Business Formation Steps
Your business structure can be formal or informal. Your choice matters, though. Your chosen business structure affects:
- your rights as owner of that business;
- your obligations as owner of that business;
- your payment of the business’ taxes;
- your payment of the business’ debts;
- your personal liability for damages caused by your Business.
Risking your assets may be tolerable provided the business is well-insured. But remember, insurance is a yearly cost that usually escalates over the years. The proper Business Formation can ensure that your assets are protected from your business activity.
The form of your business is the #1 step; choose wisely. CONTACT THE GILROY LAW FIRM TO SCHEDULE A MEETING
MOST CHOSEN BUSINESS STRUCTURES:
Sole Proprietorship:
Business is owned and operated by one individual or a married couple (joint venture).
INFORMAL STRUCTURE – No paperwork to file to create the business structure
Owner’s personal assets are at risk for business damages. All types of Insurance essential.
Owners are NOT deemed “employees” so not required to purchase Worker’s Comp Insurance. Carrying Worker’s Comp Insurance is a good idea though. Some jobs require it.
Business may hire employees or independent contractor
Watch out for mischaracterizing an employee as an independent contractor – TAB!TBD
Owners’ wages are subject to “self-employment” tax (15.3%) Read More/TBD
Owners must withhold taxes for employees, inclusive of “employer matching” on FICA.
Good News? That portion is deductible. READ MORE/TBD
Business Income Tax filed Quarterly for both Federal and State.
All Payments to Owner are treated as “profit distributions” not “wages”; file on Schedule C.
General Partnership:
Informal Structure: Similar to the Sole Proprietorship
Governing Statute above.
Best to have a Partnership Agreement drafted by a Business Lawyer.
Corporation:
Formal Business Structure
Documents Creating Corporation are filed with SOS
Articles of Incorporation filed with Secretary of State (SOS)
Annual Report filed with SOS
Annual Shareholder Meetings Required
Documents to Governing the Structure – Draft Bylaws
Operates via Bylaws (Managed by Directors elected by Shareholders.)
Business License Filed with Business Licensing Service Dept of DOR, Required Yearly
Excise Tax on Business Income to be Paid Annually, to DOR
Business owned by Corporation Shareholders (Private or Publicly Traded)
Shareholders are shielded from Liability for business damages
Shareholders are liable for Corporation’s taxes.
Wages paid to Employees (Owners can be employees!)
Wages not subject to Self-Employment Tax but subject to FICA Tax.
Corporate Income is reduced by Corp. Expenses, inclusive of Wages, then taxed at 21%.
Name of Business
Choose the “Legal Entity” Name of your business with the Washington Secretary of State (SOS)
NOTE: Under RCW 23.95.310 the Secretary of State will reserve names upon application for 180 days. Secretary of State Corporations Registration Data Search
Washington’s Business Licensing Service requires that you register your “Legal Entity” name or, if a sole proprietor using a different name or if your entity wants to use a nickname, register a “fictious name” or a a “Trade Name.”
DOR business lookup: General license
Purchase a similar URL (Uniform Resource Locator or website address, i.e. name) for online presence.
Choose your Web Hosts Wisely.
Protect your chosen “Legal Entity” name or “Trade Name” with a trademark by filing a Trademark application with the SOS or, if business extends beyond WA, with the US Patent and Trademark Office.
U.S. Patent and Trademark Commission: Search for federally registered names.
Once you complete Steps 1 and 2, you know the Form of your Business (a/k/a your “Entity Status”) and you have your business name selected or at least reserved or protected. Now it is time for the real paperwork:
- Sole Proprietorship
File paperwork with the SOS to obtain a Trade Name.
File a Master Business Application to obtain a Business License from state and city with DOR
Bls.dor.wa.gov/wizard or dor.wa.gov/MyDOR to get started LINK
DOR also requires a yearly renewal of Business License
DOR also requires a yearly Excise Tax Return (“B&O Tax”)
Other Permits may also be required, e.g. Reseller’s Permit; Land use Permits
Quarterly Tax Payments required to avoid penalty,
Federal Income Tax and Self-Employment Tax (Medicare & Social Security)
NOTE: Self-Employed persons also have to pay the “employer” portion of employee’s Medicare and Social Security tax known as “employer matching”. Good News? That portion is deductible.
OTHER Tax Implications (to be discussed with Accountant)
Ordinary Business Expenses reduce Income (File on Schedule C – Profit/Loss) (examples):
State and Local Tax
Lease & Utility expenses
Employee Benefit Costs
Legal and Tax Advice
Professional Licenses and Membership in Business Organizations
Journals and Continuing Education Costs
Marketing and Advertisements
Business Use of Home – must be exclusive use
Auto Related Expenses (per mile deduction – keep records)
Business Equipment & Capital Asset Deductions (See, 179 Property)
“Above the Line” Expenses should also be listed, if applicable (examples):
Self-Employed Retirement Plan Contribution (income related)
Health Care Savings Account Contribution (income related)
Health Insurance Premiums (income related)
All Payments to Owner are treated as “profit distributions.”
All Payments to Owner are subject to “Self-Employment Tax” (15.3% of owner income)
Income obtained via “profit distributions” are claimed on Personal Tax/Schedule C.
- Corporation
File paperwork with the SOS to obtain a Trade Name.
File Articles of Incorporation with Secretary of State (SOS)
Selection of Registered Agent Required
(Washington State Residency required; Consent via signature required. Registered Agent accepts any and all communication to the business, including lawsuits against the business. )
Name of Incorporator Required
Within 6 months, file an Initial Report that names your Directors, Officers etc.
Annual Report Required to be filed with SOS
Business License Filed with Business Licensing Service Dept of DOR, Required Yearly
Excise Tax on Business Income to be Paid Annually, to DOR
Operates via Bylaws (Managed by Directors elected by Shareholders.)
Annual Shareholder Meetings Required
Corporate Income is reduced by Corp. Expenses, inclusive of Wages, then taxed at 21%.
Wages paid to Employees (Owners can be employees!)
Wages not subject to Self-Employment Tax but subject to FICA Tax.
A Word about S-Corp Election: Short time frame to elect S-Corp. Use Form 2553. Use K-1
- General Partnership
No Filings with the Secretary of State
Business License Required with DOR
Partnership Agreement necessary unless Statute Regs are acceptable
Individual Partners are taxed as individuals. (Form K-1)
No Corporation Entity Liability Protection. Partners fully liable for debts and taxes.
- Limited Liability Company (LLC)
Company formed by Articles of Formation filed with the Secretary of State
Company is owned by “Members” rather than “Shareholders”
Members sign an Operating Agreement that governs LLC’s management
Members may be managers of LLC or have “authorized” outside managers.
Members are not liable for LLC actions, except to the extent of their investment in LLC
Members are treated, for tax purposes, as the owners though.
Members are paid, not in salary, but rather in “distributions”.
All receipts are subject to Self-Employment Tax and Income Tax.
Single Member LLC file taxes as individual; Multi-Member LLC file taxes as partnership.
LLC can elect to be treated, for tax purposes, as S-Corp (“pass-through” tax classification), the S-Corp election can save 15.3% of Self-Employment Tax on Distributions.
See the other S-Corp considerations under Corporations above.
UBI: Unified Business Identifier issued best by Washington Secretary of State (SOS)
NOTE: UBI numbers are used by SOS and DOR and are recognized by the Employment Security Department (ESD) as well as the Department of Labor & Industry (L&I)
2nd NOTE: apply for the UBI from the SOS despite the availability of the UBI from other agencies.
EIN: Employer Identification Number from IRS
EINs are free online.
EINs are needed to open a bank account and hire employees.
NOTE: Once a Business Bank Account is open, keep only business expenses and business income in that account. No commingling of funds. If the business needs money, the owners can make “capital contributions.”
Do you want unemployment insurance coverage for corporate officers? Election is required otherwise the officers are exempt from coverage. If you want to cover your corporate officers, you must submit a Voluntary Election Form.
Create Bylaws (Corporation) or an Operating Agreement (LLC) and update it regularly! READ MORE
READ MORE about the Corporate Shield from Liability
BUSINESS TAXES, Just a Few Pointers
Well-studied Clients are appreciated and move through the legal services at The Gilroy Law Firm efficiently and with the confidence of better understanding of the matter.
Formulating a business after receiving legal and tax advice is as important as ensuring that you have developed the right product or service. Successful business owners have excellent products, services and the proper legal formation to ensure monetary success, tax avoidance and asset protection. A wise decision-maker first obtains professional legal and accounting advice, then opens for business. It could be the difference between the signs “Open” and “Closed”.
With a Consultation Meeting (“Working Meeting”) at The Gilroy Law Firm, business owners receive the necessary direction and guidance on legal and basic tax issues. If need be, a CPA joins in on the meeting. The legal and tax advice presents the business in the best light as well as protects your assets, both business and personal, from risks created by the business.
A Few Pointers to Get Us Going:
Taxes for Corporations must be filed Yearly. Corporations are permitted to accumulate some monies, i.e. not distribute all of its profit to shareholders; otherwise, the Corporations are taxed at another 20% on accumulated earnings over $250,000.00 or $150,000.00 for professional service corporations.
Taxes for Corporations, with Subchapter S Elections, must also be filed Yearly by March 15. (This filing, however, is for Informational Purposes Only as the Income of the S-Corp Corporation will be claimed in owners/shareholders’ personal tax returns – Schedule K-1.)
Taxes for LLCs are not required, unless the S-Corp Election is made. Then, see above.
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Articles of Interest
More information coming soon!