S Corp Washington State: Everything You Need to Know
An S corp Washington state is a corporation that becomes an S corp when the shareholders vote for a special tax status with the IRS by filling out Form 2553.3 min read
An S corp Washington state is a corporation that becomes an S corporation when the shareholders vote for a special tax status with the IRS by filling out Form 2553 (after filing incorporation documents with the Washington state). Like C corporations in Washington, an S corporation is an individual entity separate from its owners.
Introduction to S Corp in Washington
Shareholders enjoy limited liability for the debts and obligations of their business, as well as an possible legal action against the business. Shareholders usually don't lose more than the amount the invested in the business, so even if it goes bankrupt, shareholders aren't liable for the debts. The shareholder's personal assets like a bank account, house or car are not at risk.
A Washington S corporation doesn't pay income taxes. Even if a corporation with more than one shareholder has to file tax returns, the owners have to include their share of the income or loss on their own tax returns, just like with LLCs or partnerships.
To become an S corporation in the state of Washington, you have to file a Form 2553 with the Internal Revenue Service. State filing fees must be paid and official documents have to be filed to form a Washington corporation.
Washington S corps can't have more than 100 shareholders. These shareholders can't be in other LLCs, partnerships, and corporations.
Advantages of S Corporations
- S corporation shareholders in Washington usually have limited liability and can not lose more than the money they invested.
- Shareholders of S corporations in Washington normally cannot be held liable for legal problems against the company or for any of its debts.
- The protection of shareholder personal assets is a major reason for owners to incorporate in Washington.
- The S corporations can also obtain more capital than other business types since you can issue or sell stock as evidence of interest in the corporation.
- S corporations are usually audited less often than partnerships and proprietorships.
- S corporations can easily pass through taxation and shareholders can avoid double taxation.
- S corporations pay no income tax itself, but they do file informational taxes.
- Shareholders can report losses and income on their personal tax returns so they can use their losses to offset other income.
- Self-employment taxes for owners don't apply to salaries paid by the corporation.
- Since stock can be bought, sold or gifted, this makes it possible for ownership to be changed without disturbing the corporation from continuing its business.
Disadvantages of Forming an S Corporation
- Lenders may require guarantees from corporate officers as a condition to giving them credit, so limitation of liability can be canceled.
- If the stockholders are in disagreement, then decision making can be stopped.
- Limitations of the sale of stock or buy-back agreements in the bylaws can prevent minor stockholders from getting back the value of their investment in the corporation.
- Since stocks can be gifted, ownership can be divided among people who are not even active in the business and become a voting block that doesn't support the managing stockholders.
- Corporation-paid benefits for employees/stockholders can become costly and exceed what the business can pay.
- Those stockholders who are employees and own more than 2 percent of stocks have a taxable income when it comes to employment benefits like health and life insurance.
- If the corporation is dissolved and there are appreciated assets owned by the corporation, then there will be major income taxes on the appreciated amount.
Steps in Forming an S Corporation in Washington
Washington law requires that your corporate name be unique and include an indication of its corporate status. Company, limited, or incorporate can be abbreviated in the title. You can check if your choice of name is available with the Secretary of State.
File your articles of incorporation. At minimum, your articles of incorporation must include:
- Name, address and signature of incorporator or the person responsible for filing the formation application.
- Corporation name.
- Name and address of the lawyer or the corporation's agent.
- Name and address of the corporation director.
- The corporation's business purpose statement.
- The maximum amount of shares the corporation wants to issue.
- Make sure to appoint at least one director as Washington law requires all corporations to have a director to form. This director can be changed after the corporation is formed.
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