How to Start an S Corp in Washington
Washington state is home to some of the biggest names in business — from Microsoft to Starbucks. It often ranks as one of the best places to start a business in the United States.
While starting a business may prove challenging, careful planning can turn your dreams into reality. One of the biggest decisions you’ll have to make in the initial stages involves how to structure your business. Choosing to form your business as an S corporation (S corp) in Washington state could potentially save you a significant amount on your taxes.
Whether you plan to open a new bakery, the next big coffee shop, or a small clothing boutique, electing S corp status has the potential to benefit any small business. We’ll walk you through the steps required to set up your business as a Washington S corp and keep it in good standing.
Not in Washington? Check out our other How to Start an S Corp guides to learn more.
Recommended: If you have at least $60,000 in net earnings, an S corp may offer tax advantages. Let Northwest start your S corp today.
Factors to Consider Before Starting an S Corp in Washington
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 a limited liability company (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 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.
To learn more about the tax advantages of an S corp, read our LLC vs. S corp guide and take a look at our S Corp tax calculator.
For a Free Consultation with a Tax Professional
How to Form a Washington S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the Internal Revenue Service (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
Starting a Washington 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 Northwest 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 Certificate of Formation
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.
Be sure to choose a name that complies with Washington naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Washington LLC:
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Your name must contain the words "limited liability company," the words "limited liability" and abbreviation "Co.," or the abbreviation "L.L.C." or "LLC.”
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Your name cannot include any of the following words or abbreviations: cooperative, partnership, corporation, incorporated, Corp., Ltd., Inc., LP, L.P., LLP, L.L.P., LLLP, L.L.L.P, or any words or phrases prohibited by any statute of this state.
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Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
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Certain restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual to be part of your LLC.
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Your name must be distinguishable from any existing business in the state. This includes Washington reserved names.
You can also read the Washington state statutes about permitted LLC names and general naming requirements for more information.
2. Is the name available in Washington? Make sure the name you want is available by doing a business entity search on the Washington Secretary of State 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.
Step 2: Choose Your Washington Registered Agent
You must elect a registered agent for your Washington 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 Certificate of Formation.
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.
Washington Registered Agent Consent to Appointment
Washington registered agents must consent to their appointment. They can do this by signing the Certificate of Formation. If the Certificate of Formation is filed online, the business must keep a signed hard copy of the form on file with the registered agent’s signature.
Step 3: File the Washington LLC Certificate of Formation
The Washington Certificate of Formation is used to officially register an LLC.
File Your Washington Certificate of Formation
OPTION 1: File Online With the Washington Secretary of State
File Online- OR -
OPTION 2: File by Mail
Download FormState Filing Cost: $180 by mail and $200 online, payable to the Secretary of State (Nonrefundable)
Mailing Address:
Secretary of State
Corporations Division
P.O. Box 40234
Note: The Initial Report is included with the online filing at no cost. If it is filed within 120 days, it is $10 by mail or $30 online.
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 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 S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Washington S Corp Compliant
After you set up your business as a Washington S corp, you’ll need to ensure it remains in good standing. Washington requires you to follow all state and local guidelines, keep up to date on your taxes, and file an annual report.
Washington S Corp Annual Report
While the state of Washington will tax your business as an S corp, it still considers it an LLC. As such, you must file an annual report with the Washington Secretary of State’s Corporations & Charities Division. The filing deadline is the last day of the anniversary month in which you formed your business.
Visit our Washington Annual Report guide for a step-by-step overview of the filing process.
Washington 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 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 Income Taxes
Washington state is one of the few states without a personal or corporate income tax. Business owners who start a business in Washington state don’t have to pay any state income taxes, which can save them a lot of money. They do, however, have to pay a business and occupation (B&O) and/or a public utility tax.
The B&O tax is a gross receipts tax based on the value of a business’s products and process of the sale. Because the state calculates B&O tax rates on gross income, there are no deductions for labor, materials, and other business costs. The B&O tax rate can vary by business classification, which you can review on the Washington State Department of Revenue website.
Washington Sales and Use Tax
Washington state imposes a retail sales and use tax rate of 6.5%. Local cities and towns have the authority to impose additional percentages, which can vary based on the location of your business. To learn more, visit the Department of Revenue’s Tax Rate Lookup page.
Additional State Taxes
The Washington State Department of Revenue provides details on various other state-specific taxes your business may have to pay. Some examples of these additional taxes include:
- Tobacco Products Tax
- Food and Beverage Tax
- Enhanced Food/Fish Tax
- Motor Vehicle Sales and Use tax
- Refuse or Solid Waste Tax
Visit the Washington State Department of Revenue website for more information.
Washington Local Taxes
Whether you start your business in Seattle or one of Washington State’s smaller cities, your local municipality may have its own tax structure for which your business must file and pay. Check your local government’s website to ensure your business complies with local tax laws.
Start a Washington S Corp FAQ
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
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.
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.
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.
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
Many industries are essential to Washington State’s economy, including aerospace, forestry, and agriculture. As such, the state provides a welcoming environment for small businesses of all kinds.
You can set your business up as an S corp as long as it meets the IRS’s requirements for this tax designation. Specifically, your business:
- Must be a domestic corporation
- May have no more than 100 shareholders and those shareholders can only be individuals, certain trusts, and estates
- Can issue only one class of stock
- Must not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic or international sales corporations
Washington has always been a great place to start a business. With no state income tax, it can provide an attractive place for small businesses and their owners to thrive and save money on their taxes.