Congratulations on deciding to start your business! It’s always exciting to begin a new venture. However, you likely need to do some paperwork to make your business formation official and stay in compliance with the law.
Below, we go over the main steps you need to take to form your business legally in Washington State.
1. Choose a Business Structure
When you start your business, you need to choose a legal structure for it. Your business structure affects your taxes, ability to raise capital, and personal liability. It also affects the paperwork you’ll need to do to register your business.
There are many different ways you can structure your business, but most business owners choose one of the following:
Sole proprietorship
A sole proprietorship is easy to form and gives you the most control over your business. Only one person can own this type of business. If you don’t formally register your business with a specific structure, it will be considered a sole proprietorship by default.
However, the sole proprietorship structure makes you personally liable for your business’s debts and obligations. You can’t sell stock, and you may have more trouble getting a bank loan than you would with a different structure.
Sole proprietorships usually make the most sense for low-risk businesses. Some business owners also choose to test their ideas using a sole proprietorship before forming a more formal business.
Limited partnership
A partnership is the simplest kind of business structure that allows for more than one owner. One of the most common types of partnerships is a limited partnership, which gives one partner unlimited liability while the other partners have limited liability. The partner with unlimited liability, also known as the general partner, has more control over the company.
If you form a limited partnership, your profits will be passed through to your personal tax returns. The general partner will also need to pay self-employment taxes.
To form a limited partnership, you need to document how much control and liability each partner has in a partnership agreement. A business lawyer can help you draw up a partnership agreement that reduces your risk of running into legal troubles or confusion down the road.
Limited liability partnership
A limited liability partnership is much like a limited partnership, with the exception that every owner has limited liability. If you form a limited partnership, every partner will be protected from debts against the partnership, and none of you will be responsible for the other partners’ actions.
As with a limited partnership, you should draft a formal written agreement to outline each partner’s control, profit share, and responsibility for the business.
Limited liability corporation (LLC)
An LLC protects you from personal liability in most cases. If your business faces lawsuits or bankruptcy, your personal assets won’t be at risk. Your profits and losses can either be taxed as corporate taxes or passed through to your personal income taxes, but you will need to pay self-employment taxes.
LLCs can have multiple owners (often called “governors” in Washington State paperwork). If an owner joins or leaves the LLC, you will likely need to file a lot of paperwork. This business structure often makes sense for medium- or high-risk businesses, as well as for owners who want to pay a lower tax rate than they might with a corporation.
Corporation
A corporation is a legal entity that is considered separate from its owners. It gives the owners more protection than any other type of business structure and makes it easy for owners to sell shares without disrupting operations, but it also costs more to form and maintain. Corporations must comply with strict requirements for reporting, record-keeping, and operational processes under the law.
Corporations can raise capital by selling stocks. They can also continue doing business with relatively little disturbance if a shareholder sells their shares or leaves the company.
Forming a corporation usually makes sense if you need to raise money, think your business is relatively high-risk, or plan to eventually sell your business or “go public.”
Most corporations are considered C corporations for tax purposes. However, you may be able to file with the IRS for S corporation status if your business has no more than 100 shareholders and meets other eligibility requirements. S corporation status usually leads to lower taxes since it lets you pass profits and some losses directly to the owners’ personal income taxes.
While you can change to a different business structure later on, it’s easier to start out with the right structure from the beginning. In Washington State, the process for changing a business structure is the same as for an initial business formation, which means you will likely need to reapply for any licenses and city endorsements your business had under the old structure. We recommend talking to a business lawyer before changing business structures.
2. Register Your Business
After choosing your business structure, it’s time to register. The registration process depends on your business structure and location.
Local registration: Some local governments require information from businesses that operate in their jurisdiction. You may want to call your city and county government offices to check.
State registration: If you are a sole proprietor and make less than $12,000 per year, you likely don’t need to register with the state government. However, LLCs, corporations, limited partnerships, and limited liability partnerships all need to register with the Washington Secretary of State. These business types need to designate a registered agent who will receive official papers and legal documents for the business. From there, the Secretary of State will give your business a Unified Business Identifier (UBI) and send you documents for your business formation.
You will need to apply for a business license and register your business with the Washington State Department of Revenue if any of the following are true:
- Your gross income will be $12,000 per year or more.
- You are doing business using a name other than your full legal name.
- You plan to hire employees in the next 90 days.
- You sell a product or service that requires collecting sales tax. This includes most tangible goods, some digital goods, and services like installation, repair, cleaning, altering, improving, construction, and decorating.
- Your business requires endorsements from the city, county, and state.
- Your business must pay fees or taxes such as these to the Department of Revenue.
- You buy or process specialty wood products.
- You meet nexus threshold reporting requirements.
If your business has a physical presence, frequent in-person meetings, employees, or significant revenue in another state, you likely need to register with that state’s agencies as well.
To find out which Washington state agencies you need to contact and government endorsements you need, you can use the Washington State Business Licensing Wizard.
Federal registration: If your business is a sole proprietorship and you are operating under your own name, you may not need to register with the federal government. However, most other businesses need to report information to the federal government, depending on the type of business:
- LLCs, corporations, and other business entities created by filing a document with a secretary of state must report beneficial ownership information to the U.S. Financial Crimes Enforcement Network (FinCEN).
- If you want to trademark a brand or product name, you must file with the U.S. Patent and Trademark Office.
- If you want to create an S corp, you must file form 2553 with the IRS.
3. Get IDs for Federal, State, and Local Taxes
Federal ID: Most businesses need an employer identification number (EIN) to pay federal taxes and do other important activities, such as opening a business bank account. If your business has employees or taxes separately from you, you need to get an EIN from the IRS.
Sole proprietorships typically don’t need an EIN, but you may want to get one anyway for extra protection from identity theft. If you don’t have an EIN, you will need to use your social security number on various applications and documents.
State ID: If you registered your business with the Washington State government and received a UBI, you will use your UBI to pay any state taxes that apply to your business activities. Our state does not collect its own personal income taxes, but you do need to pay state Business and Occupation (B&O) taxes if you manufacture products in Washington (whether for your own use or to sell to someone else). If you sell goods, you need to register with the Department of Revenue for sales taxes.
4. Apply For Any Required Special Licenses or Permits
If your business does work that requires special training or education, you may need to get a professional license to complete the business formation process. The Washington State government has a list of professions that require licenses here.
Washington State also requires special licenses for selling certain types of products, such as these:
- Liquor license to sell beer, wine, and/or spirits.
- Cigarette retailer license to sell cigarettes.
- Tobacco products retailer license to sell tobacco products.
- Lottery retailer license to sell Washington State Lottery products.
- Gambling license for gambling-related activities.
Some cities require you to apply for endorsements during the business formation process. You may be able to learn about your city’s requirements from one of the links on this list.
In Summary: Business Formation in Washington State
To form a business in Washington state, you need to choose a business structure. Depending on the type of business you are forming, you may need to register with the state and local governments, file a report with the federal government, get IDs for tax purposes, and apply for additional licenses and permits.
You can check with your state and local governments to find out which agencies you need to contact and which local government endorsements you need. A lawyer can also help you fill out your forms correctly and make sure you’re meeting all legal requirements.
Need Help With the Legal Aspects of Business Formation?
It’s always a good idea to call a business lawyer before starting a business. They can help you understand your legal obligations, learn about business laws that may affect your operations, and make sure you’re not missing any major requirements.
The Anderson Hunter Law Firm has been helping business owners in the Snohomish County area for over 100 years. If you need business formation advice or assistance with drafting a legal agreement, schedule a consultation with us today.