Washington D.C. is home to a strong business culture for small and large businesses alike. Entrepreneurs and business owners have access to a wealth of supportive resources, an educated workforce, and favorable tax policies. Starting a business anywhere can be challenging, with each state bringing its complexities, tax rates, and guidelines. Thankfully, small businesses in DC support each other through a diverse ecosystem that leads to long-term success.
Choosing how to structure your business in the District of Columbia can be overwhelming. Electing to be taxed as an S corporation (S corp) in Washington D.C. can save you money in taxes. Whether you’re starting a small local coffee shop to help energize some of the most influential people in the country or any small business, forming a Washington D.C. S corporation can benefit you.
This guide will help you form your S corporation in Washington D.C. and provide you with the tools you need to remain in good standing.
Not in DC? Check out our other How to Start an S Corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Washington D.C.
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by an LLC or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Washington D.C. S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form a Washington D.C. S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Washington D.C.
Starting a Washington D.C. LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Washington D.C.
Be sure to choose a name that complies with Washington D.C. naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Washington D.C. LLC:
- Your name must include the phrase “limited liability company” or “limited company” or one of its abbreviations (LLC, L.L.C., LC, or L.C.).
- Your name cannot be the same as, or deceptively similar to, the name of any department, agency, or instrumentality of the United States or the District of Columbia.
- Your name cannot contain the words “bank,” “banking,” “credit union,” “insurance,” or words of similar meaning without the prior approval of the Mayor.
- Your name must be distinguishable from any existing business in the district. This includes Washington D.C. reserved names.
2. Is the name available in Washington D.C.? Make sure the name you want is available by doing a business entity search on the DC Business Center website.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Washington D.C. Registered Agent
You must elect a registered agent for your Washington D.C. LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Washington D.C. LLC Articles of Organization
The Washington D.C. Articles of Organization is used to officially register an LLC.
OPTION 1: File Online With DC CorpOnline
- OR -
OPTION 2: File Form DLC-1 by Mail or in Person
State Filing Cost: $199 in person and $99 online or by mail, payable to the Department of Licensing and Consumer Protection (Nonrefundable)
Department of Licensing and Consumer Protection
P.O. Box 92300
Washington, DC 20090
Department of Licensing and Consumer Protection
1100 4th St. SW
Washington, DC 20024
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Washington D.C. LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Washington D.C. S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Washington D.C. S Corp Compliant
After your business is up and running, you will want to maintain it and ensure it remains in good standing. As a Washington D.C. s corp, you will want to comply with all state laws and regulations, pay Washington D.C. state taxes, and file a biennial report every other year.
The District of Columbia has a “Clean Hands” mandate in place that prevents businesses from obtaining goods and services if there is a debt owed of more than $100 for fees, fines, penalties, and the failure to file tax returns. It’s especially important to keep your business in good standing to prevent the interruption of your business operations.
Washington D.C. S Corp Biennial Report
All businesses in Washington D.C. are required to file a biennial report with the Washington Department of Licensing and Consumer Protection, Corporations Division. This report is due within the first year of registering your business by April 1 and every two years following the initial report filing. For example, if you formed your business on January 1, 2020, your first report will be due by April 1, 2021. The next report will be due by April 1, 2023, and the following by April 1, 2025, and so on.
Visit our Washington D.C. Biennial Report guide for a step-by-step overview of the filing process.
Washington D.C. S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Washington D.C. S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Washington D.C. Income Taxes
Washington D.C. has a graduated income tax that varies based on income and status. The tax rate ranges from 4% to 10.75% through income brackets. This means that the lower your income for the tax year, the less the percentage of income tax you will have to pay, and the more you make, the higher the income tax you will have to pay.
While the income tax has the potential to be higher, there are a number of benefits and incentives for small businesses that make Washington D.C. a great place to start a business.
Washington D.C. Sales and Use Tax
The sales and use tax rate is a simple 6% flat rate across the District of Columbia. This makes it simple to collect sales tax as there are no cities within the district to collect additional taxes.
Additional State Taxes
There are additional taxes that your business may be required to pay. The Washington D.C. Office of Tax and Revenue provides information on the taxes specific to the District of Columbia. Some examples of taxes your small business may be required to pay include:
- Alcoholic beverage tax
- Cigarette tax
- Public utility tax
- Motor vehicle excise tax
- Vehicle rental tax
Visit Washington D.C.’s Office of Tax and Revenue website for more information.
Washington D.C. Local Taxes
Washington D.C. is a small yet mighty district within the United States. Because there are no local municipalities, you do not have to worry about paying additional taxes based on your location. You only have to worry about what the District of Columbia has set up for its tax structure.
Start a Washington D.C. S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
Which Washington D.C. businesses are S corps?
The total number of S corporations in DC is not tallied by any official metrics. Washington D.C., to most, is primarily run through the government and government enterprises, but small businesses make up just over 98% of all DC businesses.
Is Washington D.C. a good state for an S corporation?
Although Washington D.C. has a graduated income tax that caps at 10.75%, many incentives and resources can support your small business. With its strong business culture, Washington D.C. is a great place to start an S corporation.