A LLC or Limited Liability Company is a way of structuring a business that provides limited liability to its members (owners) like a corporation, but also the structural and tax flexibility of a partnership. The limited liability aspect of the LLC protects the personal assets of its members from creditors and lawsuits that may come from the business. The incorporators can also choose whether the business should be taxed as a corporation or as a pass-through entity such as a partnership.
A LLC can only be formed under state law. As a result, the requirements and protections for LLCs can vary widely from state to state. While there is a lot of flexibility in creating and structuring LLCs in Washington, there are a few mandatory requirements:
- Choose a name for the LLC. This name must be different from all other business names on record at the Washington Secretary of State and must include the label “limited liability company,” “Limited Liability Co.,” “LLC,” or “L.L.C.”
- Obtain a registered agent. Washington requires that every business entity have a registered agent to make sure that any important information or any legal issues will make it to the LLC. The registered agent can be any individual or business with a physical address in Washington.
- Certificate of Formation. The Secretary of State provides PDF fillable Certificates of Formation for creating all types of business entities. This document requires the name of the LLC, the principal address for the LLC (where the business records are kept), a starting date for the LLC, registered agent’s information, and whether the LLC will be run by members (owners) or hired managers.
- Annual Report. All Washington LLCs are required to file an annual report. The first annual report is due within 120 days of creating the LLC and can be filed online. The Secretary of State will notify the registered agent 45 days before any future annual reports are due
The forms required to form your business as a LLC can be found at the Secretary of State website. The Certificate of Formation along with a processing fee can be filed online or mailed to the Secretary of State.
There are several reasons why you might want to structure your business as a LLC:
- Limited Liability: Like a corporation, LLCs shields the personal assets of its members from the debts and legal liability of the company.
- Federal Tax Flexibility: LLCs can choose either to be taxed as a pass-through entity or as a corporation. Most LLCs choose to be taxed as a pass-through entity to avoid the double tax associated with corporations. If the LLC chooses to be taxed as a pass-through entity, then company revenues are only taxed when received by the LLC’s members and taxed according to their personal income bracket.
- Organizational Flexibility: Through writing an Operational Agreement, LLC’s can choose whether they will be run by members (owners) or other managers and provides the LLC flexibility to operate as needed.
- Money Distributed by Agreement Not Ownership: Members of the LLC can choose any desired method for distributing profits and are not bound by traditional partnership agreements. The only limitation is that it must be included in the Operational Agreement.
While the limited liability and the tax flexibility of a LLC can be appealing, there are a few disadvantages to structuring your business as a LLC:
- Filing and Fees: Unlike a general partnership or sole proprietorship; LLCs require filing formation forms and payment of some administrative fees which can cost upwards of $200 and may require a lawyer.
- Business and Occupation Tax: Washington doesn’t have a corporate or personal income tax. Instead, it taxes all businesses on their gross receipts regardless of whether a corporation, LLC, partnership, etc. Washington business and occupation tax rates are determined by the type of goods or services are provided.
If you are looking for an attorney to help you with structuring your business, then contact a local Washington business lawyer today to get the help you need.