How to Form a Limited Liability
Company (LLC) in Washington

The Corporate form of business has the benefit of limited liability and has certain rights, privileges, and liabilities beyond those of an individual.  Doing business as a corporation may yield tax or financial benefits.  Corporations may be formed for a profit or nonprofit purpose.  Forming and operating a corporation requires certain record-keeping requirements and observation of "corporate formalities."  In the case of a corporation classified under subchapter C of the Internal Revenue Code (a "C Corporation") there can also be potentially adverse tax consequences because the corporation is taxed on its income at the entity level and the shareholders are also taxed on any dividends that are distributed.

For more details on the steps necessary to form a corporation, please refer to the links below:

 

 

 

 



Your business name can play an important role in the marketing of your goods and services, so you should choose your business name carefully.

You could be sued if you use a business name that is too similar to the name or trademark of another business.  Below is a partial list of resources to help you search for a business name and to avoid names currently being used:

You may also check:

  • Published telephone directories as well as your local phone books
  • Registered domain names at whois.net

LLC Name Requirements:

The State of Washington has a number of requirements for the name of your LLC:

  • An LLC name MUST contain the words "Limited Liability Company," the words "Limited Liability" and abbreviation "Co.," or the abbreviation "L.L.C." or "LLC";
  • An LLC name may contain the name of a member or manager;
  • An LLC name MUST NOT contain language stating or implying that the limited liability company is organized for a purpose other than those permitted by RCW 25.15.030;
  • An LLC name MUST NOT contain any of the words or phrases: "bank," "banking," "banker," "trust," "cooperative," "partnership," "corporation," "incorporated," or the abbreviations "corp.," "ltd.," or "inc.," or "LP," "L.P.," "LLP," "L.L.P.," or any combination of the words "industrial" and "loan," or any combination of any two or more of the words "building," "savings," "loan," "home," "association," and "society," or any other words or phrases prohibited by any statute of this state; and
  • An LLC name MUST be distinguishable upon the records of the Secretary of State from corporate names, limited partnership names, limited liability partnership names, and the names of any limited liability company reserved, registered, or formed under the laws of this state or qualified to do business as a foreign limited liability company in this state.

If you choose to do business under a name different from your registered LLC name, (i.e., through the use of a “trade name,” you must register any trade names by filing a Master Business Application.  You should utilize the resources above to check if the trade name is already in use.

In order to form a limited liability company, a certificate of formation must be executed.  The certificate of formation shall be filed in the office of the secretary of state.

As shown in RCW 25.15.070, the Certificate of Formation must set forth:

  • The name of the limited liability company;
  • The address of the registered office and the name and address of the registered agent for service of process required to be maintained;
  • The address of the principal place of business of the limited liability company;
  • If the limited liability company is to have a specific date of dissolution, the latest date on which the limited liability company is to dissolve;
  • If management of the limited liability company is vested in a manager or managers, a statement to that effect;
  • Any other matters the members decide to include therein; and
  • The name and address of each person executing the certificate of formation.

The certificate of formation must be filed with the Secretary of State along with the applicable filing fees.  Unless a delayed effective date is specified, a limited liability company is formed when its certificate of formation is filed by the Secretary of State.  A delayed effective date for a certificate of formation may be no later than 90 days after the date it is filed.

 

An LLC operating agreement allows you to structure your financial and working relationships with your co-owners in a way that suits your needs.  In your operating agreement, you and your co-owners establish each owner's percentage of ownership in the LLC, his or her share of profits (or losses), his or her rights and responsibilities, and what will happen to the business if one of you leaves.

Why You Need an Operating Agreement

While many states do not legally require your LLC to have an operating agreement, it is foolish to run an LLC without one, even if you are the sole owner of your company.

An operating agreement will help you guard your limited liability status, head off financial and management misunderstandings, and make sure your business is governed by your own rules - not the default rules found in the State of Washington statutes (RCW 25.15).

Protecting Your Limited Liability Status

The main reason to create an operating agreement is to help ensure that courts will respect your limited personal liability.  This is particularly important in a single-member LLC where, without the formality of an agreement, the LLC may appear to be a sole proprietorship.  Having a formal written operating agreement will lend credibility to your LLC's separate existence.

Defining Financial and Management Structure

An LLC needs to document the profit-sharing and decision-making protocols as well as their procedures for handling the departure and addition of members.  Without an operating agreement, you and your co-owners will be ill-equipped to settle misunderstandings over finances and management.  What's more, your LLC will be subject to the default operating rules created by state law.

Overriding State Default Rules

Each state has laws that set out basic operating rules for LLCs, some of which will govern your business unless your operating agreement says otherwise.

By creating an operating agreement, you choose the rules that govern your LLC's inner workings, rather than having to follow default rules that may or may not be right for your situation.

What to Include in Your Operating Agreement

There are many issues you must cover in your LLC operating agreement, some of which will depend on your business's particular situation and needs.  Most operating agreements include the following:

  • the members' percentage interests in the LLC;
  • the members' rights and responsibilities;
  • the members' voting powers;
  • how profits and losses will be allocated;
  • how the LLC will be managed;
  • rules for holding meetings and taking votes; and
  • buyout, or buy-sell, provisions, which determine what happens when a member wants to sell his or her interest, dies, or becomes disabled.

While these items seem fairly straightforward, each requires you to make some important decisions, which you should spell out in your operating agreement.

Percentages of Ownership

The owners of an LLC usually make financial contributions of cash, property, or services to the business to get it started.  In return, each LLC member gets a percentage of ownership in the assets of the LLC.  Members usually receive ownership percentages in proportion to their contributions of capital, but LLC members are free to divide up ownership in any way they wish.  These contributions and percentage interests are an important part of your operating agreement.

Distributive Shares

In addition to receiving ownership interests in exchange for their contributions of capital, LLC owners also receive shares of the LLC's profits and losses.

Usually, operating agreements provide that each owner's share corresponds to his or her percentage of ownership in the LLC.  If your LLC wants to assign shares that aren't in proportion to the owners' percentage interests in the LLC, you will have to follow rules for "special allocations."

Distributions of Profits and Losses

In addition to defining each owner's share, your operating agreement should answer these questions:

  • How much, if any, of the LLC's allocated profits (the members' shares) must be distributed to LLC members each year?
  • Can members expect the LLC to pay them at least enough to cover the income taxes they will owe on each year's allocation of LLC profits?  An LLC owner, like a partner in a partnership, has to pay income taxes on the full amount of profits that are "allocated" to him or her, not just on profits that are actually paid out.  When profits are reinvested into the business instead of being paid out, they are still treated as taxable income to the owners, in the proportions allocated.
  • Will distributions of profits be made regularly or are the owners entitled to draw at will from the profits of the business?

Because you and your co-owners may have different financial needs and marginal tax rates, the allocation of profits and losses is an area to which you should pay particular attention.  You may want to run the allocation part of your operating agreement by a tax professional, to make sure it achieves the overall results you had in mind.

Voting Rights

Most LLC management decisions are made informally, but sometimes a decision is so important or controversial that a formal vote is necessary.  There are two ways to split voting power among LLC members:

  • each member's voting power corresponds to his or her percentage interest in the business; or
  • each member gets one vote - called "per capita" voting.

Most LLCs measure out votes in proportion to the members' ownership interests.  Whichever method you choose, make sure your operating agreement specifies how much voting power each member has, as well as whether a majority of the votes or a unanimous decision will be required to resolve an issue.

Ownership Transitions

Many business owners neglect to think about what will happen if one owner retires, dies, or decides to sell the owner's interest in the company.  Operating agreements should always include a buyout plan - rules for what will happen when a member leaves the LLC for any reason.

 

It may be necessary or simply a good idea to get an EIN, even for a single-member LLC.  A separate EIN is necessary if your LLC has employees or you choose to be treated as a corporation for tax purposes.  If your LLC is a single-member LLC, you could choose to use your Social Security Number as the LLC’s taxpayer ID instead of a separate EIN.  There are, however, a number of advantages to using an EIN:

  • You can avoid using your Social Security Number when opening a bank account for your LLC (some banks may require that you have an EIN to open a business account);
  • Using an EIN can also prevent your Social Security Number from being passed around to your clients or contractors for tax purposes;
  • You can establish a business credit history with business credit cards;
  • Using an EIN can help create separation between your personal and business finances; and
  • An EIN can be additional layer of protection when you need to close or sell your business.

You can get additional information on Federal Employee Identification Numbers from the following IRS publication: Understanding Your EIN.

Choose the type of business entity for tax purposes

An LLC business entity is not recognized for federal tax purposes, but is treated as a sole proprietorship, a partnership, or a corporation.

A single-member LLC can choose to be taxed as a corporation or disregarded as an entity separate from its owner, essentially treated as a sole proprietorship (a husband and wife, who are owners of an LLC and share in the profits, can file as a single member if they reside in a Community Property State such as Washington).

An LLC with at least two members can choose to be taxed as either a corporation or a partnership.

By default a single-member LLC is treated as a sole proprietorship, and an LLC with at least two members is treated as a partnership.

To choose corporate entity classification for tax purposes the LLC must submit IRS Form 8832.

Filings required for state and local business licenses

Master Business Application

The Master Business Application is a simplified form used to apply for many state licenses, registrations, and permits, as well as some city licenses.

You must file a Master Business Application when you first start your business, or when you change or update your business.  You will need to file (or re-file) if you want to:

  • Get a state business license or Unified Business Identifier (UBI) number;
  • Get a new city or specialty license;
  • Change ownership of a business;
  • Open or change business locations;
  • Register or change a trade name;
  • Hire employees (including minors and workers in the home); and
  • Change your unemployment or industrial insurance coverage.

You may file for a Master Business Application online, by mail, or in person at a business licensing office location.

Washington State Licenses

Depending on the type of business conducted, you may be required to have additional licenses.  The list of businesses can be found at State of Washington List of Licenses.

City and County Licenses and Permits

Many cities and counties in Washington also require business licenses.  Information can be found at the following locations:

 


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Telephone: 206.621.1600

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