Start a Washington S Corp

Step 1: Choose a Name

The first step toward forming a Washington LLC is selecting a name. Before you register your LLC in Washington, you need to decide on a name. Make sure that your LLC name is distinguishable from any other company in the state. The state has a business name search, but with our Washington business name search page, we’ll walk you through it step by step.

Washington LLC Naming Requirements

Washington state law requires you to include some variation of “Limited Liability Company” as the name’s suffix. You can end your company’s name with the full “Limited Liability Company,” shorten it to “Limited Liability Co.,” or use the abbreviations “LLC” or “L.L.C.”

The state additionally prohibits certain words and combinations of words from appearing in LLC business names. For example, you can’t use words that would suggest your limited liability company is a financial institution. 

Seek a compatible domain name

As you search for available business names, check if relevant domain names are available for those business names. A website is an affordable marketing tool that can drive customers to your business. You want a domain that aligns with your LLC name, making the website easy for search engines to find. Check out our domain name registration and domain name search services for more information.

Federal and State Trademarks

The state-level search doesn’t take into account trademarks. The state could approve your LLC’s name and you can spend money on signage, business cards, advertising, etc. only to have someone serve you notice that you’re infringing on their trademark.

To see if your desired LLC name is trademarked on a national level, do a search on the U.S. Patent and Trademark Office website. You can also try applying for a trademark of your own, but this can be a long and costly process.

To see if your name is trademarked at the state level, the Washington Secretary of State site has a trademark search engine. You can also apply for a state trademark of your own for a fee.

The more research you can do on your desired business name (conducting Internet searches or even consulting a trademark attorney, etc.) beforehand, the better.

Step 2: Appoint a registered agent

Now it’s time to select a Washington registered agent. Every registered Washington business entity needs to have a registered agent. This is a person or entity acting as the point of contact for service of process (notification of a lawsuit) and other legal documents on behalf of the business.

The registered agent must have a Washington residency in the form of a physical street address in the state. If the agent is a business entity, it must have authorization to do business in the state. The agent must also be available in person during normal business hours to receive service of process.

Can you be your own registered agent?

As an LLC member, you can list yourself as a Washington registered agent for your company; however, this option isn’t always in your best interest. If you’re served with a lawsuit, for example, you don’t want to receive this paperwork at your place of business, with customers and clients around. Plus, you probably don’t want to be bound to your office all day in case a process server shows up.

Instead, consider our professional registered agent service. We can help you fill this legal requirement and make sure all important documents get to you in a discreet and time-efficient manner.

Step 3: File a Washington Certificate of Formation

The next step is to file an LLC Certificate of Formation with the state. Once you’ve decided on a business name and appointed a registered agent, the next step is making your Washington LLC official. To do so, you’ll need to complete a Certificate of Formation (known as “Articles of Organization” in most states) and file it with the Washington Secretary of State. Once approved, this is the official document that formally establishes your LLC as a recognized legal entity in Washington.

Information Required for the Washington LLC Certificate of Formation

To complete your certificate, you’ll need:

• Registered agent name and address. As noted above, this is the person or business that will receive legal documents on behalf of your business, be available during regular business hours, etc.
• Principal office address and contact information. You’ll need to provide a phone and email contact for your business. Your business street and mailing address (if they’re different) are also required. 
• Duration. You’ll pick if your company has a perpetual duration, if it expires after a certain number of years, or if it expires on a specific date.
• Effective date. This is the date your business begins to exist. You can select the date of filing or a different date, but the date isn’t allowed to be more than 90 days from your filing date. It also can’t be prior to the filing date.
• Executor. Washington requires each business to have at least one executor. An executor is a person forming the LLC and signing the Certificate of Formation. An entity is not allowed to be its own executor.
• Governor. Washington also requires each business to have at least one governor. A governor is a person or entity listed on the business’s annual report, and in an LLC is usually a member or a manager.
• Nature of the business. You can be specific, but a more general statement will suffice.
• A return address for filing. This is the email and mailing address where you want follow-up correspondence on your application to go.

File online with the Washington Secretary of State

The Washington Secretary of State prefers online filing but does accept paper forms for an extra fee. Once accepted, your LLC will receive a Washington State Unified Business Identifier (UBI). Be sure to keep a record of that number, as you will use it when dealing with other state agencies.

Within 120 days of forming an LLC in Washington, you’re required to file an Initial Report, which is really the first of the annual reports your LLC will file every year.

Get professional filing help

If you need help, don’t worry. Take a look at our business formation packages and let our team do the work for you. Once the Washington Secretary of State approves your LLC, your state paperwork will be available on your ZenBusiness dashboard, where you can keep it and other important business paperwork digitally organized.

Step 4: Create an operating agreement

Creating an LLC operating agreement is the next step. An operating agreement is a legal document where you put in writing how the business will run, the breakdown of responsibilities, how profits will be shared, and more. All members (owners) of the LLC will need to approve and sign it, making it a binding contractual relationship between the members. Washington doesn’t require a business to have an operating agreement, but most experts strongly encourage all LLCs to have one.

Why should you get an operating agreement in Washington?

You can tailor an operating agreement to your business’s needs. And, if a conflict arises and you have no operating agreement in place, the default state LLC laws will control the outcome. 

What does a Washington operating agreement look like? What’s contained inside will depend on the specifics of your business, but there are a few things you’ll likely want to include:

• Percentage of ownership and distribution of profits
• Voting rights and responsibilities
• Division of roles and responsibilities with members and any managers
• Required meetings
• Buyout and buy-sell rules

Once it’s completed and signed, it should be kept in a secure location with other important business formation information. You don’t need to file it with the state.

If you’re unsure as to how to start creating an operating agreement for your LLC in Washington, then check out this guide. Make note that, if you decide to form your LLC with ZenBusiness, we offer a customizable operating agreement template to save you time researching and crafting the agreement yourself.

Step 5: Apply for an EIN

Get an Employer ID Number (EIN) from the IRS. This is a nine-digit code the Internal Revenue Service (IRS) uses to identify businesses for tax purposes. Most Washington LLCs need this tax ID number, sometimes even those that are single-member LLCs with no employees.

Getting an EIN should be a priority, anyway, as it can help with practical things like opening a business bank account. You can use our EIN registration service to make it easy. 

Step 6: File the form to apply for S corp status

Submit the form to apply for S corporation status. Once your LLC or C corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to make an S corp election. 

The IRS requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

One important note for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

Note that all of the shareholders or members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

Pros and Cons of Filing as an S Corp

While S corp election does come with benefits for some businesses, this election might not be right for all business types. So, be sure to carefully consider the pros and cons before deciding how you want to move forward. Ask a tax professional about whether the S corp election would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC aren’t quite the same as they are for a C corporation. Let’s first look at the advantages for LLCs.

A traditional LLC already has pass-through taxation by default, so the benefits of S corp election for an LLC involve self-employment taxes. This takes some explanation, but for certain LLCs, it could save a significant amount in federal taxes.

Self-Employment Taxes

The members of an LLC without S corp election are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be an employee of the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay half of them.

Dividing Profits and Salary

When the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once that happens, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, they’ll still pay income taxes and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

Note that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of one dollar and avoid contributing anything to Social Security and Medicare. 

So, what’s considered “reasonable compensation”? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something in line with what others in your field are earning.

If the IRS decides that your salary isn’t reasonable, it can reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.

Disadvantages of S Corp Status for LLCs

Having an LLC with S corp tax designation also comes with some disadvantages compared to a traditional LLC:

Stricter Requirements 

As we mentioned, S corps have more qualifications than a standard LLC. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have such limitations.

More Scrutiny

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS monitors LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In light of this, S corp owners may want to observe some of the same formalities that C corporations do (such as extensive record keeping), even if they’re not legally required to.

More Accounting and Bookkeeping

Having an LLC with S corporation election generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will also be more complex.

With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.

Advantages of S Corp Status for C Corporations

If you have a C corporation (which is the default form of corporation), filing as an S corp does have its advantages:

No Double Taxation

A major disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are ‌distributed to the individual shareholders, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual business owner level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.

We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as major now as they were. 

Writing Off Losses

Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements. 

This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

QBI Deduction

Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income (QBI). This deduction isn’t available to C corporation shareholders.

QBI is essentially your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if you exceed it, may reduce your QBI (see the IRS website for details).  

Disadvantages of S Corp Election for C Corporations

S corp status also has its drawbacks for C corporations:

No More Than 100 Shareholders

As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could become an issue if the corporation expands and goes public.

Limited Shareholder Types

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That may limit your ability to expand outside of the U.S. You also can’t have partnerships or corporations as shareholders. C corporations don’t have limitations like this.

Only One Class of Stock

One way corporations attract investors is to offer preferred stock, but that’s not allowed for S corps.

More IRS Scrutiny

Because of the extra restrictions S corps have, the IRS watches them more closely to see if they’re in compliance, meaning, your corporation is more likely to get audited.

Again, it’s important to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings.

Washington-Specific Considerations

In an S corp, the business itself doesn’t usually pay federal income tax. But what about state income taxes?

While many states impose an income tax on earnings, Washington State does not have a personal or corporate income tax. But S corporations in Washington are required to pay the Business and Occupation (B&O) tax. This is not a tax on the profits (the money you have left after all expenses are paid) but on the gross receipts, the total amount of money the business brings in. Every S corporation in Washington must pay taxes for the B&O, even if it isn’t making any profits. Some local governments also impose an additional B&O tax of their own.

Moreover, businesses, including S corporations, are required to file an Excise Tax Return with the state of Washington, detailing their gross receipts and computing the B&O tax owed. This step is critical to maintaining compliance with state regulations and avoiding any potential legal and financial issues.

How We Can Help

Forming a business can be complicated, but we’re here to make it as easy for you as possible.

When you’re ready to take the leap, we can help you form a Washington LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward.