Operating a Business

Business Organization

Operating a BusinessStarting a new business requires making many decisions. A business owner is, by default, a decision-maker. Fortunately, resources at the local, state and federal level abound to assist you with decisions related to starting and running your new business.

Once you know the type of business you wish to operate, you will need to decide on its organization. Will it be a sole proprietorship, a partnership, a corporation, or a limited liability corporation? Perhaps these choices sound confusing, but once you understand the pros and cons of each, your decision should be easy to make.

The Different Types of Business Ownership

Sole Proprietorship

Forming a sole proprietorship is the easiest way to start a business. In most cases, the only step required is filling out a simple form to register the business with your local government and conducting a search of your company’s name to make sure there are no other companies operating with the same name in your jurisdiction. A very small fee is usually required for this service.

If you plan to operate as a sole proprietor under a trade name, you need to register your trade name with the Chesterfield County Clerk of the Circuit Court. You can search online to determine if the name you wish to register is available at the Clerk of the Circuit Court’s Business Name Search.

Once you have registered your name with the Chesterfield County Clerk of the Circuit Court, you must apply for your business license with the Commissioner of the Revenue.

Sole Proprietorship Pros and Cons

Pros: The biggest advantages to a sole proprietorship are:
1) It is an easy way to start your business;
2) It is an inexpensive way to start your business.

Con: The biggest disadvantage to a sole proprietorship is:
The business owner (YOU) is personally liable for the business. This means that if a disgruntled customer sued you, you could potentially lose your personal belongings, like your house.

For additional information on starting a sole proprietorship:
http://www.nolo.com/lawcenter/ency/article.cfm/objectID/3FD19141-DB91-4FCA-BDB93416A4D05479

Partnerships

A business partnership is created when two or more persons agree, in person or in writing, to start a business. The two main types of partnerships are: General and Limited.

General Partnership

A general partnership is the easiest type of partnership to form. The only step required is that you file to protect your trade name. This will prevent another business start-up from using the name you have chosen. One additional step which you may wish to take if forming a general partnership is preparing and signing a partnership agreement. For your convenience, a partnership agreement is including with this guide and may be accessed by clicking here. You may also wish to consult an attorney.

The biggest disadvantage to a General Partnership is that each partner is liable for the whole business. To explain this, here is an example:

You and your friend Joe Smith form a business called Water Works that sells custom-made plumbing fixtures. Unfortunately, Joe uses money set aside for the business to fund his vacation in Florida. A month later, Water Works folds, but it owes its creditors thousands of dollars. Joe is unable to provide any funds, so guess who is responsible for these debts? You are. Even though the business is a partnership, if your partner(s) turns out to be a deadbeat, you will be responsible for not half, but all, of the liabilities.

You are also responsible for any poor business decisions Joe may have made. Compare it to a marriage. If your spouse buys a house in an unsafe neighborhood while you are away on business, you are just as responsible for the house payments as your spouse is, even though it wasn’t your decision to buy the house.

Limited Partnership

A Limited Partnership is similar to the general partnership, with several major exceptions. There are two actual classes of partners that make up the partnership: General Partners and Limited Partners. General Partners have the same pros and cons as in a general partnership above; however, each Limited Partner in a limited partnership is only liable to the extent of his or her individual investment. Limited Partners have no say in the day-to-day operations of the company; the General Partners actually manage the company. In essence, a limited partner is an investor. In the case of the Water Works example above, a limited partner’s loss would only amount to the investment made in the company. The company might fold due to one of the general partner’s poor decisions, but a limited partner would not have to bear financial losses above what was initially invested in the business. However, general partners (those that manage day-to-day operations) may have the same liabilities as under a general partnership.

Trade names using any other fictitious names that differ from the actual sole proprietor, partnership, or corporate name must be recorded with the Chesterfield County Clerk of the Circuit Court. You can search online to determine if the name you wish to register is available at the Clerk of the Circuit Court’s Business Name Search.

A limited partnership is a bit more complicated to start than a general partnership. In addition to registering your trade name to protect it, you must file a Certificate of Limited Partnership with the Virginia State Corporation Commission (http://www.state.va.us/scc/).

Once you have registered your name with the Chesterfield County Clerk of the Circuit Court and have filed a Certificate of Limited Partnership with the Virginia State Corporation Commission, you must apply for your business license with the Commissioner of the Revenue.

Partnership Pros and Cons

Pro. The largest advantages of the partnership are that it is relatively simple to start a business this way, and it allows the business to benefit from a combination of talents. Another advantage, in the case of a limited partnership, is that each limited partner is only liable to the extent of his or her individual investment.

Con. The largest disadvantage with a general partnership is that you are personally responsible for more than half of the business’ losses, if it incurs losses. And you are also responsible for your partner’s business decisions, even if they are bad decisions. Also, as in the case of the sole proprietorship, with a partnership, you and your partner are not protected from liability related to the business. For instance, if an unhappy customer sued you, you could lose personal belongings, like your car.

Corporations

A corporation is a legal entity that is separate from the people who own it. Shareholders govern the corporation indirectly by electing people to manage it.

Forming a corporation is somewhat complicated, and you may want to enlist the assistance of an attorney if you choose to organize your business this way. To form a corporation requires filing Articles of Incorporation with the State Corporation Commission (http://www.state.va.us/scc/index.html) and paying filing fees and other initial fees. To access a copy of the Articles of Incorporation form, click here.

In addition, a corporation, once formed, must comply with several formalities, such as holding regular meetings and maintaining explicit records.

There are several different types of corporations:

C Corporation

This is the most common form of incorporation for America’s largest companies. The letter “C” simply refers to a subchapter of the IRS for corporate tax purposes. The separate nature of the C Corporation creates advantages and disadvantages.

Since the C Corporation is separate from its owners, also known as shareholders, the owners may be taxed twice for any profits. That is, the corporation pays taxes on its profits. Then the corporation distributes the profits to the shareholders in the form of dividends. The shareholders then pay taxes on these dividends. This is known as double taxation and is considered a disadvantage of forming a business this way. Pending legislation, however, may change this form of double taxation. Be sure to check with your accountant.

An advantage is that the shareholders are only responsible for the company up to the amount of their personal investment. They may lose all of their stock in a corporation if it goes belly-up, but they will not lose their homes or other personal belongings.

S Corporation

The S Corporation shares much in common with the C Corporation. Like the C Corporation, it is owned by shareholders who do not bear personal liability for the losses of the corporation. Also, the same filing requirements and formal rules apply to both types of corporations.

There are several differences between the two types of corporations, however. A major difference and an advantage of the S Corporation is that its shareholders will not be taxed twice for the company’s profits. All profits are passed through to the shareholders’ individual income tax statements.

Another difference is that the S Corporation cannot have more than 75 shareholders, while the C Corporation can have an unlimited number of shareholders. For this reason, larger corporations are C Corporations.

Other Types of Corporations

There are several other types of corporations, including: professional corporations (operated by licensed professionals, such as doctors and lawyers), nonprofit corporations, and cooperatives.

Corporation Pros and Cons

Pro: An advantage is that the corporation is a separate legal entity from the individual(s) owning it. This means that if someone sues the corporation, shareholders are only liable for the corporation up to the amount of stock they own.

Con: A disadvantage is that it may be more complicated and more expensive to start a business this way. There are ongoing regulations to abide by and fees to maintain when you run a corporation.

For more information on corporations, consult the State Corporation Commission (SCC) web site: http://www.state.va.us/scc/index.html. Or contact the SCC by phone at 804-371-9967 (in Richmond) or toll-free from other parts of Virginia at 1-800-552-7945.

Limited Liability Company

A Limited Liability Company (LLC) is not a corporation. It is a distinct form of business ownership that combines features of the corporation with features of the partnership or sole proprietorship.

Forming an LLC is similar to forming a corporation. Articles of organization must be prepared and filed and fees must be paid. You may wish to consult an attorney if you choose to form an LLC.

An LLC is like a corporation in that it provides liability protection for its owners. It is like a sole proprietorship, partnership or S Corporation in that it protects its owners from double taxation: profits are accounted for on the individual owner(s) income tax returns. The LLC owners may choose to operate the LLC like a corporation, and elect managers to run it, or they may choose to operate like a partnership and manage the company themselves. A single person may also operate an LLC.

LLC Pros and Cons

Pros: The major advantages include:
1) the owner(s) liability is limited;
2) there is no double taxation.

Con: It is somewhat complex and expensive to form an LLC.

Trade names using any other fictitious names that differ from the actual sole proprietor, partnership, or corporate name must be recorded with the Chesterfield County Clerk of the Circuit Court. You can search online to determine if the name you wish to register is available at the Clerk of the Circuit Court’s Business Name Search.

In addition to registering your trade name to protect it, you must file a Certificate of Incorporation with the Virginia State Corporation Commission (http://www.state.va.us/scc/).

Once you have registered your name with the Chesterfield County Clerk of the Circuit Court and have filed a Certificate of Incorporation with the Virginia State Corporation Commission, you must apply for your business license with the Commissioner of the Revenue.

Regulatory Rquirements

Local Requirements

Starting a business is easier than you might think. In the case of a sole proprietorship or general partnership, there are three simple steps to take to open your business.

  1. Complete the Application for Chesterfield Business License*;
  2. Complete the Business License Classification Questionnaire*; and
  3. Visit the Office of the Clerk of the Circuit Court in the Chesterfield County Courts Building (804) 748-1209 in person if you will be operating a business under an assumed or fictitious trade name, and register the trade name.* Please note: the business license application is updated periodically. If you are viewing this guide after 2004, please contact the Commissioner of Revenue in Chesterfield County at (804) 748-1281 to obtain the most recent version of this application.

A memo containing information on county requirements for small businesses may be viewed by clicking here.

Information on the business license application procedure may be viewed at the Chesterfield County Commissioner of Revenue web site: http://chesterfield.gov/constitutionalofficers/commissionerofrevenue/memo.asp.

If you have questions about the business license application procedure, please call the Chesterfield County Commissioner of Revenue at (804)748-1281.

For certain types of businesses, your local government may require a special license. Please check with the Chesterfield County Economic Development Department to find out if your business requires a special license.

In addition, Chesterfield County has zoning requirements for certain businesses. To find out more about zoning requirements, please contact the Chesterfield County Economic Development Department.

Local Taxes

As your business grows, so will the requirements. As you make money, you pay taxes. Most businesses located within Chesterfield County are subject to the Chesterfield County business license tax. This is a tax on the privilege of engaging in a business activity within the county, and it is calculated upon gross receipts (or gross purchases in the case of wholesale merchants).

Other taxes include:

  1. Retail Sales Tax
    Please refer to the section on this guide about Commonwealth of Virginia Requirements regarding the retail sales tax (click here). Each county and city within Virginia receives 1% of the 4.5% retail sales tax levied on retail sales within Virginia.
  2. Business Personal Property Tax
  3. Inventory Tax
  4. Gross Receipts Tax
  5. Monthly utilities tax

Information on tax rates in Chesterfield County is available at: http://chesterfieldbusiness.com/business/resources/resources.asp?id=68

If you have additional questions, please consult the Chesterfield County Department of Economic Development.

Commonwealth of Virginia Requirements

If your business is a corporation, a limited liability company or a limited partnership, you must register it with the Virginia State Corporation Commission (SCC). The type of registration form you use will depend on the type of business you are starting.

The Virginia State Corporation Commission maintains registration forms on-line. To access them, please go to: http://www.state.va.us/scc/division/clk/fee_bus.htm.

If you do not have access to the Internet, you may obtain information about the required SCC forms, by calling: (804)371-9733 (Richmond), or toll-free 1-866-722-2551 (Virginia only).

For more information about the Virginia State Corporation Commission, you may view its home page at: http://www.state.va.us/scc/

Other Virginia requirements deal with issues related to taxes, employees and specific industry regulations, including health and safety issues. For Virginia’s requirements related to taxes and employees, click here to go to that particular section in this guide. For information related to specific industry requirements, please consult the Virginia Department of Business Assistance (DBA) web site. This site contains a guide to licenses and permits within Virginia. It provides a listing by business type or activity and also by agency. Click here to go to this page (http://www.dba.state.va.us/licenses/). If you do not have Internet access, you may contact the DBA at (804) 371-8200.

Federal Requirements

Similar to many of the Commonwealth of Virginia requirements, many of the Federal requirements for small businesses relate to taxes and employment. For information on federal requirements related to taxes and employees, you may click here to go to that particular section in this guide. Your business may be required to obtain an Employer Identification Number (EIN). This number identifies your business to the Internal Revenue Service and the Social Security Administration. For more information on the EIN, click here.

Other Federal requirements for businesses deal with environmental issues. For information on Federal environmental requirements, please consult the U.S. Environmental Protection Agency Small Business Gateway at: http://www.epa.gov/smallbusiness/ or you may address your questions to the Small Business Ombudsman at 1-800-368-5888.

As a small business owner, you should be aware that, depending on what type of business you own, you may have to abide by health and safety requirements. For federal requirements dealing with health and safety, review the U.S. Department of Labor Occupational Health & Safety Administration’s (OSHA) web site at: http://www.osha-slc.gov/index.html.

In addition, federal law requires that certain specialized businesses obtain and maintain licenses. The following types of businesses require a federal license:

Meat processors, drugs (required by the FDA, http://www.fda.gov);
Interstate delivery people (required by the Department of Transporation, Federal Highway Administration, http://www.fhwa.dot.gov);
Investment services (required by the SEC, http://www.sec.gov);
Radio and TV stations (required by the FCC, http://www.fcc.gov);
Tobacco products, alcohol, firearms (required by the Bureau of Alcohol, Tobacco and Firearms, http://www.atf.treas.gov); and
Export licenses (required by the Bureau of Export Administration, http://www.bxa.doc.gov).
Information about federal permits may be found at: http://business-law.freeadvice.com/permits.htm. Laws change, so if you are in doubt as to whether a special federal license is required for your business, consult an expert.

Please address any questions about requirements that you still may have to the Chesterfield County Department of Economic Development or contact the Center for Entrepreneurial Development at (804)521-4320, email: businessinfo@ccwa.vccs.edu. The Center for Entrepreneurial Development web site is: http://www.CCWAsmallbusiness.com.

Managing Employees: The Basics

Unless you plan to run your business by yourself or with one or more partner(s), you will have to manage employees. If your business depends on its employees to thrive, remember these two rules:

  1. Hire smart, capable people; and
  2. Retain the smart, capable people you hire.

Hiring Smart, Capable People

Different people are suited for different types of occupations. If you need a mechanic for your auto repair shop, you will look for someone with different skills and interests than the CPA who is looking for an accountant to help with her tax preparation business. Write a complete job description of the position you want to fill. Thinking about and writing down the specific skills and attitudes needed to complete the job at hand will help you find the right person. Once you have your job description, you are better equipped to both find and hire your new employee.

You may already have the perfect person in mind or be able to fill your opening from a personal reference. If not, there are many ways to advertise for employees, including trade journals relevant to your field; Internet sites; and, of course, the help wanted section of your local newspaper. The method you choose will depend on the position you are filling. For instance, placing a “help wanted” poster in the window of your coffee shop may be all you need to do to get qualified applicants for the open counter position, but this method will probably not work if you are trying to hire a computer programmer.

For information on hiring:
http://www.businesstown.com/hiring/hiring-top.asp
http://www.businesstown.com/hiring/hiring-advice.asp

After completing the job description and finding one or more qualified applicants, the next step is making a job offer and hiring someone. You will probably want to interview your applicant(s). You may have a good idea of the applicant’s skills and experience based on his or her application or resume. The interview will provide an opportunity to get to know the person’s personality and level of enthusiasm. Do you click with your applicant? Personality and attitude are important factors to consider. You want to hire someone with whom you get along and who will function well in the position. For instance, someone with a friendly, outgoing demeanor would probably do well in a customer service position, whereas, an introverted person may perform well in a position as a bookkeeper. For sample interview questions, click here.

The following table (from NOLO.com) gives information on questions that can and cannot be legally asked during a job interview. Please note that these questions are not necessarily all-inclusive.

Subject Lawful Inquiry Unlawful Inquiry
Age Are you 18 years of age or older? (To determine if the applicant is legally old enough to perform the job) How old are you?
Marital status Is your spouse employed by this employer? (If your company has a nepotism policy) Are you married?
Citizenship Are you legally authorized to work in the United States on a full-time basis? Are you a native-born citizen of the United States? Where are you from?
Disability These [provide applicant with list] are the essential functions of the job. How would you perform them? Do you have any physical disabilities that would prevent you from doing this job?
Drug and alcohol use Do you currently use illegal drugs? Have you ever been addicted to drugs?

For further information on interviewing:
http://www.entrepreneur.com/amex/article/0,5742,303589,00.html
http://www.babyshopmagazine.com/fall00/hourly.htm

After the interview, always follow through and check references. It is a good practice to enhance your check of references with a background check. A background check is especially important for positions in security and law enforcement, health care, child care, and for positions that involve visits to customers’ homes or offices or where sensitive information will be handled. Be aware, however, that there are legal guidelines to follow when conducting background checks.

There are private companies who can conduct an affordable background check for you. Conduct an on-line search using the phrase “employee background checks” to find links to companies which do this type of work. Or look in your local yellow pages. Remember to check references of the company that you hire to do your background check!

For additional information on conducting background checks:
http://www.privacyrights.org/fs/fs16-bck.htm

Keeping the Smart, Capable People you Hire from Quitting

Once you have a great employee working with your business, treat her or him as you would a great customer. Everyone is different, of course, and has different career goals and requirements, but, in general, your employees will want to be compensated, motivated and rewarded.

Compensation is the combined package of salary and benefits, including health insurance and time off. Be stingy with a good employee and it may end up costing you much more than the compensation would, both financially and in terms of the hassle-factor involved in finding and training a new person when your prized employee leaves for greener fields.

Motivating your employees will require finding out more about them, since different people are motivated by different things. Reviews provide a good forum for discussing issues such as motivation with your employees. They are also important for accountability and legal backup purposes. Keep records of your employees’ performance, including documentation of any needed discipline or reprimanding. Some people may need autonomy and control over a project in order to feel motivated. Others may require a certain type of work environment or an opportunity to take classes or receive training. Find out what motivates your employees and make sure you provide it for them.

Rewards are the good grades of the business world. Provide rewards, such as a share in profits or even something as simple as verbal recognition, to high achievers. Let them know they are doing a great job. Rewards help keep morale high.

For more tips on retaining employees:
http://www.zeromillion.com/business/employee-motivate.html
http://www.entrepreneur.com/article/0,4621,301301,00.html

Employment Termination

If you take the time to interview your potential employees and check their references, you will hopefully hire a great and loyal employee and never have to go through the rough job of firing someone. But what do you do if the person you hire steals from your business, is rude to your customers, is unreliable, or is not getting the job done?

For some offenses, such as stealing, immediate dismissal might be the best solution. In other cases, you may not need to fire someone, but just provide additional training or other assistance. For instance, perhaps an employee clearly is trying to do a good job, but is making mistakes. More training may be all it takes to turn this employee into a loyal and capable addition to your staff.

In other cases, you may wish to give a series of warnings to an employee who acts in an inappropriate way to give her a chance to change before taking the drastic measure of firing her. For instance, perhaps you have a policy that your employees always show up on time for work. If someone is perpetually late, you could start with a verbal warning. If the poor attendance continues, you could follow the verbal warning with one or two written warnings. Finally, as a last resort, you may decide to fire the employee.

Sometimes you may have an employee who breaks a rule (such as showing up on time), but does an exceptional job. In this case, you may wish to overlook a rule. The product, in this case, the work completed, may be more important to your business than the process, in this case, the time in which the employee comes in to work. Remember that people have different personalities and different requirements for a work environment in which they can perform their best. Another idea is to discuss with your employee reasons for his or her misconduct. In the case of the employee who is late, maybe the employee has another obligation, such as getting a child to day care or school. You may be able to work out an adjustment in your employee’s schedule. An employee with less stress and who feels that you are on his or her side will be more likely to work hard and remain loyal to you.

If all remedies fail and you do have to fire someone, there is no easy way around it. One way to fire an employee is to call the employee into your office or another private work area. Explain the reasons why you are letting him go. Point out the series of warnings that you offered, and give details on how a final paycheck will be made. Give the employee a letter of termination which you prepared ahead of time. Above all, make sure you are abiding by all legal requirements related to firing someone. If possible, try to end the meeting on a friendly note, with a handshake and a wish for luck.

Letting Someone Go When They are Doing a Great Job

Sometimes you may have to let a great employee go due to budgetary concerns. In this case, it will be in your and your employee’s best interest to keep relations between you as excellent as possible. Providing an employee you must lay off with advance notice, a severance package and assistance in finding other work are three ways to help keep your relationship with your employee on positive footing. These steps will help your employee and they will help you maintain a positive image in the community. Also, if you need your former employee’s assistance later, he or she will be more likely to help you. As with firing someone, if you must lay off someone, be sure to follow all legal requirements.

Federal Requirements

General Federal Regulations

Employer Identification Number (EIN)

The Employer Identification Number, or EIN, identifies the business to the Internal Revenue Service and the Social Security Administration. It will appear on all business tax returns and all tax correspondence related to your business. Although sole proprietorships with no employees may not need an EIN, the Commonwealth of Virginia encourages all businesses to use one since the EIN is often used by state and local agencies as a means of cross-referencing businesses.

If you answer yes to any of the following questions, you will need an EIN:

  • Do you have employees?
  • Do you operate your business as a corporation or a partnership?
  • Do you file any of these tax returns: Employment; Excise; or Alcohol, Tobacco and Firearms?
  • Do you withhold taxes on income, other than wages, paid to a non-resident alien?
  • Do you have a Keogh plan?
  • Are you involved with any of the following types of organizations:
    • Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns;
    • Estates;
    • Real estate mortgage investment conduits;
    • Non-profit organizations;
    • Farmers’ cooperatives; or
    • Plan administrators.

To apply for an EIN, fill out IRS Form SS-4. You may access this form here. Application may be made by phone, fax, mail or on-line. For more information on applying for the EIN, visit the IRS web site: http://www.irs.gov/businesses/small/article/0,,id=97860,00.html.
Or you may reach them by phone at (800) 829-1040.

Employee Eligibility Verification

The U.S. Department of Justice, Immigration and Naturalization Service requires all employers to complete an Employee Eligibility Verification Form (Form I-9) for each employee hired. This form provides proof that the employee is eligible to work in the United States. With increased fears about terrorism, this form has become more important in recent months.

To access a copy of the Form I-9 in pdf format, click here. Information on Employee Eligibility Requirements and the form I-9 is available on the Bureau of Citizenship and Immigration Services web site: http://uscis.gov/graphics/formsfee/forms/i-9.htm. If you do not have access to the Internet, you may call 1 (800) 870-3676 to have the form mailed to you.

Required Posters

Federal regulations require that companies with employees must post certain posters in a conspicuous place so that their employees may read them. Four required posters are listed below. For additional information about these posters or to obtain information about other posters that certain employers may be required to display, you may view the Department of Labor web site at: http://www.dol.gov/osbp/sbrefa/poster/main.htm.

Fair Labor Standards Act (FLSA) Minimum Wage Poster

Employers subject to the Fair Labor Standards Act’s minimum wage provisions must display, and keep displayed, in a conspicuous place a notice related to minimum wage. An approved copy of this poster is included on this guide, and may be accessed by clicking here.

Family and Medical Leave Act (FMLA) Poster

Employers must post, and keep posted, a poster summarizing the major provisions of The Family and Medical Leave Act (FMLA) and telling employees how to file a complaint. An approved copy of this poster is included on this guide, and may be accessed by clicking here.

Equal Employment Opportunity (EEO) Poster

Employers covered by the non-discrimation and EEO laws are required to display the poster “Equal Employment Opportunity is the Law” in a prominent place. This poster gives information about laws and procedures for filing complaints of violations of the laws with the Office of Federal Contract Compliance Programs (OFCCP). An approved copy of this poster is included on this guide, and may be accessed by clicking here.

Occupational Safety and Health Administration (OSHA) Poster

Employers must display the OSHA poster in a prominent place where all employees may read it. This poster gives information about the rights of employees to a safe and healthy workplace. An approved copy of this poster is included on this guide, and may be accessed by clicking here.

Federal Tax Requirements
(Note: The forms included in this section are current as of 10/01/03. You may check for changes to any of the forms on the Internal Revenue Service web site at http://www.irs.gov.)

There are three different federal tax requirements for employers:

Income Tax
Social Security and Medicare (FICA)
Federal Unemployment Tax (FUTA)

Income Tax

Employers must withhold income tax from each employee’s paycheck throughout the year. The amount withheld will vary based on pay rate, marital status, and exemptions. Each employee must fill out an IRS W-4 form before they begin employment. In return, employers must send an IRS W-2 form to each employee showing payments and withholdings no later than January 31 of each following year. By February 28, employers must furnish the Social Security Administration with copies of all of their employees’ W-2 forms, as well as the IRS Form W-3 (Summary and Transmittal Form). The Social Security Administration submits the data to the IRS. The table you use to compute how much tax to withhold is on page 34 of IRS Publication 15, Circular E, Employer’s Tax Guide (Revised January 2004).

Employers deposit the withheld tax either monthly, or semiweekly according to the total payroll amount, and submit it using Form 941.

“Form 941 Deposit Due Date. If you are a new employer and have never filed 941 forms, you are a Monthly Schedule Depositor for the first calendar year of your business unless you are a special exception to the rule. Monthly Schedule Depositors should deposit taxes from all of their paydays in a month by the 15th of the next month, even if they pay wages every week.

“Employers with prior payrolls and taxes of $1,000 or more per quarter must determine if they make either Monthly Schedule Deposits, or Semiweekly Schedule Deposits. This determination is based on your Form 941 taxes during a four quarter Lookback Period.” (Source: IRS web site.)

IRS Publication 15, Circular E, Employer’s Tax Guide (Revised January 2004) provides the following information to help employers determine if they must make monthly or semiweekly deposits.

“Your deposit schedule for a calendar year is determined from the total taxes (not reduced by any advance EIC payments) reported on your forms 941 (line 11) in a four-quarter lookback period. The lookback period begins July 1 and ends June 30 as shown in Table 1 below. If you reported $50,000 or less of taxes for the lookback period, you are a monthly schedule depositor; if you reported more than $50,000, you are a semiweekly schedule depositor.”

Lookback Period
2001 2002 2003
July 1 to September 30 October 1 to December 31 January 1 to March 31 April 1 to June 30 Calendar Year January to December

More information about this process is available on the IRS web site at: http://www.irs.gov/businesses/small/article/0,,id=98818,00.html.

For further instructions on W-2 and W-3 forms and filing, click here.
For a copy of the W-2 form, click here (provided for informational purposes only).
For a copy of the W-3 form, click here (provided for informational purposes only).
For a copy of the W-4 form, click here.
For a copy of the Form 941, click here.

For more tax information related to businesses, consult the IRS web site at: http://www.irs.gov. Or you may consult the Richmond office of the IRS at 400 N. Eighth Street, Richmond, VA 23240; telephone (804) 916-8700.

Keep in mind that tax laws change frequently, and you may wish to consult an accountant, attorney or tax expert. For recommendations on experts, contact the Center for Entrepreneurial Development in Richmond, Virginia, at (804)521-4320.

Social Security and Medicare (FICA)

The employer and employee share the FICA tax. The employer withholds the employee’s share from each paycheck; the employer must then match this amount. The chart below (from IRS Publication 15, Circular E, Employer’s Tax Guide) gives the rates for Social Security and Medicare Tax.

Calendar Limit Wage Base Limit (each employee) Tax Rate on Taxable Wages and Tips
2002-Social Security $84,900 12.4%
2002-Medicare All Wages 2.9%
2001-Social Security All Wages 2.9%
2001-Medicare All Wages 2.9%
2000-Social Security $76,200 12.4%
2000-Medicare All Wages 2.9%

Small businesses (reporting $50,000 or less in payroll taxes the prior year) must pay federal income and FICA taxes monthly; large businesses pay these taxes twice weekly. The payments are made with Coupon 8109-B directly to a bank. In addition, these taxes are filed four times a year on Form 941.

For a copy of Form 941 (pdf), click here.
For a copy of the Employer’s Tax Guide (Publication 15) (January 2003 version), click here. This informative guide contains much information to guide you regarding taxes and your employees.

Federal Unemployment Tax (FUTA)

Funds from the FUTA and the state unemployment tax provide temporary financial relief to those who become unemployed through no fault of their own. Contrary to popular belief, employees do not contribute to the FUTA: employers are responsible for paying 100% of all unemployment taxes. The FUTA amount is based on an employee’s wages. Employers get credit towards the FUTA based on what they pay to Virginia for state unemployment taxes (see state unemployment tax below).

Employers file the FUTA annually on Form 940. It must be paid at least by January 31 of the following year or quarterly on Coupon 8109 if a higher payroll requires it.

Click here for a copy of the IRS Form 940.

Commonwealth of Virginia Requirements

Upon starting a business in Virginia, it is necessary to register your business with the Department of Taxation using form R-1. This form can also be accessed on line through the Virginia Department of Taxation web site at http://www.tax.state.va.us/.

With regard to taxes and tax forms, it is important to note that the forms included with this guide are current as of 10/01/03. Because tax forms do change, you may wish to consult the Virginia Department of Taxation’s web site for changes to any of these forms.

The Commonwealth of Virginia requires businesses to be responsible for five different types of monetary requirements:

Income Tax
Unemployment Tax
Retail Sales Tax
Workers’ Compensation Insurance
Miscellaneous Taxes

Income Tax

Employers must withhold a portion of their employee(s)’ income for Virginia’s income tax. Employers register for this tax with the State of Virginia using Form R-1. If your withholding liability for the month is less than $100, your withholding tax payments are due quarterly. If your withholding liability for the month is $100, but less than $1,000, your withholding payments are due monthly. If your withholding liability for the month is $1000 or more, your withholding tax payments are due semiweekly.

The specific forms you will use (forms VA-5, VA-6, VA-15, and VA-16) will vary based on your withholding liability. To gain more information, please consult the Virginia Department of Taxation’s web site for information on withholding taxes: http://www.tax.state.va.us/site.cfm?alias=WithholdingTax#quarterly. If you do not have access to the Internet, you may also consult the Virginia Department of Taxation’s Customer Service by phone at: (804) 367-8037.

Copies of forms are available here:

Form R-1
Form VA-5
Form VA-6
Form VA-15
Form VA-16

Unemployment Tax

As noted above, the main purpose of the unemployment tax is to provide temporary financial relief to individuals unemployed through no fault of their own. Employer’s contributions to Virginia’s unemployment fund are normally based on wages they have paid, the amount they have contributed to the unemployment fund, and the amount of compensation that their laid off employees have received from the unemployment fund. Employers pay both a state and federal unemployment tax, as noted above; the state tax paid by employers may be credited against the federal tax.

If you answer yes to any of the following questions, you must pay the unemployment tax:

  • Do you employ one or more employees (or 10 agricultural employees) during twenty weeks or more of the calendar year?
  • Do you have $1500 or more in your quarterly payroll?
  • Have you acquired a business subject to the unemployment tax?
  • Are you subject to the FUTA?
  • Are you a governmental operation or political subdivision?

The unemployment tax is paid via the Virginia Employment Commission (VEC), rather than the Virginia Department of Taxation. Payment is due quarterly to: Virginia Employment Commission, P.O. Box 1358, Richmond, Virginia 23218.

For more information, consult the VEC web site: http://www.vec.state.va.us/index.cfm. If you do not have Internet access, you may reach your local VEC office by phone. There are VEC field offices located throughout the state of Virginia. For the location closest to you, consult your local phone book.

Retail Sales Tax

Businesses in Virginia must pay a sales tax to the state on gross receipts from retail sales. The tax is noted to consumers and is added to the regular price of purchased goods. Currently the sales tax rate is 4.5% (3.5% is state tax, and 1% is local tax). The Virginia Department of Taxation defines retail sales as “sales to a customer or to any person for any purpose other than for resale.” The tax may also apply to the lease of personal property and the renting of accommodations. Some food may be taxed at a lower rate. As of July 1, 1998, nonprescription drugs and certain medicines were exempted from state sales tax.

To view the tax table for sales in Virginia, click here.

As noted above, you must register your business with the Virginia Department of Taxation using form R-1. Businesses subject to the sales tax must also submit a monthly sales tax report on form ST-9, with payment, by the 20th of the following month, regardless of whether they had taxable sales that month. The form and payment should be mailed to: Virginia Department of Taxation, P.O. Box 26626, Richmond, VA 23261-6626. Some businesses may be able to switch from monthly to quarterly payment of this tax. If you would like to switch, please contact the Virginia Department of Taxation.

For a copy of the form ST-9, click here. You may also contact Customer Service at (804) 367-8037 for a copy of the form to be mailed to you.

For more information on the Virginia Sales Tax, consult the relevant section of the Virginia Department of Taxation’s web site: http://www.tax.state.va.us/site.cfm?alias=SalesUseTax#Retail. You may also contact Customer Service at (804)367-8037.

Workers’ Compensation Insurance

Workers’ Compensation is not a tax, but a type of insurance that most employers in Virginia must have. This insurance provides compensation and medical benefits to an employee or his or her dependents if the employee becomes disabled or dies from an accidental injury or disease acquired due to employment. Any employer with three or more regular employees is required to provide worker’s compensation insurance. The employee pays no portion of this insurance.

There are four methods of obtaining insurance:

  1. Purchase and maintain a workers’ compensation policy from a company licensed in Virginia;
  2. Apply to the Virginia Workers’ Compensation Commission for approval as an independent self-insurer;
  3. Become a member of a group self-insurance association licensed by the Virginia State Corporation Commission; or
  4. Enter into an agreement with a professional employer organization as provided in Section 65.2-801.A.4 of the Code of Virginia.*
    (Source: Virginia Workers’ Compensation Commission web site.)

The contractor’s certification of insuring compensation for worker’s liability in Virginia form may be accessed here.
For more information on Workers’ Compensation Insurance, consult the Workers’ Compensation Commission web site at: http://www.vwc.state.va.us/. Or contact the Commission by phone at (703) 518-8055.Miscellaneous Taxes

In addition to the requirements listed above, certain businesses are required to pay additional, miscellaneous taxes, such as the “Litter Tax” and the “Tobacco Tax.” To find out if your business is responsible for paying a miscellaneous tax, consult the Virginia Department of Taxation’s web site for business tax information: http://www.tax.state.va.us/site.cfm?alias=BusinessTaxInformation. Or contact them by phone at (804)367-8037.

Trade names using any other fictitious names that differ from the actual sole proprietor, partnership, or corporate name must be recorded with the Chesterfield County Clerk of the Circuit Court. You can search online to determine if the name you wish to register is available at the Clerk of the Circuit Court’s Business Name Search.

Local Requirements

Chesterfield County does not maintain general requirements related to employment. One exception is that it does require background checks for individuals who work with children. For more information, contact the Chesterfield County Economic Development Department.

*Employers should be aware of the difference between independent contractors and employees. Classifying an individual as an independent contractor can make a big difference in terms of federal, state and local requirements; and federal, state and local taxes. According to the IRS, the following factors indicate someone is an independent contractor:

  1. The worker hires, supervises and pays her assistants;
  2. The worker is free to work when and for whom she wants;
  3. The work is done on the worker’s premises;
  4. The worker is paid by the job or on straight commission;
  5. The worker has the risk of profit or loss;
  6. The worker does work for several businesses at one time;
  7. The worker’s services are available to the general public; and
  8. The worker can’t be fired except for breach of contract.(Source: IRS)

For more information, consult your local IRS field office.