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Last Updated: 1/19/24
First, know that an S corp isn’t really a business structure. Rather, it’s a tax classification that either an LLC or a corporation can apply for with the IRS, provided it meets the criteria. We’ll outline those criteria and the steps you’ll need to take to file as an S corp if you decide that it’s the right tax designation for your business.
You need to know a few S corp filing requirements and limitations before you begin this process. Specifically, to qualify for S corporation status, an entity must:
As you can see, not all business entities are eligible for S corp classification. However, if your business entity meets these requirements, you can apply for an S corp election.
To create a Washington S corporation, you’ll need to create either an LLC or a C corporation if you haven’t already done so. Then, you’ll file an election form with the Internal Revenue Service (IRS).
Do you want to start a Washinton S corp but aren’t sure how to do it? We can help. Use our guide below to learn more about S corporations in Washington state and how we can help you get started on yours.
For a limited liability company (LLC), filing as an S corporation (S corp) could provide savings on self-employment taxes for owners in some cases. For C corporations (C corps), it can be a way to avoid having the business’s profits taxed twice. For more details about S corps and how they work, see our “What Is an S Corporation?” page.
For detailed formation steps, see our Washington LLC formation guide.
For detailed formation steps, see our Washington Corporation formation guide.
Submit the form to apply for S corporation status. Once your LLC or C corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to make an S corp election.
The IRS requires that you complete and file your Form 2553:
One important note for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail.
Note that all of the shareholders or members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.
While S corp election does come with benefits for some businesses, this election might not be right for all business types. So, be sure to carefully consider the pros and cons before deciding how you want to move forward. Ask a tax professional about whether the S corp election would be best for your business.
The advantages of filing as an S corp for an LLC aren’t quite the same as they are for a C corporation. Let’s first look at the advantages for LLCs.
A traditional LLC already has pass-through taxation by default, so the benefits of S corp election for an LLC involve self-employment taxes. This takes some explanation, but for certain LLCs, it could save a significant amount in federal taxes.
The members of an LLC without S corp election are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be an employee of the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay half of them.
When the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once that happens, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, they’ll still pay income taxes and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business.
Note that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of one dollar and avoid contributing anything to Social Security and Medicare.
So, what’s considered “reasonable compensation”? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something in line with what others in your field are earning.
If the IRS decides that your salary isn’t reasonable, it can reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.
Having an LLC with S corp tax designation also comes with some disadvantages compared to a traditional LLC:
As we mentioned, S corps have more qualifications than a standard LLC. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have such limitations.
Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS monitors LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In light of this, S corp owners may want to observe some of the same formalities that C corporations do (such as extensive record keeping), even if they’re not legally required to.
Having an LLC with S corporation election generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will also be more complex.
With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.
If you have a C corporation (which is the default form of corporation), filing as an S corp does have its advantages:
A major disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are distributed to the individual shareholders, they’re taxed a second time on the shareholders’ personal tax returns.
But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual business owner level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.
We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as major now as they were.
Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements.
This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of the IRS’s shareholder loss limitations.
Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income (QBI). This deduction isn’t available to C corporation shareholders.
QBI is essentially your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if you exceed it, may reduce your QBI (see the IRS website for details).
S corp status also has its drawbacks for C corporations:
As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could become an issue if the corporation expands and goes public.
All S corp shareholders must be U.S. citizens, or certain trusts or estates. That may limit your ability to expand outside of the U.S. You also can’t have partnerships or corporations as shareholders. C corporations don’t have limitations like this.
One way corporations attract investors is to offer preferred stock, but that’s not allowed for S corps.
Because of the extra restrictions S corps have, the IRS watches them more closely to see if they’re in compliance, meaning, your corporation is more likely to get audited.
Again, it’s important to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, and they may also be able to help you find additional tax savings.
In an S corp, the business itself doesn’t usually pay federal income tax. But what about state income taxes?
While many states impose an income tax on earnings, Washington State does not have a personal or corporate income tax. But S corporations in Washington are required to pay the Business and Occupation (B&O) tax. This is not a tax on the profits (the money you have left after all expenses are paid) but on the gross receipts, the total amount of money the business brings in. Every S corporation in Washington must pay taxes for the B&O, even if it isn’t making any profits. Some local governments also impose an additional B&O tax of their own.
Moreover, businesses, including S corporations, are required to file an Excise Tax Return with the state of Washington, detailing their gross receipts and computing the B&O tax owed. This step is critical to maintaining compliance with state regulations and avoiding any potential legal and financial issues.
Forming a business can be complicated, but we’re here to make it as easy for you as possible.
When you’re ready to take the leap, we can help you form a Washington LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward.
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For a corporation, one of the biggest advantages is being able to avoid double taxation. Usually, a C corporation’s profits are taxed at both the business and individual shareholder levels, while an S corp’s profits are taxed only on the individual level.
For an LLC, when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee of the LLC. Then they only pay employment taxes (Social Security and Medicare) on their salary and not the profits they receive. For some LLCs, this can add up to substantial tax savings.
The naming process for your Washington corporation or LLC isn’t affected by your S corp status. Whether you file to be taxed as an S corp or not, your business remains an LLC or a corporation and follows the same Washington business naming rules.
Before formally registering a business name, you should first search the Washington business entity records to make sure that you don’t select one that’s already in use by another business. That aside, however, you can typically name your Washington S corporation nearly anything you want as long as you comply with any applicable state naming regulations.
S corp status isn’t right for all businesses. If you’re not sure whether to identify your LLC as an S corp or keep the default status, consult with an experienced business law attorney or accountant in your state.
Calculating taxes can be confounding, but you can check out our S corp tax guide to learn more about navigating taxes for your Washington S corporation. A CPA can give you more definitive information for your circumstances.
At this time, our S corp service is only for applying for S corp status when you form your LLC with us. We do offer plenty of other services to support your business, though.
According to the IRS website, you’ll be notified of whether or not your S corp election is accepted within 60 days of filing Form 2553.
If you’re a new LLC, you have to apply for S corp status within 75 days of the formation of your LLC or no more than 75 days after the beginning of the tax year in which the election is to take effect. For an existing business, you would file at any time during the tax year preceding the tax year it’s to take effect.
An LLC is a legal business entity, but an S corp is a tax filing status that an LLC or corporation can adopt if it meets the IRS’s qualifications. You can read more on our LLC vs. S Corp page.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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