LLC vs S-Corp in Washington


Steve Goldstein
Steve Goldstein
Business Formation Expert
Steve Goldstein runs LLCBuddy, helping entrepreneurs set up their LLCs easily. He offers clear guides, articles, and FAQs to simplify the process. His team keeps everything accurate and current, focusing on state rules, registered agents, and compliance. Steve’s passion for helping businesses grow makes LLCBuddy a go-to resource for starting and managing an LLC.

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LLC vs. S Corp in Washington

Making choices as an entrepreneur is a big challenge, especially when choosing what business structure to form in Washington. When it comes to a business structure, you can choose whether to have a C-corporation, S-corporation, Sole Proprietorship or an LLC in Washington. Before you start Washington LLC filing, you must compare which structure suits you. You might be considering two popular options: a Limited Liability Company (LLC) or an S Corporation (S-Corp). Both of these structures offer distinct advantages and protections, but selecting the right one depends on various factors, including your business goals, tax preferences, and management style.

If you are confused with Washington LLC vs. S-Corporation, and thinking which one is better and more suitable for the business that you will form, there are a few things that you should consider. Before we get through this article, you should understand what an LLC and S-Corporation mean in Washington.

LLC vs. S-Corp: Definition

While forming an LLC, you must follow some major steps. It is a business structure that protects your personal assets from getting affected by business liabilities. On the other hand, the S Corp is not a conventional business structure, but it is tax status that your can file with the IRS. S Corp does not provide personal asset protection like an LLC. Here are the detailed definitions of the two-

What is an LLC in Washington?

A limited liability company (LLC) is a formal business structure that provides personal asset protection. Under this structure, the LLC owner/member can save his/her personal assets in case the business is in debt or is being targeted with a lawsuit. In some special cases, if your company is legally sued, the other party can go after your personal assets. This is called piercing the corporate veil, where you become personally liable for the company’s debt.

Forming an LLC in Washington gives you a pass-through tax benefit where you don’t have to pay an income tax based on your business revenue; instead, the income tax will be calculated based on your personal income.

What is an S-Corp in Washington?

An S-Corporation (S-corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other business structures. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-Corporation is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

S-corp is a prominent alternative to the LLC. Unlike a conventional C-corp, S-corp is more suitable for small and medium businesses, such as businesses with 100 shareholders.

LLC Vs. S-Corporation: Which is More Preferable in Washington?

In Washington, forming a business is crucial since you need to be adequate in your decision, especially when you think if Washington LLC or an S-Corporation in Washington is preferable. An S-Corporation is a tax classification that some small businesses are qualified for, whereas an LLC is a legitimate company form. By submitting a document to the Internal Revenue Sector (IRS), corporations and LLCs can choose S-Corporation taxation. An S-Corporation can be less formal than forming an LLC and doesn’t normally provide the same protection. Also, unlike LLC, S-Corporation in Washington doesn’t provide the same protections entrepreneurs seek from an LLC. It’s important to consider your options when launching a business from a legal and tax point of view.

It is better to consult a legal professional before you set up an LLC or S-corp. We shared basic differences and how you can form an LLC and S-corp. But it is always recommended to consult a professional before making any decision.

LLCBuddy Editorial Team

Tax Difference Between Washington LLC and S-Corp in Washington

There is a difference between LLC and S-Corporation when it comes to paying taxes. Based on Federal and State Tax differences between the two, you can determine if S-Corporation or LLC in Washington is suitable 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 in terms of 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 are required to 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 scenario where you are the only owner of an LLC in Washington with a $150,000 annual profit. And let’s say that $100,000 is a fair wage in your location for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $150,000 profit. But, if your company is taxed as a Washington S-Corp, you will only be responsible for paying payroll taxes on the standard wage of $100,000. Income tax will still apply to the remaining $50,000.

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 that 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).

On the other hand, you also need to pay taxes if you form an S-Corporation in Washington; besides, you must pay the S-Corp filing fee and an annual report fee after a year of establishing your S-Corp. You must also go to the DCRA to pay this.

How do Washington LLCs and S-Corporations Handle Liability Protection?

In Washington, you have no personal responsibility for the financial and legal liabilities of an LLC you will form. An S-Corporation does not provide liability protection because it is a tax designation rather than a distinct business entity. Whatever liability defense an S-Corporation provides is provided by the underlying business entity that chose the tax status. You will have the liability protection the LLC offers if it chooses S-Corporation status for tax purposes.

LLC Vs. S Corporation Ownership Requirements Comparison

Strict ownership requirements exist for LLCs and S-Corporations in Washington. LLC ownership regulations are strict because a new member can only be accepted with the approval of all existing members. On the other hand, S-Corporation ownership regulations are also strict because only specific people are permitted to become shareholders. Also, an S-Corporation can’t have more than 100 shareholders and needs one class of stock.

The following are the reasons why some cannot be shareholders in the S-Corporation in Washington.

  • Insurance business
  • Domestic and International sales corporations
  • Partnerships
  • Corporations
  • Unauthorized Immigrants
  • Certain financial institutions

Although you know most of the reasons regarding the ownership requirements of both LLC and S-Corporation, you should still seek legal advice in preparation for your business and it is best to visit LLCBuddy for your Washington LLC or Washington S-Corp.

Which is Easier to File in Washington: LLCs or S-Corporations?

Filing an LLC or S-Corporation in Washington takes time and preparation. Even though it is not as easy as it seems, something manageable still makes it not difficult. LLC and S-Corporation can be filed by Washington Registered Agent. However, in order to establish an LLC in Washington, you must submit a Articles of Organization to the Washington Secretary of State. Your Articles of Organization must contain information for your LLC, along with payment of the associated filing fee.

In addition, you need to submit more papers to make the Washington S-Corporation election. File a Form 8832 to inform the Internal Revenue Sector (IRS) that you prefer to tax your LLC as a corporation rather than a partnership. Then you will then submit Form 2553 to choose S-Corporation status.

Do not forget that you must submit annual tax returns and reports after creating your LLC in order to maintain legal compliance.

Important Information

Who Pays More Taxes, an LLC or S-Corporation?

Taxes differ for LLC and S-Corporation in Washington because it depends on the tax purposes and how much profit will be generated. Usually, LLCs are frequently taxed at personal rates and LLC owners can elect to be treated as a separate company with its own federal tax identification number.

On the other hand, owners of S-Corporations must receive a salary that includes Social Security and Medicare taxes. The owner, however, can get dividend income or some of the leftover profits, but not as an employee; thus, they won’t be subject to Social Security and Medicare taxes on that money.

Should I Convert an LLC to S-Corporation?

Since your business assets are separated from your personal assets if you’re a sole proprietor, it may be advisable to form an LLC. You are not restricted to modifying the structure of your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and adhere to more regulations, it would be ideal for more companies with more shareholders.

How to Structure an LLC to S-Corporation?

To structure an LLC to S-Corporation in Washington, you must submit Form 2553, Election by a Small Business Corporation, to the IRS in order to choose S-corp taxation. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or not more than 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, in order to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS. In Washington, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520 .

FAQs

What is the difference between an LLC and an S-Corp in Washington?
Limited Liability Companies (LLCs) and S-Corporations (S-Corps) are two ways to structure a business in the state of Washington. LLCs provide limited liability protection to their owners, meaning that members are not personally liable for the debts and obligations of the business. An S-Corp provides similar protection, but also has the potential for tax savings. The main difference between an LLC and an S-Corp is the way in which they are taxed. LLCs are subject to “pass-through” taxation, meaning that the profits and losses of the business “pass through” to the owners of the LLC, who then pay taxes on their personal returns. S-Corps, on the other hand, are subject to corporate taxation, meaning that the company first pays taxes on its income, and then the owners are taxed on their share of the profits.
What taxes do LLCs pay in Washington?
LLCs in Washington are subject to “pass-through” taxation, meaning that the profits and losses of the business “pass through” to the owners of the LLC, who then pay taxes on their personal returns. Depending on the number and type of owners, LLCs may also be subject to additional taxes, such as the Business & Occupation (B&O) tax, the unemployment insurance (UI) tax, the public works assistance (PWA) tax, and the state excise tax.
What taxes do S-Corps pay in Washington?
S-Corps in Washington are subject to corporate taxation, meaning that the company first pays taxes on its income, and then the owners are taxed on their share of the profits. Depending on the number and type of owners, S-Corps may also be subject to additional taxes, such as the Business & Occupation (B&O) tax, the unemployment insurance (UI) tax, the public works assistance (PWA) tax, and the state excise tax.
What are the legal requirements for forming an LLC in Washington?
To form an LLC in Washington, you must file Articles of Organization with the Washington Secretary of State. You must also create an Operating Agreement and obtain any necessary licenses or permits. You must also register with the Washington Department of Revenue and pay any applicable fees.
What are the legal requirements for forming an S-Corp in Washington?
To form an S-Corp in Washington, you must file Articles of Incorporation with the Washington Secretary of State. You must also create an Operating Agreement and obtain any necessary licenses or permits. You must also register with the Washington Department of Revenue and pay any applicable fees. Additionally, you must file Form 2553 with the IRS to apply for S-Corp status.
Does an LLC in Washington require a minimum number of members?
No, an LLC in Washington does not require a minimum number of members.
Does an S-Corp in Washington require a minimum number of shareholders?
Yes, an S-Corp in Washington requires a minimum of two shareholders.
Can an LLC in Washington have more than one class of membership?
Yes, an LLC in Washington can have more than one class of membership.
Can an S-Corp in Washington have more than one class of ownership?
Yes, an S-Corp in Washington can have more than one class of ownership.
Does an LLC in Washington need to issue stock?
No, an LLC in Washington does not need to issue stock.
Does an S-Corp in Washington need to issue stock?
Yes, an S-Corp in Washington must issue stock to its shareholders.
Does an LLC in Washington need to hold annual meetings?
No, an LLC in Washington does not need to hold annual meetings.
Does an S-Corp in Washington need to hold annual meetings?
Yes, an S-Corp in Washington must hold annual meetings.
Does an LLC in Washington need to file annual reports?
Yes, an LLC in Washington must file annual reports with the Washington Secretary of State.
Does an S-Corp in Washington need to file annual reports?
Yes, an S-Corp in Washington must file annual reports with the Washington Secretary of State.
Is an LLC in Washington subject to self-employment taxes?
No, an LLC in Washington is not subject to self-employment taxes.
Is an S-Corp in Washington subject to self-employment taxes?
Yes, an S-Corp in Washington is subject to self-employment taxes.
Does an LLC in Washington need to pay taxes?
Yes, an LLC in Washington must pay taxes on any profits made by the business.
Does an S-Corp in Washington need to pay taxes?
Yes, an S-Corp in Washington must pay taxes on any profits made by the business.
Does an LLC in Washington need to file taxes?
Yes, an LLC in Washington must file taxes with the Washington Department of Revenue.
Does an S-Corp in Washington need to file taxes?
Yes, an S-Corp in Washington must file taxes with the Washington Department of Revenue.
Can an LLC in Washington issue shares of stock?
No, an LLC in Washington cannot issue shares of stock.
Can an S-Corp in Washington issue shares of stock?
Yes, an S-Corp in Washington can issue shares of stock.
Can an LLC in Washington have more than one owner?
Yes, an LLC in Washington can have more than one owner.
Can an S-Corp in Washington have more than one owner?
Yes, an S-Corp in Washington can have more than one owner.
Does an LLC in Washington need to appoint a registered agent?
Yes, an LLC in Washington must appoint a registered agent to receive legal documents and correspondence on behalf of the company.
Does an S-Corp in Washington need to appoint a registered agent?
Yes, an S-Corp in Washington must appoint a registered agent to receive legal documents and correspondence on behalf of the company.
Does Washington offer any tax incentives for LLCs?
Yes, Washington offers some tax incentives for LLCs, including the B&O tax credit and the employment incentive tax credit.
Does Washington offer any tax incentives for S-Corps?
Yes, Washington offers some tax incentives for S-Corps, including the B&O tax credit and the employment incentive tax credit.
Does an LLC in Washington need to file a separate tax return?
Yes, an LLC in Washington must file a separate tax return with the Washington Department of Revenue.
Does an S-Corp in Washington need to file a separate tax return?
Yes, an S-Corp in Washington must file a separate tax return with the Washington Department of Revenue.
Can an LLC in Washington have employees?
Yes, an LLC in Washington can have employees.
Can an S-Corp in Washington have employees?
Yes, an S-Corp in Washington can have employees.

Also Read

Why Washington LLC Vs S Corp is So Important

One of the primary considerations for business owners in Washington when deciding between forming an LLC or an S Corp is the tax treatment of each structure. LLCs are considered pass-through entities, which means that the profits and losses of the business are passed through to the owners and reported on their personal tax returns. This can be advantageous for owners who want to avoid the double taxation that occurs with C Corporations.

On the other hand, S Corps are also pass-through entities, but they offer some unique tax advantages. For example, in Washington state, S Corps are not subject to the business and occupation (B&O) tax, which can result in substantial tax savings for owners compared to an LLC. Additionally, S Corp owners may be able to structure their income to minimize self-employment taxes, which is not possible with an LLC.

Another important consideration for business owners choosing between an LLC and an S Corp in Washington is the flexibility and complexity of governance. LLCs offer a simpler and more flexible organizational structure, with fewer formalities and requirements for ongoing operation. This can be attractive to business owners who want to maintain control and autonomy over their business without having to adhere to strict rules and regulations.

On the other hand, S Corps have more stringent governance requirements, including the need to hold regular board meetings, maintain detailed corporate records, and follow specific guidelines for electing officers and directors. While this additional complexity can be daunting for some business owners, it can also offer advantages in terms of providing clearer roles and responsibilities for management and decision-making.

In addition to tax treatment and governance considerations, business owners in Washington state should also carefully consider the implications of liability protection when choosing between forming an LLC or an S Corp. Both structures offer limited liability protection, which means that owners are generally not personally responsible for the debts and obligations of the business. However, there are nuances to this protection that can vary between the two entities.

For example, LLC owners in Washington state may be personally liable for the actions and debts of the business if they are found to have engaged in fraudulent or wrongful conduct. S Corp owners, on the other hand, are generally not personally liable for the actions of the corporation, except in cases of fraud or gross negligence. This distinction can have important implications for business owners seeking to protect their personal assets from legal claims and lawsuits.

In conclusion, the decision to choose between forming an LLC or an S Corp in Washington state is a critical one for business owners. Each entity offers distinct advantages and disadvantages in terms of tax treatment, governance, and liability protection. Business owners should carefully consider their specific needs and goals when making this decision, seeking advice from legal and financial professionals to ensure they choose the structure that best aligns with their objectives.

Conclusion

Even though you can choose a different corporate structure, consider whether it will primarily assist your organization. Striking the perfect balance between corporate benefits and legal protection that suits your particular needs is important. In forming an LLC or S-Corp in Washington, you must be aware that every detail is well-formed so that starting your business will be successful. And, if you would like us to help you form a Washington LLC and S-Corp in Washington, read our other business guides.

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