Why Entity Selection Matters
The entity you choose for your business affects liability protection, taxation, management flexibility, and your ability to raise capital. While you can change structures later, doing so often triggers tax consequences and administrative hassle—so it's worth thinking through the options at the outset.
This guide covers the most common entity types for Washington businesses: sole proprietorships, LLCs, corporations, and the S-corp tax election. Each has trade-offs depending on your goals, industry, and growth plans.
The Main Options
Sole Proprietorship
The default for one-person businesses
What It Is
If you start doing business without forming an entity, you're a sole proprietor by default. There's no legal separation between you and the business.
Advantages
- Simplest to set up—no state filing required (though you may need a business license)
- No annual report or franchise tax
- All income reported on your personal tax return (Schedule C)
Disadvantages
- No liability protection—you're personally responsible for business debts and lawsuits
- Harder to raise outside investment
- Less credibility with some customers and partners
- Self-employment tax on all profits
Best For
Very small, low-risk businesses or early-stage testing of an idea before formalizing.
Limited Liability Company (LLC)
Flexibility with liability protection
What It Is
An LLC is a separate legal entity that provides liability protection while offering flexibility in management and taxation. It's the most popular choice for small businesses.
Advantages
- Liability protection — Your personal assets are generally protected from business debts and lawsuits
- Tax flexibility — By default, profits pass through to owners (avoiding double taxation), but you can elect corporate taxation if beneficial
- Management flexibility — No required board structure or formal meetings
- Operating agreement — Customize ownership, profit sharing, and governance as you see fit
Disadvantages
- Self-employment tax on profits (unless you elect S-corp treatment)
- Less familiar to outside investors—venture capital typically requires a corporation
- Some states have higher LLC fees (though Washington's are reasonable)
Washington Specifics
- Filing fee: $200 (online) to form
- Annual report: $60, due on formation anniversary
- No state income tax on LLC profits
- B&O tax applies to gross receipts (see below)
Best For
Most small to mid-sized businesses, professional services, real estate holdings, and businesses not seeking venture capital.
Corporation (C-Corp)
The standard for venture-backed companies
What It Is
A corporation is a separate legal entity owned by shareholders, managed by a board of directors, and run day-to-day by officers. It's the most formal business structure.
Advantages
- Investor-friendly — Standard structure for raising venture capital; easy to issue different classes of stock
- Liability protection — Shareholders generally protected from corporate debts
- Equity compensation — Well-established frameworks for stock options (ISOs, NSOs) and restricted stock
- Unlimited growth potential — No limits on number of shareholders or types of investors
- Perpetual existence — Corporation continues regardless of ownership changes
Disadvantages
- Double taxation — Corporation pays tax on profits, then shareholders pay tax on dividends
- Formalities — Required board meetings, minutes, annual reports, and corporate records
- Less flexibility — Governance rules more rigid than an LLC
- Higher startup costs — Attorney fees for proper setup, especially for tech companies with equity compensation plans
Washington Specifics
- Filing fee: $180 (online) to incorporate
- Annual report: $60, due on formation anniversary
- No state corporate income tax
- B&O tax applies to gross receipts
Best For
Companies planning to raise venture capital, issue stock options to employees, or eventually go public.
S-Corporation Election
A tax election, not a separate entity type
What It Is
An S-corp is not a separate entity type—it's a tax election available to qualifying LLCs and corporations. It allows profits to pass through to owners (avoiding corporate-level tax) while also avoiding self-employment tax on a portion of income.
How It Works
Owner-employees pay themselves a "reasonable salary" (subject to payroll taxes), and remaining profits are distributed as dividends (not subject to self-employment tax). This can result in meaningful tax savings for profitable businesses.
Requirements
- 100 or fewer shareholders
- Only U.S. citizens or residents as shareholders
- Only one class of stock
- Cannot be owned by another corporation or certain trusts
Advantages
- Pass-through taxation (no double taxation)
- Potential self-employment tax savings compared to standard LLC
Disadvantages
- Ownership restrictions make it incompatible with venture capital
- Must pay owner-employees reasonable salaries (IRS scrutiny if too low)
- Payroll administration required
- Less flexible than standard LLC for profit allocation
Best For
Profitable small businesses (typically $75K+ in net profits) that want to reduce self-employment taxes and don't plan to raise outside investment.
Quick Comparison
| Factor | Sole Prop | LLC | C-Corp | S-Corp |
|---|---|---|---|---|
| Liability Protection | None | Yes | Yes | Yes |
| Formation Cost (WA) | $0 | $200 | $180 | $180–$200 |
| Annual Report (WA) | None | $60 | $60 | $60 |
| Double Taxation | No | No | Yes | No |
| Self-Employment Tax | Yes | Yes | N/A | Partial |
| VC Compatible | No | Rarely | Yes | No |
| Stock Options | No | Limited | Yes | Limited |
| Formalities | Minimal | Moderate | High | High |
Washington-Specific Considerations
Business & Occupation (B&O) Tax
Washington has no state income tax—but it does have the B&O tax, a gross receipts tax that applies to all business entities. The rate depends on your business classification:
- Retailing: 0.471%
- Manufacturing: 0.484%
- Service & other: 1.5%
- Technology (royalties): May qualify for reduced rate
Because B&O tax is on gross receipts (not profits), it applies even if your business isn't profitable. This is an important consideration for high-revenue, low-margin businesses.
No State Income Tax
Washington doesn't tax personal income or corporate income at the state level. This makes Washington attractive for profitable businesses and high earners—but it also means there's no state-level tax benefit to corporate structure selection. Your federal tax situation will drive most of the analysis.
Registered Agent Requirement
All Washington LLCs and corporations must maintain a registered agent with a physical address in Washington. This can be yourself (if you have a Washington address), or you can use a commercial registered agent service (typically $50–150/year).
Special Considerations for Tech Companies
The Delaware Question
Many tech founders hear they should incorporate in Delaware, regardless of where they operate. There's truth to this—but it's not universal.
Delaware makes sense if:
- You plan to raise venture capital (investors expect Delaware C-corps)
- You're issuing stock options with complex terms
- You expect significant corporate litigation (Delaware has specialized business courts)
- You're on a clear path to acquisition or IPO
Washington may be fine if:
- You're bootstrapping or raising from friends/family/angels
- You're building a lifestyle business or agency
- You want to keep things simple early on
- You're not planning to raise institutional money
If you incorporate in Delaware but operate in Washington, you'll need to register as a "foreign corporation" in Washington and pay fees in both states. This adds cost and complexity—worth it for funded startups, but often unnecessary for smaller businesses.
Equity Compensation
If you plan to offer stock options or equity to employees, entity selection matters:
- C-Corps can issue Incentive Stock Options (ISOs) with favorable tax treatment for employees
- LLCs can issue "profits interests" or unit options, but the tax treatment is more complex and less familiar to employees
- S-Corps can issue stock, but the one-class-of-stock requirement limits flexibility
For tech companies planning to hire with equity, a C-corp structure (often Delaware) provides the most straightforward path.
You can convert between entity types, but it's not always simple. Converting an LLC to a corporation, for example, may trigger taxable events. It's generally easier (and cheaper) to choose the right structure from the start than to convert later. If you're unsure which direction you're headed, an LLC provides the most flexibility—you can always convert if you raise venture funding.
Formation Checklist
Regardless of entity type, Washington businesses typically need to:
- Choose a business name — Check availability with the Secretary of State
- File formation documents — Articles of Incorporation (corp) or Certificate of Formation (LLC)
- Designate a registered agent — Physical address in Washington
- Get an EIN — Federal tax ID number from the IRS (free)
- Register for state taxes — B&O tax account with the Department of Revenue
- Create governing documents — Operating agreement (LLC) or bylaws (corp)
- Obtain business licenses — State business license plus any city/county requirements
- Open a business bank account — Keep business and personal finances separate
The Bottom Line
For most Washington small businesses, an LLC offers the best combination of liability protection, tax flexibility, and simplicity. If you're building a tech company with venture capital ambitions, a Delaware C-corp is the standard path. And if you're running a profitable service business with no plans for outside investment, an S-corp election can save meaningful self-employment taxes.
The right choice depends on your specific situation—there's no one-size-fits-all answer.
Need help choosing an entity?
Every business is different. Schedule a consultation to discuss your specific situation and goals.
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