LLC vs S-Corp | What Entrepreneurs Need to Know in Washington

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LLC vs S-Corp in Washington

When starting a small business in the Washington, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Washington. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Washington. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Washington

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Washington?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Washington?

Unlike a limited liability company (LLC) or other business structures, Washington S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Washington

Creating a business in Washington requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Washington Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Washington does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Washington.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Washington

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Washington is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Washington. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Washington are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Washington are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Washington to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Washington with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Washington State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Washington, it costs $60, which can be paid to the DCRA. Of course, before forming the whole LLC, you must pay the initial fee of $200 (online and $180 by mail) to the Washington Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Washington have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Washington LLC: An LLC can have any number of owners, called members, from starting Washington Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Washington S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Washington LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Washington.

Washington S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Washington LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Washington S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Washington LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Washington Operating Agreement.

Washington S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Washington LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Washington: LLC or S-Corp?

Filing an LLC or S-Corporation in Washington requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in Washington, you must submit the Certificate of Formation to the Washington Secretary of State. Your Certificate of Formation must include information about your Washington LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Washington S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Washington: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Washington depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Washington LLC Cost for detailed information.

Washington S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Washington LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Washington?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Washington. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520​ in Washington.

FAQs

What is an LLC and an S-Corp and how are they different in Washington state?
An LLC is a Limited Liability Company, and an S-Corp is a corporation that allows for certain tax benefits. The main difference is in how they are taxed.
Can an LLC be taxed as an S-Corp in Washington?
Yes, an LLC can choose to be taxed as an S-Corp in Washington to take advantage of certain tax benefits.
What is the process for creating an LLC in Washington?
To create an LLC in Washington, you need to file articles of organization with the Washington Secretary of State, obtain a business license, and file an annual report.
What is the process for creating an S-Corp in Washington?
To create an S-Corp in Washington, you need to file articles of incorporation with the Washington Secretary of State, obtain a business license, and file an annual report.
What are the tax benefits of being an S-Corp in Washington?
S-Corps in Washington can potentially pay less in taxes because they are not subject to double taxation like traditional corporations.
Can an S-Corp have more than 100 shareholders in Washington?
No, an S-Corp in Washington cannot have more than 100 shareholders.
Can foreigners own an LLC or S-Corp in Washington?
Yes, foreigners can own an LLC or S-Corp in Washington.
Can an LLC or S-Corp be owned by another LLC or S-Corp in Washington?
Yes, an LLC or S-Corp can be owned by another LLC or S-Corp in Washington.
How does liability protection differ between LLCs and S-Corps in Washington?
Both LLCs and S-Corps offer liability protection to their owners, but the details of that protection may differ.
What are the annual fees for an LLC or S-Corp in Washington?
The annual fees depend on the type of entity and may vary from year to year. As an example, in 2021, the annual report fee for LLCs is $60 and the corporation’s filing fee structure is similar to LLCs.
Can an LLC or S-Corp have an office in another state while being registered in Washington state?
Yes, an LLC or S-Corp can have an office in another state while being registered in Washington state.
How do the taxes for LLCs and S-Corps in Washington work?
LLCs in Washington are typically taxed as pass-through entities, meaning that profits and losses flow through to the owners’ personal tax returns. S-Corps are also pass-through entities, but they have more specific tax rules to follow.
Is a lawyer necessary to form an LLC or S-Corp in Washington?
It’s not legally necessary to hire a lawyer to form an LLC or S-Corp in Washington, but it may be helpful for ensuring compliance with state laws.
Can an LLC or S-Corp switch their business structure to the other type in Washington?
Yes, it’s possible for an LLC or S-Corp to switch their business structure to the other type in Washington, but it may require more than simply checking a box on a form.
What are the differences in management structures between LLCs and S-Corps in Washington?
LLCs in Washington can be managed by their owners (known as members) or by a designated manager. S-Corps have a board of directors that makes business decisions.
Can an LLC or S-Corp’s name include “Inc” or “Corp” if they’re not organized as a traditional corporation?
Strictly speaking, LLCs and S-Corps in Washington cannot use the designation “Inc” or “Corp” in their name, but there may be some wiggle room depending on the circumstances.
Are LLC or S-Corp owners required to draw a salary in Washington?
LLC or S-Corp owners may choose whether or not to draw a salary in Washington, but there may be tax implications for choosing not to.
What are the bonding requirements for LLCs and S-Corps in Washington?
The bonding requirements for LLCs and S-Corps in Washington may vary depending on the type of business or industry they’re in.
Can a single person own an LLC or S-Corp in Washington?
Yes, a single person can own an LLC or S-Corp in Washington.
How do I dissolve an LLC or S-Corp in Washington?
The dissolution process for an LLC or S-Corp in Washington typically involves filing articles of dissolution with the Secretary of State and completing other necessary paperwork.
Can a business that provides professional services elect to be taxed as an S-Corp in Washington?
Yes, assuming the business meets all the requirements to be an S-Corp and follow all related regulations, it may choose to elect to be taxed as an S-Corp in Washington.
How do distributions work for LLCs and S-Corps in Washington?
Distributions for LLCs are usually allocated among members according to each member’s percentage ownership of the company, while S-Corp shareholders receive distributions based on their number of shares.
Can an LLC or S-Corp have a foreign name in Washington?
Yes, an LLC or S-Corp can have a foreign name in Washington, but there may be extra steps to complete during the registration process.
Can I use an online service to create an LLC or S-Corp in Washington?
There are many online services available to help register an LLC or S-Corp in Washington, but it may be wise to consult with additional resources to ensure full and compliant completion.
What are the relevant business tax rates in Washington?
In Washington, the business tax rate varies according to the type of business and its income.
What are the annual report requirements for an LLC or S-Corp in Washington?
In Washington, both LLCs and S-Corps need to file an annual report with the Secretary of State and pay a corresponding fee.
Can an LLC or S-Corp in Washington turn into a C-Corp?
Yes, on a case by case basis an LLC or S-Corp in Washington can turn into a C-Corp.
Can I convert my sole proprietorship into an LLC or S-Corp in Washington?
Yes, it is possible to convert a sole proprietorship into an LLC or S-Corp in Washington.
What are the differences between an LLC and S-Corp in Washington?
An LLC is a type of business structure that provides flexibility in terms of management and taxation, while an S-Corp is a specific type of corporation that allows for pass-through taxation.
Is there a minimum number of members required for an LLC in Washington?
No, Washington state law does not require a minimum number of members for an LLC.
What is the filing fee for forming an LLC in Washington?
The filing fee for forming an LLC in Washington is $180.
How is an LLC taxed in Washington?
An LLC in Washington can be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp, depending on the preferences of the members.
Can an LLC be formed and operated by a single individual in Washington?
Yes, an LLC can be formed and operated by a single individual in Washington.
How is an S-Corp taxed in Washington?
An S-Corp in Washington is not usually taxed at the corporate level; instead, income, deductions, and credits are passed through to shareholders to report on their personal tax returns.
Is there a minimum or maximum number of shareholders required for an S-Corp in Washington?
Washington state law requires a minimum of one shareholder for an S-Corp, but there is no maximum.
What is the filing fee for forming an S-Corp in Washington?
The filing fee for forming an S-Corp in Washington is $200.
Can an S-Corp operate in multiple states including Washington?
Yes, an S-Corp can operate in multiple states, including Washington.
Are there residency requirements for shareholders in a Washington S-Corp?
No, shareholders of an S-Corp in Washington do not have to be residents of the state.
Is there a limit to the amount of income an S-Corp in Washington can have to qualify for pass-through taxation?
Yes, the IRS has set a limit on revenue and shareholders to qualify for S-Corp status in Washington; for 2021, an S-Corp in Washington cannot have more than 100 shareholders.
How easily can I transfer ownership of an LLC in Washington?
Ownership of an LLC in Washington can be easily transferred, but it depends on how the LLC’s operating agreement is written.
What is the liability protection for LLC owners in Washington?
LLC owners in Washington have limited liability protection, meaning they are only responsible for the LLC’s debts and obligations up to the amount of their investment.
Can an LLC convert into an S-Corp in Washington?
Yes, an LLC can convert into an S-Corp in Washington, but the process and eligibility requirements can be complex.
What are the annual reporting requirements for an S-Corp in Washington?
An S-Corp in Washington is required to file an annual report with the state, which includes basic company information and a list of officers and directors.
How can an S-Corp raise capital in Washington state?
An S-Corp in Washington can raise capital through the sale of stock or through borrowing.
Can an LLC change its tax status from a sole proprietorship to an S-Corp in Washington?
Yes, an LLC can change its tax status from a sole proprietorship to an S-Corp in Washington.
Are there any restrictions on who can be a shareholder in a Washington S-Corp?
Yes, certain types of entities, such as other corporations, partnerships, and nonresident aliens, are generally not eligible to be shareholders in a Washington S-Corp.
What is an operating agreement for an LLC in Washington?
An operating agreement is a legal document that outlines the management and ownership structure of an LLC in Washington.
What must be included in an operating agreement for an LLC in Washington?
An operating agreement for an LLC in Washington should include information about member rights and responsibilities, management structure, allocation of profits and losses, and provisions for dispute resolution.
How soon after forming an LLC in Washington do I need to file an initial report?
An LLC in Washington must file an initial report within 120 days of formation.
Is the dissolution process for an S-Corp in Washington complicated?
The dissolution process for an S-Corp in Washington can be complicated and requires a vote of the shareholders, filing of state and federal paperwork, and settling debts and obligations.
Can an S-Corp elect C-Corp taxation status in Washington?
Yes, an S-Corp can elect C-Corp taxation status in Washington, but it requires a vote of the shareholders and the filing of a special form with the IRS.
What are the advantages of an LLC over a corporation in Washington?
An LLC in Washington can provide more operational flexibility, less regulation, and more favorable tax treatment.
What are the advantages of an S-Corp over an LLC in Washington?
An S-Corp in Washington can provide more substantial tax savings, as well as structural formality, which can help attract investments and partnerships.
Can I own multiple LLCs or S-Corps in Washington?
Yes, there is no limit to the number of LLCs or S-Corps a person can own in Washington.
What are the compliance requirements for a foreign-owned LLC or S-Corp operating in Washington?
A foreign-owned LLC or S-Corp operating in Washington must usually register as a foreign entity and comply with state and local tax, business, and employment laws.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Washington will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Washington and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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