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STARTING AND OPERATING A BUSINESS IN WEST VIRGINIA Copyright © 2008, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION West Virginia has a fairly typical tax and legal structure under which businesses must operate. Like most states, West Virginia imposes an income tax, a franchise tax 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 West Virginia in LLC or LLP form may obtain the advantages of limited liability, without having to incorporate or become subject to corporate taxation, generally. West Virginia, which makes up a large part of the long-depressed "Appalachia" region, is blessed with beautiful scenery and vast coal reserves, but has long lagged behind other states in the region economically. With a strong populist tradition, the state has tended to tax businesses and most forms of wealth very heavily, which tends to discourage new investments in the state. For instance, most corporate businesses are subject to a corporation income tax (at one of the highest rates of any state in the U.S.), a business franchise registration fee or tax on each business location, a business franchise tax on the capital of corporations, LLC's and partnerships, and a corporation license tax based on corporate capital that is apportioned to West Virginia. West Virginia is also one of the few remaining states that does not exempt business inventories from property taxation. Other West Virginia taxes include a state property tax on any corporation that owns more than 10,000 acres of land in the state; severance taxes on every kind of natural resource that is mined or extracted; and special gross receipts taxes on health care providers of all kinds. However, the state has taken some business-friendly steps in recent years, including repeal of its bulk sale notification requirements for persons acquiring an existing business or the assets of a business, and while West Virginia was one of only few states that had a property tax on intangible property, until recently, the latter tax was phased out during the years 1998 through 2002, and was fully eliminated, beginning with the 2003 tax year. In addition, under tax legislation enacted in 2006, West Virginia has reduced the corporate franchise tax rate from 0.7% to 0.55% and the corporate income tax from 9% to 8.75%. Both tax reductions were effective as of January 1, 2007. Under 2008 legislation, the corporate income tax rate will gradually drop to 6.5% by 2014. Additional legislation enacted in 2007 and 2008 reduces the franchise tax rate from .55% to .48% in 2009, with additional decreases to .41% in 2010, .34% in 2011, .27% in 2012, .20% in 2013, .10% in 2014 and zero thereafter. The corporate license tax was repealed entirely as of July 1, 2008. At present, the state's economy is reasonably strong, in terms of the level of unemployment, average per capita income levels, and other economic measures, and the West Virginia economy is being aided by the tremendous increases seen in recent years in oil prices, which (until recently) have led to similar increases in the price of coal. In October, 2008, the state's unemployment rate was only 4.7%, the same as a year earlier, and significantly below the national unemployment rate of 6.5% for the same month. To view the latest federal Bureau of Labor Statistics unemployment rate data for West 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 West Virginia can do so 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. However, all corporations (including S corporations) and all partnerships and LLC's are subject to a business franchise tax on their net worth and corporations are subject to an annual license fee based on their authorized capital stock. West Virginia also provides for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like 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 West Virginia can be established with no formalities, except that almost every business that wishes to operate in the state must first register with the State Tax Department and pay the business registration tax of $15 a year (which must be renewed at the end of every two year period, for $30) for each business location in West Virginia. No fee applies to a new business that is just starting up in West Virginia. All but the smallest businesses (those with $4,000 or less of total annual revenues nationwide in the prior year, and not subject to sales tax or any tax withholding requirements) must be registered. There is a penalty of $100 per day for each day a business operates without a license in West Virginia, if it is required to be registered. In addition, 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 West 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 West Virginia income tax and filing requirements for individuals. Doing business as a sole proprietor in West Virginia is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, nor obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), it will be required to register the name with the county where you do business, as discussed in Section IV(g). (c) Partnerships. West Virginia's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). As is discussed in Section IV(b), every business in West Virginia except the very smallest must first register with the state and subsequently must pay a business registration tax ($15 a year, paying $30 at each biennial renewal) for each location. Partnerships, as entities, are not subject to state income tax in West 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 required to file an annual tax information return with the state. For details on West Virginia partnership tax return filing requirements, see Section IV(c). In addition, a business franchise tax applies to all partnerships and other business entities, except for sole proprietorships. For a description of this tax, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in West Virginia can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), every business in West Virginia must first register with the state and subsequently must pay a business registration tax every other year. While not required to do so, a general partnership may register its partnership agreement with the West Virginia Secretary of State, for which there is a filing fee of $50. A general partnership that does business under an assumed name (trade name) is required to register the name with the clerk of the county commission in the county where the business is located, as noted in Section IV(g). In addition, any partnership or other business that has employees will generally have to register for and pay state unemployment tax on wages paid, as discussed in Section V(b), and must also withhold West Virginia state income tax from employees' wages, as discussed in Section V(a). 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 West Virginia law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the secretary of state, on Form LP-1, together with a filing fee of $100. Foreign limited partnerships must also register before being allowed to do business in West Virginia, on Form LP-2, and must pay a registration fee of $150. A copy of the certificate of registration should be filed with the clerk of the county commission in the county where the partnership's principal West Virginia office is located. The West Virginia Secretary of State is the attorney-in-fact for every limited partnership in West Virginia, and an annual payment of $25 is required for designating the Secretary as agent for the limited partnership. For information on limited partnership filing requirements, see the contact information for the offices of the West Virginia Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of West Virginia. Like an LLC, an LLP provides some degree of limited liability for its owners, while retaining the tax advantages of a partnership for federal and West Virginia state income tax purposes. Unlike an LLC, an LLP typically operates like a regular partnership, with or without a partnership agreement, and is not required to have or file articles of organization or similar documents. A general partnership can achieve a degree of limited liability by simply registering the partnership with the state as an LLP. However, an LLP does not generally offer the same degree of liability protection as a corporation or LLC, since, under West Virginia law, an LLP only protects a partner from liabilities arising from the misconduct or negligence of another partner or employee or agent of the partnership. Thus, LLP's are mainly utilized by professional partnerships, as West Virginia's LLP law provides considerably less liability protection than the LLP laws in most other states. Nevertheless, an LLP will provide greater liability protection than a regular general partnership in many instances. To form an LLP in West Virginia, you must register a West Virginia partnership on Form LLP-1, and pay a one-year filing fee of $250 to the secretary of state. Foreign LLP's, those created under the laws of another state, must register with the secretary of state on Form LLP-2 and pay a fee of $500 for two years. Every LLP doing business in West Virginia, including both domestic and foreign LLP's, must renew its LLP registration with the secretary of state and pay the applicable renewal fee of $500, paid annually by domestic LLP's or every two years by foreign LLP's. The West Virginia Secretary of State is the attorney-in-fact for every LLP in West Virginia, and an annual payment of $25 is required for designating the Secretary as agent for the LLP. State law requires that every LLP must carry at least $1 million of liability insurance for malpractice, misconduct, and the other kinds of liability that are limited by the LLP law. One potential drawback of LLP's, if you will do business in other states besides West Virginia, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some states, like California and New York, only recognize certain types of professional partnerships as LLP's. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. For more information on LLP registration and other state requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). (d) Corporations. To form a corporation in West Virginia, you must file articles of incorporation with the West Virginia Secretary of State and pay a fee of $50, plus the minimum corporation license tax. 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 West Virginia, by filing an application for a certificate of authority and paying a filing fee of $100, plus the minimum corporation license tax. For more information on filing articles of incorporation or applying for a certificate of authority to do business in West Virginia, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports and pay a corporation license fee each year, based on the corporation's capital. The license fee can range from a minimum of $20 to the maximum of $2,500 for a domestic corporation. Foreign corporations pay a license fee equal to 175% of the regular fee paid by domestic corporations, with a minimum annual fee of $250. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. The West Virginia Secretary of State is the attorney-in-fact for every corporation in West Virginia, and an annual payment of $30 is required for designating the Secretary as agent for the corporation. In addition to paying federal income taxes on its income, a corporation that does business in West 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. Corporations that do business in West Virginia are also subject to the same business franchise tax that applies to partnerships and LLC's, as described at the beginning of Section IV(c). The franchise tax return is due on the 15th day of the third month after the end of its taxable year, in the case of a corporation. For tax forms and more information on corporate income and license taxes and the business franchise tax in West Virginia, see the contact information for the offices of the West Virginia State Tax Department, part of the Department of Revenue, 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 (in most states), 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. West Virginia recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. However, like other corporations, and like partnerships and LLC's, S corporations are subject to the business franchise tax on capital, as well as a separate corporate license fee (tax) based on capital stock, both of which taxes are described in Section IV(c). (f) Limited Liability Companies. West 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 West Virginia may also choose to operate in the form of an LLC. LLC's 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 flow-through tax treatment of a partnership for federal tax purposes, and in most states. See Section IV(c) for a discussion of the tax treatment of LLC's under West Virginia tax laws. To form an LLC under the laws of West Virginia, one or more persons must file articles of organization with the secretary of state, which must be accompanied by filing fees of $100. West Virginia state law allows formation of one-owner LLC's, which now qualify for treatment as sole proprietorships for federal tax purposes. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in West Virginia, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $150. Unlike some states, West Virginia's laws now also permit the formation of professional LLC's. In addition to initial filing fees, LLC's must subsequently file annual reports with the secretary of state. Under the LLC law, the West Virginia Secretary of State is the attorney-in-fact for every LLC in West Virginia, and an annual payment of $25 is required for designating the Secretary as agent for the LLC. This provision of the law replaced a former provision that required LLC's to have an agent and office in West Virginia. Like corporations and partnerships, LLC's are subject to the business franchise tax on capital, as described in Section IV(c). For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, 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 you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. 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. West Virginia is one of the business-friendly states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in West Virginia. (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 is consummated. In West Virginia, you should be aware that the Department of Revenue (State Tax Department) must be notified when a business or a business inventory is sold. The seller must file a final tax return and pay any taxes due within 30 days after the transaction, and the taxes owed are a lien on the property you acquire until the seller obtains a tax clearance certificate from the state. The types of taxes involved may vary, depending upon the nature of the business that is acquired, so you should ask the seller to authorize the West Virginia State Tax Commissioner to release the necessary tax information to you regarding the seller's tax liabilities. Use Form WV-ARI-001, Authorization to Release Information, for this purpose. (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, if the seller has a tax rate lower than you would otherwise obtain as a new business. In West Virginia, unlike most states, you do not have the option of deciding whether or not you want to succeed to the seller's experience rating; under West Virginia law, you will automatically be treated as a successor employer. The acquiring employer's contribution rate for the remainder of the calendar year is not affected by the transfer, but that employer's rate for the succeeding calendar year is based on the combined experience of the two accounts as of July 31 of the year in which the transfer occurred. As a buyer, if you succeed to the business of a liable employer you are required to submit a Form UC-201-BS, Statement for Transfer of Business, which must be signed by both the successor employer and the predecessor employer. PLANNING POINT: EXAMPLE: (e) Withholding Tax on Real Estate Purchases. Beginning on January 1, 2008, if your business buys real estate located in West Virginia from a nonresident individual, you are required to withhold state income tax from the purchase price at the rate of 2.5% of the sales price or 6.5% on the seller's estimated capital gain on the transaction, whichever is less. The withheld tax must be remitted to the state within 30 days after the transaction occurs. IV. WEST VIRGINIA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
For a somewhat rural state, West Virginia has a very wide
array of individual and business taxes and registration
requirements, including a business registration requirement
for almost every business in the state, including sole
proprietorships and general partnerships.
In addition, all types of business entities except sole
proprietorships (corporations, S corporations, LLC's, and
partnerships) are subject to an annual business franchise
tax, based on their capital employed in the state. If your
business does business both within West Virginia and outside
the state, an apportionment calculation must be made to
determine the portion of your company's capital that is
taxable in West Virginia under the business franchise tax
law. See Section IV(c) for more on the
business franchise tax.
Like most states, West Virginia imposes sales and use
taxes, local property taxes, and personal and corporate
income taxes. Corporations must also pay an annual corporate
license fee based on their authorized capital stock.
West Virginia is not a right-to-work state.
(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
hall 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.
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 West Virginia, every business, with a very few limited
exceptions, such as small businesses with under $4,000 in total
revenues, must first register with the State Tax Department
(Department of Revenue) before commencing business, obtaining
a business registration certificate. A business must also
pay an annual business registration tax of $15 per business
location, although the tax is now paid only every two years
($30 per two-year period). To register, file Form
WV/BUS/APP, West Virginia Application for Registration
Certificate. There is no initial licensing fee to
register for the first time, but you will be billed $30 per
location every other May, for the following two fiscal year
periods beginning on July 1st.
In addition, contractors must register for a Contractor's
License through the West Virginia Division of Labor.
All state governments require special licenses for many
kinds of professionals, such as physicians, dentists, lawyers,
and accountants. To further protect consumers, West 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.
For more information on state licensing and business registration
requirements in West Virginia, see the contact information for
the offices of the State Tax Department (part of the Department
of Revenue), listed in Section VI(a).
You may want to obtain a copy of the 2005 publication, by
Lexis/Nexis, of West Virginia Laws for Business and
Licensing, which is available from the secretary of
state's office for $20.
(c) Income and Franchise Taxes. West Virginia has both an individual income tax and a corporate income tax, as well as a business franchise tax on corporations, LLC's, and partnerships. In addition to those taxes, all corporations, including S corporations, are subject to an annual license fee based on their capital stock, as is described in the segment below on the taxation of corporations in West Virginia. BUSINESS FRANCHISE TAX All partnerships, LLC's, and corporations that do business in West Virginia are generally subject to the business franchise tax, imposed at the rate of 0.55% of the company's capital that is employed in West Virginia, and with a minimum tax of $50 per year. The tax rate is scheduled to decrease by 0.07% on January 1, 2009 and each subsequent year until the rate is decreased to 0.20% of capital in 2013 and thereafter. UPDATE NOTE: If the expected business franchise tax can be reasonably expected to exceed $12,000, the taxable entity is required to make estimated franchise tax payments in advance, on the 15th day of the 4th, 6th, 9th, and 12th months of its taxable year. The annual business franchise tax return is filed at the same time as the partnership, LLC, or corporation income tax return -- generally by April 15 for a calendar year partnership or LLC, or by March 15 for a calendar year corporation. Businesses that conduct business within and without the state must allocate or apportion a percentage of their capital to West Virginia, using a formula based on payroll, sales, and property. PLANNING POINT: For state tax forms and tax information, see the contact information for the West Virginia Department of Revenue, State Tax Department, in Section VI(a). TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS The West Virginia individual income tax is imposed at a maximum tax rate of 6.5%. 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 West Virginia personal income tax return is Form IT-140, which must be filed with the State Tax Department by April 15th of the following year. Partnerships, or entities taxable as partnerships, such as LLC's, are not subject to state income taxation in West Virginia, but must file an information return with the State Tax Department each year, showing each partner's share of taxable income, losses, and credits, on Form IT-165. The partnership information return is due by April 15th of the following year, in the case of a calendar year partnership. While partnerships are not subject to the West Virginia state income tax, they are subject to the business franchise tax. In addition, any partnership that has non-resident partners must withhold West Virginia state income tax with respect to the West Virginia sourced income allocable to such non-residents (reported on From WV/NRW-2), unless the partnership elects to file a composite (group) tax return on behalf of all of its non-resident partners, on Form IT-140NRC. Such withholding has been at the rate of 4%, but increased to 6.5% on January 1, 2008. There is a $50 processing fee for filing a composite return. Individual taxpayers doing business as sole proprietors (or who are partners in partnerships, members of LLC's, or shareholders in S corporations), who have taxable income from the business, will generally be required to make advance payments of estimated West Virginia individual income taxes, on Form IT-140ES, if their estimated income tax, not covered by income tax withholding, exceeds $600. Estimated tax payments are due in four installments, on the 15th day of the 4th, 6th, and 9th months of the taxable year, and the 15th day of the first month of the following year. To avoid penalties for underpayment of estimated tax, you must generally pay in 90% of the current year's tax. No underpayment penalty will apply if your prior year tax liability was zero and your total current year tax liability is less than $5,000, generally. UPDATE NOTE: The West Virginia corporate income tax rate, on corporations other than S corporations, is a flat rate of 8.75% (reduced from 9% before January 1, 2007). UPDATE NOTE: The corporation income tax return is Form WV/CNF-120, which must be filed with the State Tax Department (Department of Revenue) by the 15th day of the third month following the end of the taxable year, or by March 15th in the case of a corporation whose taxable year is the calendar year. It is a combined return for reporting both the corporate income tax and the business franchise tax. Corporations are required to make estimated tax payments of their state corporate income tax in advance, if their taxable income for the year is $10,000 or more. Estimated income 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. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. However, no penalty is imposed if the corporation pays in an amount equal to 100% of the prior year's income tax liability. S corporations are generally exempt from the corporate income tax under West Virginia tax laws, as under the federal tax law, but must file an annual information return on Form WV/CNT-112S. However, S corporations with nonresident shareholders are required to withhold state income tax with regard to such nonresidents, at the rate of 6.5% (4% before January 1, 2008). Corporations, like partnerships and LLC's, are also subject to the annual business franchise tax, equal to 0.55% of their capital apportioned to West Virginia, as described above in this Section IV(c), and are required to make advance estimated franchise tax payments if the expected franchise tax for the year is $12,000 or more. The business franchise tax applies equally to S corporations. Effective as of January 1, 2009, the franchise tax on corporations will be reduced to 0.48%, and will decrease by 0.07% each year thereafter until it is 0.20% in 2013 and subsequent years. West Virginia has also imposed an annual corporation license fee or tax on all corporations, including S corporations. The tax was based on a corporation's capital (or the amount of its total capital apportionable to West Virginia), and ranged from $20 to $2,500 a year for domestic corporations, depending on the amount of its taxable capital. Foreign corporations paid a license fee that is 175% of the amount paid by domestic corporations, or a minimum fee of $250. However, this tax was repealed, effective July 1, 2008. TAXATION OF LIMITED LIABILITY COMPANIES In West Virginia, a limited liability company (LLC) is taxed for income tax purposes in the same manner as it is for federal purposes, which in most cases will be as a partnership, thus avoiding the possible double taxation of income that can occur with a corporation. Note that under federal income tax regulations, since 1997, an LLC is 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 income tax purposes. West Virginia law follows the federal classification of an LLC 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" 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, West 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 West Virginia would treat the LLC as a single-member LLC or as a partnership. LLC's, like all business entities other than sole proprietorships, are subject to the West Virginia business franchise tax, which is discussed in more detail above. While an LLC that is treated as a partnership is not subject to state income tax in West Virginia, it may be required to withhold state income tax with respect to any non-resident members, as is discussed more fully in the segment regarding partnership taxation in this Section IV(c). (d) Sales and Use Tax. West Virginia imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 6%. Unlike most states, no sales tax permit is required in West Virginia. Instead, nearly all businesses must file a business tax registration. After filing, your business will be sent sales tax forms by the State Tax Department (Department of Revenue) if you are required to collect the Consumer Sales Tax or use tax. Effective since January 1, 2006, the West Virginia sales tax rate on food and food ingredients (for human consumption) was reduced from 6% to 5%. "Food and food ingredients" does not include prepared foods or alcoholic beverages. "Prepared food" is defined as any of the following:
The tax rate on such food items was reduced to 4% on July 1, 2007 and decreased again, to 3%, on July 1, 2008. However, on July 1, 2007, the sales tax rate on soft drinks and all food sold through vending machines increased to 6%. Effective on and after July 1, 2008, certain qualifying municipalities may impose a pension relief municipal sales and service (and use) tax, at a rate of up to 1%, to be administered by the state. Qualifying municipalities are certain municipalities with severely underfunded police and firemen's pension and relief funds. There are numerous 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 West 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. Before making any taxable sales or engaging in business in the state, you will need to obtain a business registration certificate from the State Tax Department (Department of Revenue), on Form WV/BUS/APP, West Virginia Application for Registration Certificate. Taxpayers should note that, as of October 1, 2005, the Streamlined Sales Tax Agreement between a number of states became effective, and West Virginia is one of the states which has joined this cooperative effort among a number of states to simplify and rationalize sales tax reporting for businesses that sell goods or services in more than one state. For more information on West Virginia sales and use taxes, see the contact information for the offices of the West Virginia Department of Revenue, State Tax Department, in Section VI(a). (e) Real and Personal Property Taxes. In West Virginia, as in every other state, any business real estate you own will be subject to real property taxes. Like most states, West Virginia also imposes personal property taxes on tangible personal property. ("Personal property" is any kind of property that is not real estate.) Unlike most other states, West Virginia does not exempt business inventories from the personal property tax base. However, under new 2008 tax legislation, a tax credit against corporate income tax and franchise taxes is allowed for property taxes paid on inventories of manufacturers, beginning in 2009. Business owners in West Virginia are required to file a Business Property Tax Return each year. Such property tax reports are filed with the counties, rather than with the State Tax Department. West Virginia also formerly imposed a personal property tax on certain types of intangible personal property, such as notes, bonds, stocks, and accounts receivable. However, the West Virginia tax on intangibles was phased out, under 1997 legislation, which provided that intangible assets would be taxed at smaller and smaller percentages of assessed value, from 1999 through 2002, until the intangibles tax was completely phased out in 2003 and thereafter. Under the current law, only tangible personal property is subject to personal property taxes. A special tax applies to certain corporations that have large land holdings in the state. Every corporation that owns more than 10,000 acres of land in West Virginia is subject to a state property tax of five cents per acre on its land holdings in excess of 10,000 acres. (f) Other Business Taxes. West Virginia imposes a number of excise and other taxes on businesses, some of which may apply to you or your business. These include:
(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. A sole proprietorship or general partnership that operates under an assumed name in West Virginia must file an assumed name certificate in the office of the clerk of the county commission, for the county in which the business is located. Other business entities using an assumed name must register the true name with the secretary of state. There is a $25 fee for registering an assumed or fictitious name with the secretary of state. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since West Virginia imposes a state income tax on the income of individuals, you will need to also withhold West 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 Revenue, State Tax Department, on Form WV/BUS-APP, West Virginia Application for Registration Certificate, the registration form required for all businesses, whether or not they have employees. If you have employees, you must also register for unemployment tax, as is discussed in Section V(b). Under 2008 tax legislation, the West Virginia withholding tax rules were simplified by adopting of the federal withholding schedules and procedures. For more information on state income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Revenue, State Tax Department, 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 any calendar quarter, you, as an employer will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the West Virginia unemployment tax are required to register with the West Virginia Unemployment Compensation Division of the Bureau of Employment Programs by filing a business registration form, and filling out the portion for employers subject to the unemployment compensation law, Form WV/BUS-APP, West Virginia Application for Registration Certificate. New employers are generally required to pay tax at a rate of 2.7%, or 7.5% in the case of certain out-of-state construction companies, in 2007 on the first $8,000 of wages paid to each employee. After you have had employees for approximately 36 months, you will be assigned 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 that are 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 West Virginia law, cannot be charged to your employees or withheld from their wages. For more information on your West Virginia unemployment tax obligations as an employer, see the contact information for the offices of the Unemployment Compensation Division, Bureau of Employment Programs, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In West Virginia, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. One of the few exceptions is for agricultural employers with five or fewer full-time employees. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. Similarly, an employee of a corporation who is an officer or director of the corporation is not generally required to be covered for workers' compensation purposes. A further exception is made for a limited liability company (LLC), which may elect to exclude up to four persons from coverage, if such persons are acting in the capacity of officer, manager, or member of the LLC. 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 West Virginia workers' compensation laws, contact your insurance carrier or see the contact information for the offices of BrickStreet Insurance, listed in Section VI(a), which provides workers' compensation insurance in West Virginia. IMPORTANT NOTE: (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 West Virginia wage-hour laws, which provide for a state minimum hourly wage that was $6.55 an hour, effective since July 1, 2007, but was increased again on July 1, 2008 to $7.25 an hour. (This rate will increase further to match any increase in the federal minimum wage at any time in the future when the federal minimum wage is increased). A training wage of at least $5.15 per hour (or the federal training wage, if higher) can be paid for up to 90 days to a person under the age of 20, or up to an additional 90 days in some cases for a new business. The West Virginia minimum wage law applies only to an employer who employs six or more employees in one business location during any calendar week, and does not apply to an employer if at least 80% of the employer's employees are covered by the federal minimum wage, maximum hours, or overtime laws. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the West Virginia wage-hour rules, as are traveling salespersons and outside salespersons. As under the federal labor laws, West Virginia requires employers to pay time-and-a-half wages for overtime hours worked, for employees who work more than 40 hours in a week. The overtime pay requirements do not apply to employees who are exempt from the minimum wage requirements, generally. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state labor law poster, which you can obtain from the West Virginia Division of Labor. 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 West Virginia. The West Virginia child labor laws include the following provisions:
For more information on West Virginia wage/hour and child labor law requirements for employers, contact the West Virginia Division of Labor, at the address listed for that agency in Section VI(a). (e) State Occupational Safety and Health Laws. Roughly 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. West Virginia is one of the states that has not set up its own OSHA-type agency to enforce health and safety standards in the workplace, leaving that responsibility to the federal OSHA agency. However, the Safety Section of the West Virginia Division of Labor does perform several health and safety functions, including enforcement of the Elevator Safety Act, the Steam Boiler Inspection Law, and the Amusement Rides and Amusement Attractions Safety Act, as well as administering the OSHA Onsite Consultation Program. To determine if your workplace is in compliance with federal and West Virginia job safety requirements, you may wish to contact the West Virginia Division of Labor-- Safety Section, 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 Charleston offices of the Division of Labor--Safety Section, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other West Virginia labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. Employers are required to pay wages to employees at least once every two weeks, unless there is a special agreement providing otherwise. A discharged employee must receive his or her final wage payment within 72 hours of discharge, while an employee who quits must be paid no later than the next regular payday, except that an employee who gives notice of intention to quit at least one pay period in advance must be paid in full at the time of quitting. At the time of hiring, you must notify an employee, in writing, of the rate of pay and of the day, hour, and place of payment. Note that employers involved in construction or in the severance, production, or transportation of minerals must generally post a bond or else demonstrate the financial ability to pay all wages and fringe benefits due employees. This requirement does not apply to an employer who has been engaged in such activities in West Virginia for at least five years. (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. West Virginia does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. Besides having to comply with federal anti-discrimination laws, your business must also be aware of and comply with state civil rights laws in West Virginia, which prohibit discrimination in the areas of employment and public accommodations on the basis of race, religion, color, national origin, ancestry, sex, age, blindness, disability, or familial status. Employers must display a poster informing employees of their rights. You can obtain this poster from the Charleston office of the West Virginia Human Rights Commission, at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a specified state agency. Reports must be filed with the West Virginia New Hire Reporting Center, for West Virginia employers, generally within 14 days after the date of hire. Reports can be filed online, by mail, or by fax. Employers who submit reports magnetically or electronically must submit the reports in two monthly transmissions not less than 12 nor more than 16 days apart. See the contact information for the New Hire Reporting Center, listed in Section VI(a) or the web link for filing new hire reports online, in Section VI(c). (5) Lie Detector Tests Prohibited. West Virginia state law prohibits the use of lie detector tests in hiring as a condition of employment or of continued employment, with exceptions for employees who are involved in the manufacturing, storage, distributing, or dispensing of controlled substances. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Unlike most other states, West 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 West Virginia. Accordingly, you will need to contact the various West Virginia government 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 West Virginia state agencies is set forth below for your convenience. One good starting place for assistance, if you will start or relocate your business in West Virginia, is the state's lead Small Business Development Center, listed in Section VI(b). BUSINESS STARTUP INFORMATION. A key agency that can provide helpful information on getting your business up and running in West Virginia is the West Virginia Development Office. Contact them about financing or for referrals to appropriate state agencies, at: West Virginia Development Office SECRETARY OF STATE. Contact the office of the secretary of state for information on:
Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the West Virginia State Tax Department, part of the Department of Revenue, which is the main tax collection agency in West Virginia. Also register with this agency as an employer, for state income tax withholding purposes. West Virginia Department of Revenue STATE LABOR LAWS. Contact the West Virginia Division of Labor about your obligations as an employer under various state labor laws, including:
West Virginia Division of Labor STATE SALES TAX. Obtain sales and use tax information on the West Virginia sales and use tax law, from the State Tax Department (Department of Revenue), at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the State Tax Department, Department of Revenue, at the address listed above for that agency, to register as an employer, for purposes of West Virginia income tax withholding. 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. Unemployment Compensation Division WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact BrickStreet Insurance, for information on coverage. (NOTE: The West Virginia Workers' Compensation Commission was privatized and replaced by this mutual insurance corporation, as of January 1, 2006, which was the sole source of workers' compensation insurance for West Virginia employers until January 1, 2008.) The new address (2008) of BrickStreet Insurance is: BrickStreet Insurance STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in West Virginia, contact the Division of Labor--Safety Section, at the address listed above for that agency. STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on West Virginia civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace: West Virginia Human Rights Commission NEW HIRE REPORTING. Contact the West Virginia New Hire Reporting Center for information on New Hire Reporting or to file New Hire Reports, at the following address: West Virginia New Hire Reporting Center (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout West 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. West Virginia SBDC (c) Internet Sites. For anyone with 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 West Virginia 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 West Virginia. Since new sites are appearing frequently, you might also want to search for other West Virginia government Web sites by using one of the popular Internet search engines, such as Google or Yahoo. To start your Internet search for West Virginia government information, you may want to begin with the following Internet sites: State of West Virginia home page: List of West Virginia state government agencies (alphabetical listing): West Virginia Development Office (information on business startup assistance, financing): For information on unemployment tax laws in West Virginia, go to the following Web site of the Bureau of Employment Programs: West Virginia State Tax Department, Department of Revenue (to download state tax forms, and for tax information or information on the Telemarketing Act): West Virginia Secretary of State (corporate, LLC and various partnership filings): West Virginia New Hire Reporting Center (on-line reporting of newly hired or rehired employees): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in West Virginia, or contact the following state agency, which helps provide financing for businesses expanding or relocating in the state. West Virginia Economic Development Office The address of the main SBA Office in West Virginia is: U.S. Small Business Administration |
Copyright © 2008 Michael D. Jenkins
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