Key Takeaways

  • Forming an S Corp in Washington State involves incorporating as a C Corp first and then filing IRS Form 2553 to elect S corp status.
  • Washington corporations must comply with state-specific naming rules, registered agent requirements, and annual reporting obligations.
  • An S corporation avoids double taxation by passing income through to shareholders, but has limitations on shareholder types and benefit deductions.
  • Owners must carefully structure compensation to comply with IRS reasonable salary rules and optimize tax benefits.
  • A Washington S corp may be subject to the state’s Business & Occupation (B&O) tax and must register with the Department of Revenue.

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.

Eligibility Requirements for S Corp Election

Before filing IRS Form 2553 to elect S corp status, your corporation must meet all of the following federal eligibility criteria:

  • Be a domestic corporation (incorporated in the U.S.)
  • Have no more than 100 shareholders
  • Shareholders must be U.S. citizens or residents, and only individuals, certain trusts, and estates qualify—no partnerships or corporations can hold shares
  • Have only one class of stock (no preferred shares)

Failing to meet these requirements may disqualify your business from S corp election.

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.

Washington-Specific Challenges for S Corps

While S corporations offer tax and liability advantages, forming an S corp in Washington State comes with additional state-specific considerations:

  • B&O Tax Applies to Gross Receipts:
    Unlike corporate income tax based on profits, Washington’s B&O tax applies to gross income, regardless of profitability. This can be a disadvantage for startups or low-margin businesses.
  • No Deduction for Federal Taxes Paid:
    Washington does not allow deductions for federal taxes, which can affect how you plan distributions and compensation.
  • Limited Fringe Benefits:
    If shareholders own more than 2% of the company, benefits like health insurance are taxable income and cannot be deducted as a tax-free benefit.
  • Strict IRS Rules on Salary:
    Shareholder-employees must receive a “reasonable salary” before taking distributions. The IRS closely monitors S corps for compliance, and failure to pay appropriate wages may result in penalties.

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.

Filing IRS Form 2553: Timing and Tips

Once your corporation is formed in Washington, you must file IRS Form 2553 to elect S corp status. Keep these points in mind:

  • Deadline: File within 75 days of formation or by March 15 of the tax year in which the election is to take effect.
  • Signatures: All shareholders must sign the form.
  • Acknowledgment: The IRS will send a confirmation letter (CP261 Notice) upon acceptance of your election.

It’s recommended to retain proof of submission (such as certified mail receipts or IRS fax confirmations) in case follow-up is needed.

Washington State Requirements and Compliance Tips

When forming an S corp in Washington State, it's not enough to file incorporation papers—you must also satisfy key state-level compliance rules. Here are some additional requirements and helpful tips:

  • Business Licensing and Taxes:
    Washington does not have a corporate income tax, but most businesses must pay the Business & Occupation (B&O) tax. You must register with the Washington State Department of Revenue and obtain a business license through the Business Licensing Service (BLS).
  • Annual Reports:
    Every corporation in Washington must file an annual report with the Secretary of State and pay a filing fee. This report updates company ownership and contact details.
  • Registered Agent Requirement:
    Your S corporation must maintain a registered agent with a physical address in Washington who is available during business hours to receive legal documents.
  • Public Disclosure:
    Your business information, including ownership and contact details, becomes part of the public record when you register your S corp.
  • Foreign Entities Doing Business in Washington:
    If your corporation was formed in another state but operates in Washington, you must register as a foreign corporation and obtain authority to do business here.

Frequently Asked Questions

1. Do I need to register my S corp with the Washington Department of Revenue? Yes. Most S corps in Washington must register with the Department of Revenue and pay applicable taxes like the Business & Occupation (B&O) tax.

2. Can a non-resident alien be a shareholder in a Washington S corp? No. Only U.S. citizens and resident aliens can be shareholders in an S corporation.

3. How much does it cost to form an S corp in Washington? The filing fee for Articles of Incorporation is $200 online or $180 by mail, plus any additional business licensing or state fees.

4. What is a reasonable salary for an S corp shareholder? The IRS requires S corp shareholder-employees to receive reasonable compensation based on industry standards, roles, and experience. Consult a CPA for guidance.

5. Do S corps in Washington file separate state tax returns? No. S corps themselves don’t file a separate Washington income tax return, but they must file an annual report and pay B&O tax if applicable.

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