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You are here: Home / business taxes / Washington State LLC vs Corporation Rules

Washington State LLC vs Corporation Rules

June 21, 2013 By Stephen Nelson CPA

Picture of pencil writing word profit.
To choose between a corporation and LLC, you want to understand both the tax and legal features of each option.

New business owners often want to organize a venture as a corporation or limited liability company. And that choice makes great sense. Both LLCs and corporations give Washington state business owners good liability protection.

However, most small businesses should probably, given these two choices, go with the limited liability company option. Why? Simple. A Washington LLC provides three big benefits to small business entrepreneurs.

LLC Benefit #1

Here’s the first thing to know about an LLC: You get more tax accounting flexibilty.

A corporation, for example, can file its tax return using regular corporation tax accounting rules. Or it can file its tax return using the Subchapter S tax accounting rules. Two choices in other words.

An LLC, in comparison, gets those same two choices–regular corporation or Subchapter S. But the LLC also gets another choice.

An LLC with one owner can also file its tax return as disregarded entity (which means the income and deductions of the small business just go inside the owner’s regular 1040 tax return).

And an LLC with multiple owners can also file its tax return as a partnership.

In a nutshell, an LLC lets you pick from a longer of list of tax accounting options. And that longer list means you often save taxes, reduce costs and avoid taxes.

Business owners can often start off as a disregarded entity or partnership to save taxes, reduce compliance costs and maximize deductions. Later on, when the business starts to heat up, the same owner might decide to operate as a Subchapter S corporation or regular corporation.

Ask your accountant for more information. But know this: The LLC option’s flexibility can save you thousands of dollars.

LLC Benefit #2

A note about another benefit of the LLC option: You should find it easier to operate the LLC. The LLC means less red tape and bureaucratic boogalooga-ing.

With a corporation, for example, you should have an annual stockholders meeting, set up a board of directors, have regular board of directors meetings, and so on.

With an LLC, you shouldn’t have to do any of this stuff.

LLC Benefit #3

A third benefit of the LLC option directly ties to the way that Washington state’s unemployment taxes work. Since 2009 Washington state corporations by default pay unemployment tax on corporate officers. But LLC’s don’t pay unemployment tax on LLC members treated as employees because the LLC elects to be treated as a corporation.

Unemployment taxes maybe don’t seem like that bad a deal. But the tax can run $1,000 to $2,000 per shareholder-employee. And business owners usually don’t actually ever get benefits anyway. (Click here if you want to get into the weeds about why the business owner usually can’t benefit.)

While a corporation can apply for exemption to avoid paying unemployment taxes on corporate officer employees, the corporation can’t be sure the exemption request will be granted. Furthermore, just applying for the exemption takes time and requires screwing around. And if you don’t immediately apply for the exemption at the point you become an employer, you have to wait until the next new year.

In comparison, an LLC doesn’t have to pay unemployment taxes on the LLC members it employs and treats as corporation officers.

Filed Under: business taxes, Incorporation, New business

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