Choosing Your Washington Business: Corporations

Basic Considerations:

This series of article describes certain basic considerations and costs involved in forming a Washington business. Please note that choosing a business form should not be done in vaccum. Consideration as to how this decision may impactfuture alternatives is critical. For example, converting a LLC into a Corporation immediately before the business is acquired, rather than at an earlier time, may prevent the transaction from being tax-free.This article is only an overview, particularly as to tax issues and should not be substitute for a Business Attorney’s analysis and recommendations based on your individual fact situations when establishing your business.

A. Selecting the Form of Business Organization:

No single factor is controlling in determining the form of business organization to select, but if the business is expected to expand rapidly, a corporation will typically be the best alternative because of the availability of employee incentive stock plans; ease of accommodating outside investment and greater long-term liquidity alternatives for shareholders. A corporation also minimizes potential personal liability if statutory formalities are followed.

The characteristics of a corporation are described below, followed by an overview of other traditional forms of business organizations. Each of the following factors is described for comparison purposes: 1) statutory formalities of creation, 2) tax consequences, 3) personal liability of owners, 4) ease of additional investment, 5) liquidity, 6) control and 7) legal costs.Compare LLCs.

1. Corporation:

A Corporation is created by filing articles of incorporation with the Secretary of State Washington. Corporate status is maintained by compliance with statutory formalities. A corporation is owned by its shareholders, governed by its Board of Directorswho are elected by the shareholders and managed by its officers who are elected by theBoard. A shareholder’s involvement in managing a corporation is usually limited to voting on extraordinary matters. In Washington, a president/CEO, chief financial officer/treasurer and secretary are the officer positions generally filled in a startup. All officer positions may be filled by one person.

Incorporation in Delaware?:

The reasons for using a Delaware corporation at startup are the ease of filings with theDelaware Secretary of State in financings and other transactions, a slight prestige factor in being a Delaware corporation and avoiding substantial reincorporation expenses later, since many corporations which go public reincorporate in Delaware at the time of the IPO. Delaware corporate law benefits are of the most value to public companies.

Taxation of Corporation:

A corporation is a separate entity for tax purposes. Income taxed at the corporate level is taxed again at the shareholder level if any distribution is made in the form of a dividend. The S- Corporation election described below limits taxation to the shareholder level but subjects all earnings to taxation whether or not distributed. The current maximum federal corporate tax rate is 35%. In Washington, there is no Income Tax, however, Corporations are faced with a 'Business and Occupation' (B&O) Tax, and Corporations suffer from the higher than average Sales tax in Washington Tax.

If the corporation is notproperly organized and maintained, a court may “pierce the corporate veil” and impose liability on the shareholders. The company can raise additional capital by the sale and issuance of more shares of stock, typically preferred stock when an angel or venture capitalist is investing. Though rare, the power of a court to look through the corporation for liability underscores the importance of following proper legal procedures in setting up and operating your business.Filing fees, other costs and legal fees through the initial organizational stage usually total about $3,500 to $5,000. These can be performed by an experienced Kirkland Small Business Attorney.