold the entire ownership of the LLC in some form of co-tenancy, such as joint tenants with right of survivorship, tenants by the entirety, or as tenants in common. The federal Internal Revenue Service (IRS) has taken a very lenient position in Rev. Proc. 2002-69, where a couple hold the LLC interest as community property, ruling that the IRS will accept whatever choice the couple make, either to disregard the LLC as an entity (treating it as a "single-member LLC") or to treat it as a partnership between the husband and wife. However, Virginia is not a community property state, so where the LLC is owned by a husband and wife in some form of co-tenancy, it is unclear whether the IRS treatment would be as lenient as for community property owners, since the IRS has not issued any published rulings on whether an LLC can be a disregarded entity if held in one of the various forms of co-tenancy by a married couple, rather than being held as community property. Thus, it is also unclear, where an LLC is owned by a husband and wife as co-tenants, whether Virginia would treat the LLC as a single-member LLC or as a partnership. For a discussion of Virginia tax requirements for an LLC that is taxable as a partnership, see the discussion herein of partnership taxation by Virginia; or, for an LLC that elects to be taxable as a corporation, see the discussion of corporate taxation by Virginia. (d) Sales and Use Tax. Virginia imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 4%, on and after September 1, 2004. This is 1/2% higher than the state sales and use tax rate that was in effect prior to September 1, 2004. In addition, local governments are allowed to adopt local sales taxes, at the rate of 1%, which all cities and counties have done. Thus, the combined sales tax rate is 5% in all parts of the state. A reduced (combined) tax rate of 4% applies to food purchased for home consumption, and this rate will decrease to 3.5% on July 1, 2005, 3.0% on July 1, 2006, and to 2.5% (1.5% state rate plus 1% local) on July 1, 2007. Sellers are required to obtain a seller's permit and to collect and pay over the state and local sales and use taxes to the Virginia Department of Taxation on Form ST-9. You can register for sales tax and other state taxes on Form R-1, Business Registration Application. Once you have registered for sales tax, you will be sent your sales tax Certificate of Registration, Form ST-4, which you must display at your place of business. Vendors are allowed to keep a percentage of any sales tax collected, which varies with the volume of tax collected each month. The larger the amount of tax collected, the smaller the percentage or "discount" that may be retained by the vendor. For small businesses, the discount can be as much as 3% of the tax that is collected, or 3.2% in the case of vending machine sales tax collections. For larger businesses, the discount is either 2.25% (2.4% for vending machines) or, for the largest businesses, 1.5% (1.6% for vending machine sales tax collections). Effective July 1, 2004, computer software, data, content, and other information services delivered electronically via the Internet are exempted from Virginia sales and use taxes. This exemption does not apply to software or other electronic data that is transferred by shipment of a tangible product, such as a CD-ROM or floppy disk. There are numerous other exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within Virginia. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. For more information on Virginia sales and use tax registration and compliance, see contact information for the offices of the Virginia Department of Taxation listed in Section VI(a). (e) Real and Personal Property Taxes. In Virginia, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. Virginia also imposes personal property taxes on tangible personal property. However, certain business personal property, such as business inventories, are treated as "intangible" property at the State level, and thus exempt from personal property taxation by the state in Virginia, but not from local Merchant's Capital property taxes, which are imposed in 47 of the counties in the state, or approximately half of Virginia's 95 counties. While Virginia generally taxes tangible personal property, it does not impose a property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets. Note that if you have taxable business personal property on any January 1, such as business equipment, furniture, machinery or tools, you must file an annual business personal property tax return, Form 762 or a locally prescribed form, with the local commissioner of revenue for your county or town, by May 1st. (f) Other Business Taxes. Virginia imposes a number of other taxes on businesses, including:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. In Virginia, you must register a fictitious business name by filing a fictitious name certificate and small fee with the clerk of the circuit court for each county where you conduct business. Limited partnerships, limited liability companies, or corporations operating under fictitious or trade names must also file a copy of the fictitious name certificate with the State Corporation Commission. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. Once you hire the first employee in your business, you must comply with many more Federal and state laws. One of the first things you will need to be concerned about as a new employer is the requirement that you withhold personal income taxes from the wages of your employees. As an employer, you are responsible for withholding the taxes and paying them over to the government on behalf of the employee. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Virginia imposes a state income tax on the income of individuals, you will need to also withhold Virginia income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Department of Taxation on Form R-1, Commonwealth of Virginia Business Registration Application (which also serves as your registration for sales tax, corporate income tax, and certain other state taxes). For more information on Virginia income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Taxation, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in the preceding calendar quarter, you, as an employer will be required to pay state unemployment tax based on the amount of such wages paid. You will also need to register for unemployment tax on Form VEC-FC-27. New employers are required to pay tax at a rate of 2.84% (6.54% for certain out of state contractors) in 2004 on the first $8,000 of wages paid to each employee. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Virginia law, cannot be charged to your employees or withheld from their wages. For more information on your Virginia unemployment tax obligations as an employer, see the contact information for the offices of the Virginia Employment Commission, listed in Section VI(a). This agency also publishes a helpful free Employer's Handbook on your rights and duties as an employer under the Virginia Unemployment Compensation Act, which you should request. (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. States that require workers' compensation coverage also generally allow some companies that can demonstrate sufficient financial resources to self-insure, in lieu of purchasing such insurance from state-operated or private insurers. However, as a practical matter, most small businesses with employees will have to obtain workers' compensation insurance coverage, as few, if any, small firms will have the financial wherewithal to obtain state permission to self-insure. In Virginia, virtually all businesses with three or more employees are required by law to have workers' compensation insurance, except those able to self-insure. However, firms with less than three employees may voluntarily elect coverage, if the employer and employees agree to elect such coverage. As an employer, it will usually be wise to elect such coverage, because of the potential liability exposure if you do not have such insurance. Real estate agents and brokers who work under a written contract that specifies that they are independent contractors are not required to be covered, as they are not considered to be employees. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the Virginia workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Virginia Workers' Compensation Commission, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, if, for example, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Virginia wage-hour laws, which provide for a state minimum hourly wage that is the same as the federal minimum and also require overtime pay at time-and-a-half for hours worked in excess of 40 a week. The Virginia minimum wage law exempts from coverage the employees of any firm that has fewer than four employees. Husbands wives, sons, daughters and parents of the employer are not counted in determining the number of persons employed. Note that, similar to federal wage-hour laws, certain traveling or outside salespersons are exempted from the Virginia wage-hour rules. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Virginia Department of Labor and Industry. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Virginia. For example, minors under age 16 must obtain employment certificates from the local school superintendent's office before they may be employed. Work by children under age 16 during school hours is very strictly limited, and minors age 16 and 17 are prohibited from employment in hazardous industries. (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Virginia is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and Virginia job safety requirements, you may wish to contact the Virginia Division of Occupational Safety and Health (VOSH) and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Division of Occupational Safety and Health of the Virginia Department of Labor and Industry, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Virginia labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. Virginia's labor laws generally require employers to pay wages at least once a month, except to certain exempt executive or administrative employees, or twice a month for employees who are paid on an hourly basis. An employee who quits or is discharged from employment should be paid final wages immediately, or in no case later than the next scheduled payday on which he or she would otherwise have been paid if employment had not been terminated. Civil penalties of up to $1,000 per violation may be imposed on the employer. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Virginia has a right-to-work law, which makes it an attractive place to do business, for many employers. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Virginia, and display a poster informing employees of their rights. You can obtain this poster from the Virginia Council on Human Rights, at the address listed in Section VI(a). (4) Reporting new hires. Under new federal welfare
reform laws, employers in all states now have to report
newly-hired (or rehired) employees to a state agency. In
Virginia, employers must report new hires within 20 days
after the date of hire to the New Hire Reporting Center,
operated under the authority of the Division of Child
Support Enforcement of the Virginia Department of Social
Services. See the contact information in Section
VI(a) for mailing or faxing in new hire reports.
VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Unlike most other states, Virginia does not have a single agency to whom you can go to handle all your licensing and permitting requirements for your business under the laws of Virginia. Accordingly, you may need to contact the various agencies that are mentioned in this book or listed below on an individual basis, to obtain needed forms, official posters, information, and other assistance from each such agency. A list of addresses and other contact information for such key agencies is set forth below for your convenience. BUSINESS STARTUP INFORMATION. A key agency that can provide helpful information on getting your business up and running in Virginia is the Virginia Economic Development Partnership, a privately chartered corporation, which is the successor organization to the Virginia Department of Economic Development.
STATE CORPORATION COMMISSION. Contact the office of the State Corporation Commission for information on:
EMPLOYER WITHHOLDING. Contact the Virginia Department of Taxation, listed above, to register as an employer, for purposes of Virginia income tax withholding. You will need to register on Form R-1 as an employer, to receive a state employer identification number. STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject, on Form VEC-FC-27.
STATE NEW HIRE REPORTING. Virginia employers must report newly hired employees within 20 days to the state New Hire Reporting Center at the following address, or electronically at the web site listed in Section VI(c).
(b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Virginia to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Virginia. Since new sites are appearing constantly, you might also want to search for other Virginia government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Virginia government information, you may want to begin with the following Internet sites: State of Virginia home page: Virginia Department of Taxation Web site, from which you can order or download state tax forms, or ask tax questions by e-mail: List of Virginia state government agencies and contacts: State Corporation Commission: Virginia Department of Business Assistance: Virginia Employment Commission Virginia New Hire Reporting Center:(d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Virginia, or contact the following agency:
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Copyright © 2004 Michael D. Jenkins
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