How to Start an S-Corporation in Washington (2024 Guide)


Steve Bennett
Steve Bennett
Business Formation Expert
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Start an S-Corporation in Washington

If you want to start an LLC in Washington, there are things that you should consider. Washington is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Washington, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Washington if qualified for the limitations and requirements.

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How to Form an S-Corporation in Washington?

To create S-Corp in Washington, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Certificate of Formation, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Washington

After you have decided on the idea to start an S-Corp in Washington, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Washington Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Washington.
  • Limit of restricted words that need a license in Washington
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Registered Agent

The next step in starting an S-corp in Washington is hiring a Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Registered Agent in Washington.

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Step 3: File For Certificate of Formation

The Certificate of Formation is an important document to start your limited liability company (LLC). Washington Certificate of Formation is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Certificate of Formation to be filed in DCRA, you need to pay a filing fee of $200. In Washington, the filing fee of forming an LLC is $200 (online and $180 by mail).

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Step 4: Creating an Operating Agreement

After you have filed your Certificate of Formation, the next step is to create an operating agreement in Washington. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Washington can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Certificate of Formation to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Washington, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520 .

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Washington, including:

  1. Filing Fees: When forming a corporation in Washington, you must file Articles of Incorporation with the Washington Secretary of State and pay a filing fee of $180 for online and by mail filing.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Washington are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Washington General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Washington are subject to the annual franchise tax, which can financially burden some businesses.

In an Washington S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Washington franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-corporation?
An S-corporation is a type of corporation that offers pass-through taxation benefits to shareholders.
How do I form an S-corporation in Washington?
To form an S-corporation in Washington, you must file articles of incorporation with the Washington Secretary of State and obtain an S-corporation status from the IRS.
What are the requirements for forming an S-corporation in Washington?
In Washington, you must meet the state’s general requirements for forming a corporation and file for an S-corporation election with the IRS.
How long does it take to form an S-corporation in Washington?
It typically takes about two to three weeks to form an S-corporation in Washington.
What are the tax benefits of forming an S-corporation in Washington?
S-corporations enjoy pass-through taxation, which means that profits and losses are passed through to the owners’ individual income tax returns.
What is Washington’s corporate tax rate?
There is no state corporate income tax in Washington.
What are the state filing fees for forming an S-corporation in Washington?
The filing fee for forming an S-corporation in Washington is $180.
Do I need a registered agent to form an S-corporation in Washington?
Yes, you must appoint a registered agent for your Washington S-corporation.
Can a foreign corporation form an S-corporation in Washington?
Yes, a foreign corporation can form an S-corporation in Washington, provided it meets certain requirements.
Is there a minimum number of shareholders required to form an S-corporation in Washington?
In Washington, an S-corporation must have between one and 100 shareholders.
Can an S-corporation in Washington have a single owner?
Yes, an S-corporation in Washington can have a single owner.
Are profits and losses split equally among shareholders in an S-corporation in Washington?
No, profits and losses in an S-corporation in Washington are allocated based on the percentage of ownership.
Can an S-corporation in Washington offer stock options to employees?
Yes, S-corporations in Washington can offer stock options to employees.
Is Washington a business-friendly state for S-corporations?
Washington is generally considered to be a business-friendly state for S-corporations, with no corporate income tax and low filing fees.
Can an S-corporation in Washington convert to a C-corporation?
Yes, an S-corporation in Washington can convert to a C-corporation.
What are the cons of forming an S-corporation in Washington?
Some of the cons of forming an S-corporation in Washington include strict ownership limitations and additional paperwork requirements.
Can I form an S-corporation in Washington for a nonprofit business?
No, S-corporations can only be formed for for-profit businesses.
Are there any annual fees associated with maintaining an S-corporation in Washington?
S-corporations in Washington are subject to an annual report filing fee of $60.
Can I elect S-corporation status for my LLC in Washington?
Yes, LLCs in Washington can elect S-corporation status with the IRS.
Can S-corps issue different types of stock in Washington?
No, S-corporations in Washington are limited to issuing only one class of stock.
Are S-corporations required to hold annual meetings in Washington?
While Washington does not require S-corporations to hold annual meetings, it is good practice to do so.
Can S-corporation shareholders also be employees in Washington?
Yes, S-corporation shareholders can also be employees in Washington.
Are S-corporation profits subject to self-employment taxes in Washington?
Yes, S-corporation profits for shareholders who are also employees are subject to self-employment taxes.
Can an S-corporation in Washington be owned by another corporation?
Yes, a corporation can be a shareholder in an S-corporation in Washington.
Does an S-corporation in Washington require a board of directors?
No, an S-corporation in Washington does not require a board of directors.
What happens to an S-corporation in Washington if a shareholder leaves?
If a shareholder leaves an S-corporation in Washington, their ownership interests are typically bought out by the remaining shareholders.
Are S-corporations in Washington required to adhere to specific accounting standards?
While S-corporations in Washington are not required to adhere to specific accounting standards, they are required to maintain accurate financial records.
Can non-residents form an S corporation in Washington?
Yes, non-residents can form an S corporation in Washington.
What is the minimum number of shareholders required to form an S corporation in Washington?
In Washington, you need at least one shareholder to form an S corporation.
Is there a limit to the number of shareholders an S corporation can have in Washington?
No, there is no limit to the number of shareholders an S corporation can have in Washington.
What is the filing fee for forming an S corporation in Washington?
As of 2021, the filing fee for forming an S corporation in Washington is $180.
Can an S corporation in Washington own another corporation?
Yes, an S corporation in Washington can own another corporation.
Does an S corporation in Washington have to pay state income taxes?
No, S corporations in Washington do not have to pay state income taxes, but the shareholders will have to pay taxes on their share of the income.
How does an S corporation in Washington file its taxes?
In Washington, S corporations file a federal tax return (Form 1120S) and a state tax return (Washington Annual Report).
Can an S corporation in Washington have a fiscal year that doesn’t end on December 31st?
Yes, an S corporation in Washington can have a fiscal year that ends on a date other than December 31st.
Can an S corporation in Washington be formed for any type of business?
No, S corporations in Washington cannot be formed for certain types of businesses, such as banking and insurance.
How long does it take to form an S corporation in Washington?
It typically takes 3 to 5 days to form an S corporation in Washington.
Can an S corporation in Washington have only one employee who is also a shareholder?
Yes, an S corporation in Washington can have only one employee who is also a shareholder.
What is the process for dissolving an S corporation in Washington?
To dissolve an S corporation in Washington, you’ll need to file articles of dissolution and distribute the assets to the shareholders.
Are S corporations in Washington required to hold annual meetings?
No, S corporations in Washington are not required to hold annual meetings.
How often does an S corporation in Washington have to file an annual report?
In Washington, S corporations must file an annual report every year.
Can an S corporation in Washington convert to a C corporation if needed?
Yes, an S corporation in Washington can convert to a C corporation if needed.
Are there any residency requirements for shareholders of S corporations in Washington?
No, there are no residency requirements for shareholders of S corporations in Washington.
Can an S corporation in Washington claim the 20% deduction for pass-through entities on its state tax return?
Yes, S corporations in Washington can claim the 20% deduction for pass-through entities on their state tax return.
Can an S corporation in Washington have multiple classes of stock?
No, S corporations in Washington cannot have more than one class of stock.
Is there a personal liability risk for shareholders of an S corporation in Washington?
No, shareholders of an S corporation in Washington are not personally liable for the corporation’s debts.
Do S corporations in Washington have to pay sales tax?
Yes, S corporations in Washington may be required to pay state sales tax if they sell taxable goods or services.
Can an S corporation in Washington have foreign shareholders?
Yes, an S corporation in Washington can have foreign individuals or entities as shareholders.
Can an S corporation in Washington deduct fringe benefits for shareholders who are also employees?
Yes, an S corporation in Washington can deduct fringe benefits for shareholders who are also employees.
Are S corporations in Washington required to obtain obtain a business license?
Yes, all corporations formed in Washington, including S corporations, must obtain a business license from the Department of Revenue.
How often are shareholder meetings required for an S corporation in Washington?
S corporations in Washington are not required to hold regular shareholder meetings.
Can an S corporation in Washington operate multiple businesses at once?
Yes, an S corporation in Washington can operate multiple businesses at once.
What is the difference between an S corporation and a C corporation in Washington?
The main difference between an S corporation and a C corporation in Washington is how they are taxed. S corporations do not pay federal or state taxes, whereas C corporations must pay both.
Are S corporations in Washington required to file a tax return even if they do not have any income?
Yes, S corporations in Washington are still required to file a tax return even if they do not have any income.
Can an S corporation in Washington carry forward losses to offset future income?
Yes, S corporations in Washington can carry forward losses to offset future income.

Also Read

Why You Should Start Washington S Corp

One key benefit of forming an S Corp in Washington is the tax advantages it provides. S Corporations are considered pass-through entities, meaning that profits and losses are passed through to the shareholders’ personal tax returns. This allows business owners to avoid double taxation that traditional corporations face. By choosing to operate as an S Corp, you can potentially save on self-employment taxes and take advantage of deductions that may not be available to other business structures.

Another advantage of forming an S Corp in Washington is the protection of personal assets. By incorporating your business as an S Corp, you can separate your personal assets from those of the business. This means that in the event of any legal trouble or financial difficulties, your personal assets will be protected. This can provide you with peace of mind and better protect your personal finances.

In addition to tax benefits and asset protection, forming an S Corp in Washington can also help you attract investors and raise capital. Investors often prefer to invest in S Corporations due to the pass-through tax structure and limited liability protection. By structuring your business as an S Corp, you may find it easier to secure funding, expand your operations, and grow your business.

Furthermore, operating as an S Corp can also lend credibility to your business. Many customers, suppliers, and partners may view S Corporations as more legitimate and trustworthy compared to sole proprietorships or partnerships. By establishing your business as an S Corp, you can build a reputable brand image and signal to stakeholders that you are committed to long-term success.

Finally, forming an S Corp in Washington can also offer flexibility and growth opportunities. S Corporations have the flexibility to issue different classes of stock, which can be advantageous for attracting investors and structuring ownership agreements. Additionally, S Corps can easily transfer ownership, making it easier to bring in new partners or sell the business in the future.

In conclusion, starting a Washington S Corp can provide you with a range of benefits that can help you achieve your business goals. From tax advantages and asset protection to attracting investors and building credibility, structuring your business as an S Corp can position you for success and growth. If you are considering starting a business in Washington state, forming an S Corp may be the right choice for you.

Conclusion

Forming an S-Corporation in Washington can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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