Start an S Corporation in Washington

Are you looking to start an S corporation (S corp) in Washington? There’s more to S corp status than simply declaring it the type of tax classification you want for your business entity. 

This article will walk you through Washington business rules, like specific tax considerations, the six steps needed to form an S corp, and some guidance on whether or not an S Corp is right for your small business.

S Corporation in Washington: Key Points

• S corporations in Washington aren’t required to pay corporate taxes but must pay what is known as state business and occupation (B&O) tax.

• Washington collects retail sales tax on all sales subject to the retailing classification of the B&O tax unless a specific retail sales tax deduction or exemption applies.

• Washington state law requires that S corporations hire a registered agent to act as a liaison between the state and an S corp.

What Is an S Corporation?

According to the Internal Revenue Service (IRS), an S corp passes its income, losses, deductions, and credits to shareholders for federal tax purposes.[1] 

Recognizing that an S corporation is not a business structure is essential. Instead, it is a type of tax classification that businesses can choose. Suppose your business entity elects S corp status. In that case, any of your company’s profits and losses will go through to its shareholders. The IRS sees S corps as a pass-through entity, which makes them an excellent option for small business owners.

Businesses typically pay corporate taxes at the end of every tax year. Rather than filing corporate taxes separately, an S corporation’s taxes pass through to shareholders. Owning members will then file business taxes on their tax returns. Note that according to the Department of Revenue, the state of Washington does not have a corporate income tax.[2]

Business owners might also be interested in C corporations and LLCs. An LLC, or limited liability company, is a business structure. You can form your Washington LLC and elect one of the two corporation types – S corp or C corp – to determine how your business files its taxes because they are tax classifications. Note that an S corp is a pass-through entity, but a C corp is not.

Tax Considerations for an S Corporation in Washington

Again, electing S corp status means choosing a tax classification and not a business structure. Therefore, it’s essential to understand how this affects your business and the specific tax considerations it needs to follow. S corps also have rules and tax treatment specific to Washington. Shareholders can be liable for different types of taxes.

For example, Washington does not have a corporate or personal income tax. However, businesses that operate in the state can be subject to business and occupation (B&O) tax, retail sales or use tax, and personal property tax instead.[3] Keep reading for more info on S corp tax classification.

Washington Tax Treatment of S Corporations

Because S corps are pass-through entities, shareholders report the company’s income and losses on their annual tax returns. The benefit is that tax returns are assessed at the individual’s income tax rates.[4] This means they can avoid being taxed twice on corporate income, making this tax classification incredibly enticing for small business owners.

Owners must pay federal income taxes for their businesses based on net profit (revenue minus expenses). This can be done using Form 1040-ES. S corps typically have payments due on April 15, June 15, September 15, and January 15.[5]

As mentioned, Washington doesn’t have a corporate or personal income tax, so S corps don’t have to pay this when filing taxes. Instead, they have to pay what is known as state business and occupation (B&O) tax. Any company formed as a corporation, LLC, partnership, or sole proprietor is subject to the B&O tax. This applies to both nonprofit and for-profit businesses.[6]

Washington Franchise Tax for S Corporations

Don’t let the word “franchise” fool you; a franchise tax refers to “a tax paid by certain enterprises that want to do business in some states.”[7] This shouldn’t be confused with federal and state income taxes that businesses must file each year. To check what type of taxes your business needs to pay, check out the Washington Department of Revenue site, which administers over 60 types of taxes.

Pass-Through Taxation

S corps pass all corporate income, losses, deductions, and credits to their shareholders for federal tax purposes. This means that owners are responsible for filing any business-related taxes on their personal tax returns.[8] Self-employment tax can come into play here since shareholders are more likely to own their businesses and employ themselves, usually in the case of small businesses.

Self-employment tax refers to Social Security and Medicare taxes. This does not include any other taxes that self-employed people must file. Not specific to the state of Washington, the IRS collects self-employment tax at a rate of 15.3% across all 50 states.[9]

In addition, B&O tax might not apply to working owners of S corps, who act as employees who receive standard paychecks.[10] In this case, working owners may not need to make estimated tax payments if they have enough income tax withheld from their paychecks.

Requirements for Forming an S Corporation in Washington

Only some businesses can elect S corp status. Business owners should check their entity’s eligibility before proceeding with all the steps needed to claim it as a tax classification successfully. Swyft Filing’s online filing service can help ensure you don’t miss any critical requirements to register your organization as an S corp.

While this tax classification especially appeals to small businesses and LLCs, only some companies can elect S corp status. S corporation shareholders will be required to take on their entity’s corporate taxes on state and federal levels. For this reason, it must operate in the U.S. In addition, the business and its shareholders must fit specific requirements and follow certain rules.

To qualify for S corp status, businesses must meet the requirements below:

• Be a domestic corporation, i.e., operate in the United States

• Have only allowable shareholders

  • Allowable: individuals, certain trusts, U.S. citizens, and/or estates

  • Not allowable: partnerships, corporations, and/or non-resident aliens

• Have no more than 100 shareholders

• Have only one class of stock

• Not be an ineligible corporation, e.g., certain financial institutions, insurance companies, or domestic international sales corporations[11]

Filing as an S Corp in Washington

To register your S corporation in Washington, keep reading for a step-by-step guide taking you through each part of the process. Note that the filing process is different from state to state. Be sure to research what’s required because your business needs to follow the rules for its state and where it operates. You don’t want to find yourself paying unnecessary filing fees or getting in trouble for missing payments because you looked up the guidelines for the wrong place of business.

Step 1: Choose a Business Name

Beyond thinking of how your name appeals to customers or how it looks in design, business owners also need to take the proper legal steps to claim their name. You can search a business name to check that it’s free to use through the Washington Business Licensing Service or the Washington Secretary of State. Using the same name as another business could cause confusion or, even worse, land you in legal trouble. Your business name must also indicate what type of entity it is, e.g., Corp. for a corporation. Then, you must register your name by completing a Washington Business License Application for $5.[12] If your business only operates in the state, you can file a trademark with the Secretary of State. Otherwise, the U.S. Patent and Trademark Office would be involved.

Step 2: Appoint Directors and a Registered Agent

A unique aspect of filing for S corp status is appointing a director or a board of directors. Some specific internal practices and regulations come with claiming this tax status.[13] S corps are responsible for conducting shareholders’ meetings, documenting meeting minutes, and writing corporate bylaws. This is where hiring an elected board of S corp directors can be helpful.

In addition, state law requires getting a registered agent. A Washington registered agent is someone based in the state who receives your official service of process and other legal documents, acts as the address linked to your S corp, and more. This can be you, your attorney, or an outside party.[14] Check out Swyft Filings’ registered agent service to help you find an agent that fits your needs.

All corporations, LLCs, and limited partnerships in Washington must have a registered agent with a physical address in the state. Otherwise, they risk not being recognized as a business. This is because business owners must be able to receive essential documents to continue operating in the state.[15]

Step 3: File Articles of Incorporation

The Articles of Incorporation, also known as the Certificate of Formation for LLCs, contain specific information so that the state successfully recognizes your business entity as fully formed. Each state has its own set of rules to follow when filing and a filing fee.[16] This cost varies depending on your business type.

Businesses must file with the Secretary of State and receive their Washington State Unified Business Identifier, or UBI number. This is a state business identification number for interacting with other state agencies.[17]

Washington has different sets of instructions and rules for filing Articles of Incorporation based on the type of business. For example, domestic LLCs differ from domestic profit corporations, domestic nonprofit corporations, domestic limited partnerships, and domestic limited liability partnerships. The guidelines for each business type can be found here. 

Your Washington Articles of Incorporation should at least contain these critical pieces of information::

• Your S corp’s registered name and business address

• The registered agent’s name, business address, and mailing address (if different)

• A statement regarding the registered agent’s consent

• Name and mailing address of the person forming the S corp

• Whether the business is managed by manager or members

• Any other additional information

In addition, note that because S corp status is a tax classification and not a business model, it’s likely that business owners will have to file for an LLC before applying for S corp status. For this reason, follow the steps for forming an LLC before electing S corp status for your entity.

Step 4: Create an S Corp Operating Agreement

Then, create what is known in the state of Washington as “bylaws” for a corporate entity or an “operating agreement” for a limited liability entity to formalize ownership.[17] The primary purpose of this legal document is to identify and solidify the business owners, but other pieces of information can go into the document. An operating agreement also outlines the responsibilities that each owner needs to maintain to keep the business running. When drafting your operating agreement, describe the business structure, including the owners, and explain how they will manage the company according to different styles.

Step 5: Apply for an Employer Identification Number

Toward the end of the process, apply for an Employer Identification Number (EIN). Like an individual social security number (SSN), the IRS uses an EIN to identify your business when you file your tax return. You must apply for an EIN to open a business bank account, get a credit card, apply for required licenses, and report your taxes.

Suppose your business is a sole proprietorship, and you aren’t planning on employing anyone else. You can use your SSN as the business’s federal tax identification number in that case. If you choose not to do so, you will need an EIN.[17]

Step 6: File Form 2553 for S Corporation Election

Business owners must complete Form 2553 (Election by a Small Business Corporation) if they want their entity to be treated as an S corp with pass-through taxation benefits. This form officially elects their S corp status and is required by the IRS. All shareholders must sign it and take full ownership for filing their S corp’s income and losses on their personal tax returns.

Make sure to make the election at any time during the tax year before the tax year you want it to apply to.[18] This cannot be any later than two months and 15 days after the tax year starts. However, there is relief for late elections. You can contact the Department of the Treasury at the IRS Center in Utah or find more information here.

If a business owner has an LLC they want to classify as an S corp and the LLC is already past the deadline, they must file an additional form. Form 8832 (Entity Classification Election) allows the business to be taxed as a corporation and must be done with Form 2553.

Washington S Corp vs. Washington LLC

Remember that LLCs are business structures and S corp election is a tax classification. Each type of classification can be appealing for different tax purposes and offer benefits that might interest you and your business needs. While we have gone over the ins and outs of electing S corp status, there might be reasons why you want your Washington LLC to have different tax treatment than S corp status.

Advantages of Starting an LLC in Washington

LLCs offer personal liability protection, flexible taxation, and are relatively cheap and easy to form compared to other businesses. It is an excellent option for entrepreneurs and small business owners and comes with flexibility in ownership and management. If you’re a business owner looking to start an LLC, try using Swyft Filings as an online filing service to save time and energy.

Disadvantages of Starting an LLC in Washington

On the other hand, there can be some downsides to forming an LLC. The IRS doesn’t recognize LLCs as a tax classification, as mentioned. Therefore, the default is sole proprietorship taxation if there is only one owner, or partnership taxation if there is more than one. If you want to elect S corp status, then there are additional steps you have to follow, which requires more time and money.[19]

Advantages of forming an S Corporation in Washington

Electing your LLC as an S corp can come with significant benefits when filing taxes. For one, S corps in Washington are not subject to corporate income tax.[20] Additionally, as a pass-through entity, shareholders report the company’s income and losses on their tax returns, recognizing their individual income tax rates.

Disadvantages of forming an S Corporation in Washington

Alternatively, going the S corp route may mean that LLCs may face stricter administrative requirements than sole proprietorships or limited partnerships. And while they offer flexibility when it comes to filing taxes and ownership, it may also complicate things when having to choose a tax classification and managing members.[21]

Ready to File for S Corp Status in Washington?

Forming and maintaining an S corporation in Washington requires time, money, and attention to detail. Each step must be done right to ensure your business gets up and running. Swyft Filings is a way to ensure that your S corp gets through the process successfully from start to finish. Small business owners can use our S-corp filing service to let us handle the paperwork.

We help folks save time and effort by ensuring everything is filed correctly from the start, noting S corp limitations from day one, and guaranteeing efficiency. With fast turnaround times, we provide a quick, easy, and reliable formation service to get you S corp status when needed. 

Frequently Asked Questions (FAQs)

What is an S Corporation in Washington?

An S corp is a business that passes any income, losses, deductions, or credits to its shareholders for federal tax purposes. Shareholders then file business taxes on their tax returns using individual tax rates.

Does Washington recognize S corporations?

Yes, Washington state recognizes S corps as one of the four organizational structures used to identify business income tax.[22]

What is the turnaround time for filing for S corp status with the IRS?

On average, business owners will be notified of their business entity’s S corp status within 60 days after filing Form 2553.[23]

What is the difference between an S corp and an LLC?

The main difference is that an S corp is a type of tax classification, not a business structure. An LLC is a business structure that needs to elect a tax classification.

What are the requirements for an S corporation in Washington?

According to the IRS website, to qualify for S corp status, your business entity must:

• Operate domestically

• Appoint only allowable shareholders (individuals, certain trusts, and/or estates).

• Have at most 100 shareholders

• Have only one class of stock

• Not be an ineligible corporation, e.g., certain financial institutions, insurance companies, or domestic international sales corporations.

Are taxes for LLCs and S corps the same?

No. How LLCs are taxed depends on the type of tax classification they choose: S corp, C corp, Partnership, or Sole Proprietorship. While LLCs provide professional services like other businesses, they must determine a tax structure and are not treated as separate tax entities.

What is the S corp tax rate?

According to the Department of Revenue for Washington state, the Retailing B&O state tax rate is 0.47% of business owners’ gross receipts.[24] It also states, “in addition, retail sales tax must also be collected on all sales subject to the retailing classification of the B&O tax, unless a specific retail sales tax deduction or exemption applies.”[24]

How do I dissolve an S corporation in Washington?

You can dissolve an S corp in Washington through the Department of Revenue website or the Business Information Change Form. Note that if you dissolve a corporation registered to do business in Washington, you must contact the Secretary of State, provide a Revenue Clearance Certificate, and follow specific steps after closing your account.[25]

You can also quickly dissolve an S Corp in Washington using our online dissolution service.

Bibliography

1. Internal Revenue Service. “S Corporations.” Accessed February 6, 2023.

2. Department of Revenue: Washington State. “Income Tax.” Accessed February 6, 2023.

3. Department of Revenue: Washington State. “Business Tax Structure in Washington State.” Accessed February 6, 2023.

4. Internal Revenue Service. “S Corporations.” Accessed February 6, 2023.

5. Small Business Guidance. “Run Your Business.” Accessed February 6, 2023.

6. Department of Revenue: Washington State. “Business Tax Structure in Washington State.” Accessed February 6, 2023.

7. Investopedia. “Franchise Tax Definition, Rates, Exemptions, and Example.” Accessed February 6, 2023.

8. Internal Revenue Service. “S Corporations.” Accessed February 6, 2023.

9. Internal Revenue Service. “Self-Employment Tax (Social Security and Medicare Taxes).” Accessed February 6, 2023.

10. Small Business Guidance. “Run Your Business.” Accessed February 6, 2023.

11. Internal Revenue Service. “S Corporations.” Accessed February 6, 2023.

12. Small Business Guidance. “Start Your Business.” Accessed February 6, 2023.

13. Investopedia. “What is an S Corp?” Accessed February 6, 2023.

14. Small Business Guidance. “Start Your Business.” Accessed February 6, 2023.

15. Washington Secretary of State. “FAQ - Registered Agent.” Accessed February 6, 2023.

16. Washington Secretary of State. “Download Forms.” Accessed February 6, 2023.

17. Small Business Guidance. “Start Your Business.” Accessed February 6, 2023.

18. Internal Revenue Service. “Instructions for Form 2553 (12/2020).” Accessed February 6, 2023.

19. Small Business Guidance. “Start Your Business.” Accessed February 6, 2023.

20. Department of Revenue: Washington State. “Income Tax.” Accessed February 6, 2023.

21. Upcounsel. “Disadvantages of an LLC: Everything You Need to Know.” Accessed February 6, 2023.

22. Small Business Guidance. “Run Your Business.” Accessed February 6, 2023.

23. Internal Revenue Service. “Instructions for Form 2553 (12/2020).” Accessed February 6, 2023.

24. Department of Revenue: Washington State. “Business and Occupation (B&O) Tax.” Accessed February 6, 2023.

25. Department of Revenue: Washington State. “Close My Account.” Accessed February 6, 2023.