Written by attorney Adam Nathaniel Williams

Steps to Establish a Corporation in Washington

RCW 23B, et seq., governs Business Corporations. A Corporation comprises a more complex business structure. A corporation holds certain rights, privileges, and liabilities beyond those of an individual.

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An S corporation means a “small business corporation,” which comprises of less than 100 shareholders, has only shareholders that are individuals, have no nonresident aliens as a shareholder, and have only one class of stock. See 26 U.S. Code § 1361(b). This business entity allows for limited liability protection, but direct flow-through of profits and losses. C corporations entail all other corporations. They face “double taxation,” but enjoy limited liability for its shareholders and managers. Advantages of an S Corporation: • An S Corporation protects the personal assets of its shareholders absent a personal guarantee. • An S Corporation pays no taxes at the corporate level. Any business income or loss “passes through” to shareholders who report it on their personal income tax returns. • Shareholders can also hold a position as an employee and draw a salary as an employee. • Shareholders may freely transfer their interest without adverse tax consequences. • An S Corporations increases credibility by showing a commitment to the business. Disadvantages of an S Corporation: • An S Corporation requires ongoing fees to the State each year to renew the corporation. The initial filing also requires additional fees and may require a professional such as an accountant or attorney. • Mistakes regarding the various elections, consent, notification, stock ownership and filing requirements can accidentally result in the termination of S corporation status. • An S Corporation may only issue one class of stock. • An S Corporation prohibits foreign ownership. • Because distributions come as dividends or salary, the IRS scrutinizes payments to make sure the characterization conforms with reality. • An S Corporation offers less flexibility in allocating income and loss. Advantages of a C Corporation: • A C Corporation grants limited liability to directors, officers, shareholders, and employees. • A C Corporation exists perpetually. • Suppliers and lenders give C Corporations more credibility. • The C Corporation may grow exponentially because of the sale of stock. • No shareholders limit. However, after the company acquires $10 million in assets and 500 shareholders, it must register with the SEC under the Securities Exchange Act of 1934. • Certain individuals enjoy tax-deductible business expenses affiliated with the corporation. Disadvantages of a C Corporation: • The government taxes C corporations both at the company level and again as shareholder dividends. • Many fees associated with filing Articles of Incorporation and the State charges an annual fee to renew. • The government watches C Corporations more than other entities due to complex tax rules and protection provided to owners regarding debts, lawsuits, and other financial obligations. • Unlike a S corporation, a shareholder may not deduct losses on their personal tax returns.

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