Washington State Benefits of Limited Liability Corporations

By Ari Mushell, J.D.

Washington State Benefits of Limited Liability Corporations

By Ari Mushell, J.D.

You live and work in the Evergreen State and feel ready to launch your own business. It makes sense for you to incorporate your new business as a limited liability company, or LLC, because it provides significant benefits, including limited liability, pass-through taxation, and flexibility of profit distribution.

Green roadside sign that says "welcome to Washington the evergreen state"

Here is more information on each of those benefits, specific to LLCs in Washington State.

Limited Liability

A main feature of a Washington LLC is that it provides members with limited liability protection. The assets and liabilities of the company are considered distinct from those of the LLC members, which means that any company liability cannot be satisfied from a member's personal assets. If a creditor pursues the LLC and does not find sufficient assets to cover a debt, Washington law legally bars the creditor from satisfying such debt with the personal assets of the members.

Pass-Through Taxation

As a state, Washington does not have corporate or business income taxes. When it comes to federal taxes, LLCs enjoy a favorable taxation scheme. Unlike a corporation, which might pay double tax—once on the corporate level and again on a personal level—LLCs take advantage of pass-through taxation, in which profits and losses pass through from the LLC to its members, who pay taxes on those profits with their individual income tax returns. The LLC itself, as a pass-through entity, does not pay federal income taxes.

Although an LLC does not pay income tax in the traditional sense, it would likely pay business and occupation tax.

Business and Occupation Taxes

The State of Washington does not levy income taxes on businesses, but it does levy a business and occupation tax based on gross receipts. LLCs must also pay this tax. This means that for every gross receipt received, the business must pay a percentage of that to tax, even if the business has no net gain from the transaction. The tax rate for business and occupation tax depends on the type of business. For instance, as of 2018, service businesses pay 1.5 percent of gross receipts, while manufacturing and wholesaling companies pay 0.484 percent of gross receipts.

Flexibility of Profit Distributions

Under Washington state law, when an LLC distributes profits to its members, the distribution occurs according to provisions in the LLC's operating agreement. Suppose one member has 25-percent ownership in the LLC but negotiated a 50-percent profit distribution. If the LLC incorporated this negotiation into the operating agreement, the LLC would distribute 50 percent of profits to that member despite actual ownership stake.

This flexibility can be very beneficial. Perhaps an LLC wants to invest in a project that it considers a surefire money maker, but it lacks capital to invest. The LLC can partner with an investor who is willing to provide significant capital in return for a large stake in the LLC's profits. Even though the investor only contributes a small sum in relation to the value of the LLC, the investor can still receive a disproportionate share of the LLC profits, provided that the operating agreement reflects this change.

If you start a business in the State of Washington, forming your business as an LLC can be very beneficial. The LLC would give you limited liability, favorable federal tax treatment, and a flexible medium of profit distribution.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.