Starting a business in Washington state involves strategic planning and adherence to legal requirements. Choosing the right business structure and entity establishment process lays a solid foundation for your company’s success. This guide provides key information and considerations for forming a corporation or LLC in Washington.
Selecting a Business Structure
One of the first steps when starting a company is selecting the right business structure. The business structure legally defines your company, governs ownership, and determines operational processes. It also impacts taxes, personal liability, and your ability to raise capital.
Washington state allows for many different legal structures, but the most common for small businesses are:
A sole proprietorship is the simplest and most common structure for small businesses in Washington. It is owned and operated by one person who takes on unlimited personal liability. No formal business registration is required—you may operate under your own name or choose a business name by registering a “doing business as” (DBA) name.
- Easy and inexpensive to form; minimal legal requirements
- Complete control over all decisions and operations
- Business income and losses reported on your personal tax return
- Unlimited personal liability if sued or business has debt
- Raising investment capital can be difficult
A partnership involves two or more people owning and operating a Washington business together. Partners share responsibility for management, as well as liability for debts and claims against the business. State registration isn’t required—partnerships can be formed with just an oral agreement. However, a written partnership agreement is strongly advised to outline ownership, responsibilities, profit/loss distribution, buyout terms, etc.
There are two primary types of partnerships:
- General partnership: Partners have equal rights and responsibilities in operating the business and face unlimited personal liability. Profits are divided based on the partnership agreement.
- Limited partnership: Has both general and limited partners. General partners manage the business and have unlimited liability. Limited partners have limited management rights and their liability is limited to their investment amount. The partnership structure must be registered with the state.
- Easy to establish with minimal legal formalities
- Shared ownership means partners contribute resources and share risks
- Partnership income can avoid double taxation
- Partners have unlimited personal liability
- Disagreements between partners may occur
- If a partner leaves or passes away, it can dissolve the partnership
Forming a corporation creates a separate legal entity owned by shareholders. In Washington, you establish a corporation by filing articles of incorporation with the Secretary of State’s office.
Corporations require more formalities like appointing directors and officers, issuing stock, holding shareholder meetings, keeping meeting minutes, and corporate records. Corporations provide limited liability protection for shareholders—the company has legal liability rather than individuals. However, the corporation pays taxes on profits and shareholders pay income tax on dividends.
- Owners and shareholders have limited liability protection
- Ownership is easily transferable through buying/selling of stocks
- Easier access to capital through the sale of stock
- More complex formation and ongoing legal requirements
- Double taxation of profits at corporate and shareholder levels
Limited Liability Company (LLC)
A limited liability company (LLC) combines benefits of corporations and partnerships. Owners are called members. To establish an LLC in Washington, you’ll file articles of organization with the Secretary of State.
LLCs limit personal liability for members while allowing pass-through taxation like a partnership. They provide more flexibility in structuring ownership and management. LLCs involve more start-up legal costs but provide liability protections without extensive ongoing filings.
- Members protected from personal liability
- Flexibility in management structure
- Tax efficiencies of a partnership
- Higher costs to establish
- Limited life span in some states
Factors to Consider in Choosing a Business Structure
- Liability protection – If limiting personal risk is a priority, a corporation or LLC limits owners’ liability. Sole proprietorships and partnerships expose owners to greater personal risks.
- Taxes – Sole proprietorships, partnerships, and LLCs allow pass-through taxation while corporations are subject to corporate level taxes. Double taxation can occur with corporations.
- Raising capital – Corporations can raise large amounts of capital through selling stock. Partnerships and sole proprietorships typically rely on debt financing from loans.
- Ownership and management structure – Decide how centralized or decentralized you want management and ownership to be. Sole proprietorships retain full control under just one owner.
- Administrative requirements – Structures like corporations and LLCs involve more legal compliance with state reporting and paperwork. Sole proprietorships have minimal requirements.
- Cost -Filing fees, legal/accounting fees, and other expenses vary by structure. Sole proprietorships are simplest and cheapest while corporations and LLCs cost more upfront.
Forming a Corporation or LLC in Washington
Once you’ve selected a business structure, it’s time to take the legal steps to establish your company. The process involves filing documents, naming your business, appointing agents, creating operating agreements, and more.
Naming Your Business
The first step is choosing an original, distinctive name that meets state requirements. The name must indicate your company is a corporation by including “incorporated,” “corporation,” “company,” or abbreviations like Inc., Corp., or Co.
For LLCs, the name must contain the words “limited liability company” or the abbreviation LLC or L.L.C. You’ll want to check name availability to ensure it isn’t already taken by searching Washington’s Secretary of State database. You can reserve an available name for 120 days for a small fee.
Appointing a Registered Agent
Washington corporations and LLCs must designate a registered agent – an individual or service authorized to accept service of process (legal notices and documents) on the company’s behalf. The agent must have a physical street address in Washington (not just a P.O. Box).
Many businesses choose to work with a third-party registered agent service. However, you can save money by designating an officer, company executive, or yourself to serve as the registered agent. This person’s name and address will be listed on the public formation documents.
Filing Formation Documents
To legally create your corporation or LLC, you must file formal paperwork, known as articles of incorporation or articles of organization, with the Secretary of State’s office. This application outlines basic information like your business name, address, registered agent, and the names of directors or officers for corporations.
You file articles of incorporation to form a corporation and articles of organization for LLCs. The current filing fee for online applications is $180 for both LLCs and corporations. Expedited filing is available within 1-2 business days for an additional $50 fee. The regular processing time is 5-10 business days.
Creating Organizational Documents
While not required, it’s highly recommended that corporations adopt corporate bylaws and that LLCs create an operating agreement. These documents establish important ground rules for your internal governance, ownership structure, voting procedures, assigning duties, admitting new members, dividing profits and losses, and more.
Having organizational documents helps avoid disputes down the road and provides clear procedures and policies for smooth operations. If seeking investors or selling ownership stakes, these foundational documents become even more critical.
Obtaining Business Licenses
Depending on your industry, location, and business activities, you may need to apply for specific state and local licenses. Common examples include:
- Business license – general license covering basic business activities
- Seller’s permit – required if selling goods in Washington
- Food service permit – for restaurants and food-based businesses
- Liquor license – for businesses selling alcohol
- Professional licenses – for professions like medical, legal, architecture, accounting, etc.
Be sure to research if your business needs any special licensing. You can use the Business License Wizard tool provided by the Washington Secretary of State’s office. Also check for any applicable licenses at your city, county, and municipal level.
Any business operating in Washington must register for tax purposes at both state and federal levels. You’ll need to apply for the following identifiers:
- EIN – Employer Identification Number from the IRS to identify your business for federal tax purposes
- Business License/UBI Number – Unified Business Identifier issued by Washington’s Department of Revenue upon registering your business. This will encompass tax registrations for state taxes.
- Retail Sales Tax ID – If selling physical products, you need a retail sales tax license. This allows you to collect and remit sales tax to the state.
- Use Tax ID – Businesses using tangible goods in-state need a use tax ID to report and pay use tax on items purchased without sales tax.
Open a Business Bank Account
With your EIN and business formation documents complete, open a business bank account in your company’s legal name. This keeps your business finances organized and separate from personal finances, which is important for liability protections. Shop around to find a bank that offers suitable services and features for your needs.
Maintaining Ongoing Compliance
Forming your business entity is just the first step – you must maintain compliance with various legal and tax requirements. Failing to adhere to rules and regulations could put your company at risk.
Washington corporations and LLCs must file an annual report each year to maintain an active status. The report confirms your registered agent, business address, and managers/executives. For corporations, you may also need to file an annual license renewal.
For corporations, the annual report and renewal is due by the end of your anniversary month each year. For LLCs, it is due by the end of April. There is a filing fee for annual reports – currently $60 for corporations and $10 per member for LLCs capped at $200.
Can I File Early?
Yes, you can submit your annual report up to 180 days prior to the expiration date for your business entity. Filing early helps avoid accidentally missing deadlines and falling into delinquent status.
Submitting early does not reset or change your official expiration date. As long as your business maintains active status annually, your expiration remains the last day of your original formation month.
What if My Status Changed After Filing?
You may receive notices of status changes or delinquency after submitting your annual report. This is because the Secretary of State still needs to formally review and process your filing.
As long as you met the deadline, your report will be honored once processed and your status will be switched back to active. Check the processing times listed on the Secretary of State website.
What Happens if I Miss The Deadline?
If your business entity does not file its annual report by the expiration date, it will become delinquent. Delinquent status prohibits you from conducting normal business activities like signing contracts or seeking loans.
If delinquency is not addressed, your business can face administrative dissolution or revocation of its authority to operate in Washington. Reinstating a dissolved company involves paying hefty fees and penalties.
How Do I File and Pay?
You can conveniently submit your annual report electronically through the Secretary of State’s online filing system. Payment of the annual report fees can also be made online by credit card or eCheck.
Be sure to keep careful track of your annual due date and calendar reminders to maintain your active status. Reach out to the Secretary of State with any other questions about meeting your annual reporting obligations.
Taxes and Fees
Stay on top of all your state, local, and federal tax obligations. This includes paying corporate income taxes, employer taxes, sales and use taxes, business property taxes, and any applicable industry-specific taxes.
Washington also charges corporations a yearly license fee based on assets – generally starting at $112 per year for smaller corporations under $1 million in assets. LLCs may owe an annual business license fee.
Maintaining proper records is essential for every corporation and LLC. This includes keeping minutes of all meetings, tracking important company decisions, retaining payroll records, keeping receipts, balancing accounts, and more. Accurate record-keeping prevents legal issues should your records be subpoenaed.
Hire qualified accounting staff or work with an accounting firm to ensure your financial statements, taxes, and reporting are handled properly. If seeking investors or selling your company one day, audited financials are important.
Meeting Legal Requirements
Follow all legal requirements regarding operating your business such as contracts, consumer regulations, intellectual property, insurance coverage, and employment laws. Work with trusted legal counsel when needed to mitigate risks.
By making ongoing legal and financial compliance a priority, your Washington corporation or LLC can avoid legal jeopardy. Don’t let compliance obligations slide – make adherence a regular part of your company processes.
Foreign Company Registration
If your business is already legally formed outside of Washington, and you simply want to do business in the state, you must still register with the Secretary of State as a foreign (out-of-state) company.
The steps are similar to forming a new domestic company:
- File a foreign registration application along with your incorporation/organization documents from your home state
- Provide the name of your registered agent located in Washington
- Pay the $180 filing fee
- Obtain required business licenses
- Register for taxes
Your home state legal entity remains intact. Foreign registration simply authorizes you to transact business in Washington. It also requires appointment of an in-state agent for accepting service of process.
Building Strong Company Practices
In addition to meeting all compliance regulations, developing prudent internal company practices lays a good foundation for success. Consider the following guidelines:
- Draft a comprehensive employee handbook covering workplace policies, codes of conduct, anti-discrimination rules, safety protocols, etc.
- Institute solid financial practices like requiring multiple signers for large checks, maintaining detailed financial reports, and running payroll internally or through a reputable service.
- Maintain organized records using tools like cloud software, digital filing, document management systems, and offsite backups of critical data. Don’t just haphazardly store important documents and contracts.
- Draft written procedures for company operations, sales, production, hiring, onboarding, etc. to create institutional knowledge and continuity even with staff turnover.
- Hold regular shareholder and director meetings for corporations. Follow your bylaws guidance for meeting frequency, voting procedures, and topics to address. Take and approve meeting minutes.
- Develop a responsible online presence with a professional website, social media, and engaging content to build brand trust and recognition.
- Seek trusted advisors like lawyers and accountants to actively guide major company decisions and monitor compliance. Utilize their expertise.
Building these smart company-wide habits from the start prevents “growing pains” down the road as your business evolves.
Changing Business Structure
As your company changes over time, you may decide your current business structure is no longer suitable. Fortunately, you can change your Washington business entity if needed.
Some common reasons to change business structure include:
- Seeking liability protection not offered by your current structure
- Needing to raise capital which your current structure limits
- Wanting to alter tax treatment of profits and losses
- Changing ownership structure like adding or removing partners
To change entities, you will essentially need to form a new replacement entity then legally merge or dissolve the old entity into the new one. The assets and ownership of the old transfer over to the new. It’s advisable to work with legal counsel to ensure the transition goes smoothly while retaining essential legal protections.
Closing a Business in Washington
If the time comes to dissolve or close your Washington corporation or LLC, follow the state’s legal steps to keep your liability limited and tie up loose ends appropriately.
For LLCs, the process includes passing a resolution to dissolve, filing articles of dissolution with the state to make the dissolution official, paying off remaining debts and obligations, distributing remaining assets per your operating agreement, cancelling tax IDs, and more.
Closing a corporation follows a similar process of filing dissolution paperwork, settling debts, distributing assets, and filing final tax returns. Consult resources like the Secretary of State website for procedures.
It’s important to close out your company correctly to avoid future liability issues. Seek legal and tax help to navigate the dissolution process efficiently.
Leverage Resources to Succeed
Navigating the intricacies of starting a Washington company can feel complex. Lean on the many helpful resources available:
- Washington Secretary of State – Information on business structures, licensing, formation documents, compliance rules, and more.
- Washington Department of Revenue – Resources on state tax registration, sales tax rules, industry-specific requirements, and accessing your tax accounts.
- IRS – Federal tax guidance, employer information, and applying for an EIN.
- SCORE – Free small business mentoring, workshops, and educational tools through this nonprofit.
- Washington Small Business Development Centers – Local offices across the state provide free advising and education for new entrepreneurs.
- Small business associations – Join established groups like the Washington Retail Association or regional chambers of commerce for support.
Don’t go it alone – leverage expertise and tap helpful networks. With proper guidance and preparation, establishing your company legally and correctly in Washington sets the stage for stability and growth.
Frequently Asked Questions
Do I need a business permit or license?
Washington state requires most businesses obtain a state business license, known as a business license and/or unified business identifier (UBI) number. This is issued by the Department of Revenue when you register your business. Most cities and counties also require a general business license. Specific industries like alcohol sales, marijuana, or professional services need additional permits and licenses. Use the Business License Wizard tool to identify requirements.
Where do I obtain my Employer Identification Number (EIN)?
An EIN is issued by the Internal Revenue Service (IRS). You can easily apply online at http://www.irs.gov or complete Form SS-4. This unique number identifies your business for federal tax purposes.
Should I trademark my business name?
You are not required to federally register a trademark for your business name. However, doing so provides legal protections against others copying or using your business name without permission. Consult an intellectual property attorney about the trademark registration process.
Do I need a business bank account?
While not legally required, it’s highly recommended to open a separate business bank account once you form your Washington entity. This helps keep your business and personal finances separate for legal protections. Only use the business account for company transactions.
What address do I use when forming my company?
You must provide a valid physical Washington address when registering your business entity – this cannot be a P.O. Box. It’s acceptable to use a home address, coworking space, commercial mail box, registered agent’s address, or virtual office.
How often do I need to hold shareholder/manager meetings?
For corporations, shareholder meetings must be held at least once per year. Many corporations choose to hold them more often to vote on major decisions. The frequency of manager meetings for LLCs depends on your operating agreement. Many hold them quarterly or as needed when important matters arise.
What employee policies and handbooks do I need?
Once you hire staff, legally required policies include anti-discrimination, anti-harassment, wage and hour, safety protocols, and leave policies. Comprehensive employee handbooks help communicate workplace expectations, codes of conduct, benefits overviews and more.
How often do I need to file reports with the state?
Washington corporations and LLCs must submit annual reports to the Secretary of State to maintain an active status. Reports are due at the end of your anniversary month (corporations) or by April 30 (LLCs). You may also need to periodically renew business licenses.
Can I still run my business if I move to a different state?
Yes, you can continue operating your Washington-registered business if you relocate out of state. The key requirements are maintaining a valid registered agent and address in Washington, continuing to meet tax and licensing obligations, and filing your annual reports.
What are the record keeping requirements?
Washington corporations and LLCs must maintain certain financial statements, tax records, ownership ledgers, meeting minutes, contracts, receipts, bank statements, and other documents. Records must be kept available for inspection and audit if requested by the state.
How do I transfer ownership or sell my company?
The process depends on your business structure. For LLCs and partnerships you need to draft and execute new membership/partnership agreements. Corporations need shareholder agreements and new stock issuance. Consult an attorney to ensure transfers are done properly according to your operating/shareholder agreements.
Can I convert my LLC into a corporation later on?
Yes, you can change business entities in Washington by filing new formation documents and legally merging your LLC into the new corporation. Work closely with legal and tax professionals to execute the change appropriately.
What are the differences in owner liability for each structure?
With a sole proprietorship or general partnership, owners have unlimited personal liability for any business debts or legal actions filed against the company. Their personal assets are at risk.
With a corporation or LLC, owners have limited liability protection. The business entity takes responsibility for debts and liabilities rather than the individual owners. Owners’ personal assets are generally protected under these structures.
For limited partnerships, limited partners enjoy limited liability while general partners have unlimited liability. Shareholder liability in corporations depends on ownership share.
What ownership percentage should I give co-founders/investors?
The owners’ percentage interests are negotiable based on factors like who contributed the most startup capital, sweat equity and effort at founding, or industry expertise. Co-founders often split ownership 50-50 or base it on initial financial contributions.
With outside investors, 10-25% equity for the first major seed investment is fairly common, though amounts vary. Overall, determine percentages based on who brings the most value to propel growth. The operating agreement or shareholder agreement should document the agreed-upon breakdown.
What insurance policies are needed?
Common recommended insurance policies include:
- General liability insurance to protect against third party bodily injury and property damage claims
- Professional liability insurance for protection against errors and omissions
- Cyber liability insurance for protection against data breaches, malware, or digital threats
- Workers’ compensation insurance which is required if you have employees
- Business interruption insurance to compensate for lost income due to disruptions
Consult knowledgeable insurance brokers to determine the right coverages for your particular business.
How do I attract investors and venture capital funding?
Key tips for attracting investors include perfecting your pitch deck, networking relentlessly to find leads, leveraging accelerators and incubators, demonstrating major traction and milestones, highlighting your experienced team, acing due diligence, and conveying your large market potential. Also be willing to give up equity in exchange for funds.
How can I ensure I meet all legal obligations?
Thoroughly research all state, local, and federal regulations that may apply to your industry before opening up shop. Maintain organized records so important compliance documents are accessible. Hire knowledgeable legal counsel and tax professionals to monitor obligations and keep you updated on any changing regulations. Make ongoing compliance a priority rather than an afterthought.