Starting a Corporation in Washington

Recently we discussed how to form a Limited Liability Company, a popular choice for Entrepreneurs because of its relatively simple governance structure and its protection against exposure to personal liability. For some Entrepreneurs however, forming a traditional Corporation is a better fit because of a need for a larger company, more investors, tax-planning purposes or other purposes.

Corporations can either be organized as a “C-Corporation,” or an “S Corporation.” The primary difference between these two is that a C Corporation is taxed like a traditional corporation with a corporate tax rate being applied to profits of the company, along with a capital gains tax that is assessed on dividends of the shareholders. An S-Corporation however is taxed like a Limited Liability Company, where the profits of the corporations “pass through” to the shareholders and are taxed at individual rates. This can be an attractive option for situations where the shareholders will want to have access to distributed profits on a more regular basis, such as if they will be using the profits as a regular source of income.  In order to elect to have S Corporation tax status, the Corporation must designate S Status via Form 2533 within 2 months and 15 days of filing the articles of incorporation.

After deciding on what type of corporation to form, the first step is to file the Articles of Incorporation with the Washington Secretary of State. This will include the basic information of the company along with the number of designated shares for the corporation. The Articles can be filed online with automated forms but it is better to have them drafted by an Attorney so that additional detail can be provided that is tailored to the specific nature of the company and to avoid any pitfalls with the legal organization of the corporation.

A registered agent is also required in order for the corporation to do business and is commonly served by the law firm that handles the incorporation. The registered agent must be located in Washington and be able to accept legal papers and service on behalf of the Corporation.

A board of directors must be appointed in order to run the Corporation until an Organization Meeting is held to elect the board of directors. In Washington, a Corporation must have at least one Director, and the number of directors for the particular Corporation can be set in either the Articles of Incorporation or the Bylaws.

Once the Board is elected, they can draft and finalize the bylaws of the Corporation.  The bylaws provide the rules for governing the Corporation and will decide issues such as how many votes are required in order to effect certain changes, how much power an Executive will have, and the processes for appointing and removing Executives and all other important areas of corporate governance.  The bylaws are not filed with the State like the Articles of Incorporation but are instead kept internally by the Company in the Corporate Records Book.

The Corporation must also issue stock to each of its shareholders and the Board must decide upon the amount of consideration required for each share (how much each share is worth). The Board can also decide if there is going to be more than one class of stock, and if so, what kind of voting power each class has along with other features, such as being either preferred or common stock.

 

Once the Corporation is registered with the State and internally organized according to the steps listed above, it is ready to begin the application process for the required business licenses with the state along with the city in which the Corporation is primarily doing business. The state business license is filed with the Department of Revenue, and after filing the application you will also receive a Unified Business Identifier (UBI) number which you can use for later filings such as registering with the Internal Revenue Service and opening a bank account. A city business application can also be filed in conjunction with the state application, or it can be filed separately with the city at a later date.

After the business applies for the state business license it can apply for a Federal Tax Employer Identification Number (EIN) by filing Form SS-4 online with the Internal Revenue Service.

Depending on the type of business that the Corporation is involved in, special permits and licenses may also need to be obtained. This is true at both the state and city level, including meeting zoning regulations. Additionally, professional licenses must be acquired when incorporating a professional corporation, such as a corporation that provides legal or medical services.

There are many additional details required depending on if the corporation is planning on hiring employees, along with other tax issues dependent on the amount of revenue expected in the first year of operation. Additionally there are ongoing corporation governance and compliance requirements that are unique to Corporations. In addition to these internal governance requirements there are also annual reporting requirements, including the initial annual report that is due within 120 days of incorporation. It is important to discuss these issues with an Attorney in order to make sure that the Corporation can be formed efficiently and not incur penalties or obstacles in carrying out business during the first year of operation.