Start a Washington S Corp

S Corporation Requirements and Limitations

Before you decide to use the S Corporation designation, you should understand the requirements of the tax status and its limitations. To take advantage of S Corp status, your company must:

• Be a domestic corporation or other eligible business
• Have only certain kinds of corporate shareholders, including individuals, estates, exempt organizations, and certain trusts, but not partnerships, corporations, or non-resident immigrants
• Have no more than 100 shareholders
• Have no more than one class of stock
• Not be an ineligible corporation such as an insurance company, an international sales corporation, or a certain kind of financial institution

For companies that already exist, there are timing requirements when changing your Washington corporation or LLC to an S Corporation designation. The form must be filed no more than 2 months and 15 days after the beginning of the tax year the election is to take effect. The other filing option is that it can be filed at any time during the tax year preceding the tax year it is to take effect.

Weighing the pros and cons of creating an S Corporation

As with many things, there are some positives and negatives with being an S Corp. So you need to evaluate your own circumstances and determine if the pros outweigh the cons of using the S Corp tax designation.

Pros

The positives about having a Washington S Corporation include the following:

• You receive the personal asset protection that LLCs and corporations offer.
• You avoid double taxation corporations are typically subject to.
• You can be more flexible with income designation, which can ultimately save you more on taxes.

If the positive aspects of an S Corporation designation will help your business become successful, it’s pretty easy to establish by filing a simple form.

Cons

S Corps have restrictions and certain requirements that you may decide are not the best for your business:

• There can be only one class of stock offered, so all stockholders are treated the same.
• There is a limited number of stocks that can be offered.
• There is more extensive IRS oversight.
• There are more stringent eligibility requirements.

For questions about the tax benefits and requirements, it’s always best to review your options with a tax professional.

What to know before creating a Washington S Corporation

Keep in mind that if you don’t specifically declare S Corp status, then the IRS will automatically designate your corporation with a C Corp status. C Corp status does not allow pass-through taxation, so your corporation would be subject to double taxation.

C Corps are taxed twice on the income they earn, once at the corporate level and then again at the individual level when the profits are passed down to the shareholders. This is called double taxation. This doesn’t happen with an S Corporation because the corporate level income is allowed to be passed through to the individual shareholders without any corporate tax having to be paid. So the individual shareholders will pay tax only once at the individual rate.

What is an S Corporation?

S Corporations are basically small business corporations that have limited corporation shareholders but aren’t subject to corporate double taxation.

What’s the difference between an S Corporation and a C Corporation?

Both S Corp and C Corp are tax designations used by the IRS. The major difference is that the S Corp designation allows for pass-through taxation and prevents the double taxation that you would see with the C Corp status. But there are both positives and negatives for both designations, so you need to evaluate what is best for your company and circumstances.

Can LLCs choose an S Corporation election?

Yes! If you have an existing Washington LLC, you can change its tax status to an S Corp. You may wonder what are the benefits of an S Corp for an LLC, when Washington LLCs already have pass-through taxation? The answer is that there are still tax savings an LLC can take advantage of with an S Corp designation.

For example, for small, Iowa LLCs with just a handful of owners, having an S Corp tax designation will cut down on the amount of self-employment tax that’s required.

We can help

We can put you and your company on the road to success by helping you set up a Washington S Corporation. With our easy step-by-step guide, you can quickly learn what’s necessary to take advantage of the S Corp tax designation.