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Starting an S corporation in Washington, D.C. offers tax advantages and limited liability protection. If you need to set up an S corp in the area, this guide provides valuable insights, from meeting the eligibility requirements to completing the registration process. No matter whether you’re a small business or a well-established business entity, read on for all the information you require.
S Corporations in Washington, D.C.: Key Points
An S corporation is a tax classification recognized by the IRS.
S corporations offer liability protection and pass-through taxation, which can result in considerable tax savings.
You must form a C corporation or LLC before applying for an S corp election with Form 2553.
Unlock tax savings and ensure compliance with critical regulations with our assistance.
What Is an S Corporation?
An S corporation is a tax classification recognized by the IRS, not a business entity. A business organization can only elect S corp status if they satisfy specific eligibility requirements by the IRS.
S corps are similar to C corporations and limited liability companies (LLCs), only with one significant advantage: pass-through taxation. This results in considerable tax savings as the firm’s gains and losses are transferred to shareholders and recorded on their personal tax returns.[1]
S corps also provide limited liability protection to shareholders, similar to C corporations and LLCs.
Tax Considerations for an S Corporation in Washington, D.C.
An S corporation is a tax classification that enables a corporation to transfer its income, deductions, credits, and other items to its shareholders for federal tax purposes. In contrast to a C corporation or LLC, an S corporation offers numerous tax advantages for eligible small businesses.
Washington, D.C. Tax Treatment of S Corporations
In Washington, D.C., S corporations are subject to the same corporate income tax rate as C corporations. However, unlike C corporations, S corporations are exempt from the District’s unincorporated business franchise tax.
Likewise, the D.C. franchise tax on gross receipts doesn’t apply to S corporations. This means S corporations in Washington, D.C. aren’t subject to double taxation like C corporations.
Washington, D.C. Franchise Tax for S Corporations
S corporations in Washington, D.C. aren’t subject to the unincorporated business franchise tax or the franchise tax on gross receipts. However, they must submit an annual report to the Department of Licensing and Consumer Protection (DLCP) and pay a filing fee. The annual report is required each year by April 1, with a filing cost of $300.[2]
Pass-Through Taxation
Pass-through taxation is one of the key advantages of having an S corporation. This means the S corporation doesn’t pay federal income tax on its earnings. Instead, the income, deductions, credits, and other items pass through to the shareholders, who report their share on their individual tax returns.[3]
The shareholders pay taxes on their share of the S corporation’s income at their individual tax rates. This eliminates the frequent double taxation applicable to C corporations. Unless there are specified exclusions, sole proprietorships, partnerships, and S corporations frequently use pass-through taxation.
Income Tax
S corporations in Washington, D.C. are subject to federal income tax laws like other similar enterprises. They don’t pay federal income tax on their earnings, but their shareholders are required to report income and losses on their personal tax returns.
Moreover, the 8.25% D.C. corporate income tax applies to S corporations in Washington, D.C.
Tax Return
S corporations in Washington, D.C. must file a federal tax return on Form 1120S, which shows the corporation’s income, deductions, credits, and other items. The IRS uses this tax form solely for informational purposes and to obtain an overview of the total revenue and expenses of the business.[4]
Moreover, S corporations must submit a D.C. corporate income tax return on Form D-20 detailing the corporation’s income, deductions, credits, and other items. The deadline for filing the D.C. corporation income tax return is March 15 each year.[5]
Self-Employment Tax
A shareholder of an S corporation is required to pay self-employment tax on their part of the company’s earnings. This tax is determined by the shareholder’s net earnings from self-employment and can be calculated using Schedule SE on their individual tax return.[6]
If the shareholder is not actively participating, they may not be subject to self-employment tax.
Requirements for Forming an S Corporation in Washington, D.C.
If you’re starting a business in Washington, D.C., you may be interested in forming an S corporation. Yet, it’s crucial to remember that not all companies can obtain S corporation status.
Here are the requirements a company must meet to become eligible:[7]
Be a domestic entity structured as a corporation or a limited liability company (LLC)
Have no more than 100 stockholders who are citizens or residents of the United States
Have just one type of stock.
Adopt a calendar year as their tax year unless they can demonstrate a business purpose for using a fiscal year
If your company satisfies these requirements, you might qualify for S corp classification. However, ongoing compliance requirements must be satisfied to keep your S corporation status, such as keeping detailed records and filing annual tax returns. Our Swyft Filings online service can help ensure you don’t miss any requirements, allowing you to focus on running your business.
How to File as an S Corp in Washington, D.C. in 7 Steps
S corp status can be a terrific solution for companies wishing to lower their tax obligations and safeguard their personal assets. Here are the steps you’ll need to take to file for S corp status in Washington, D.C.[8]
Step 1: Choose a Business Name
When launching a new company, picking the appropriate name is crucial, especially if you intend to set up an S corporation in Washington, D.C.
There are two precise naming guidelines to follow to ensure that your name is original and complies with state laws:
Must not be similar or identical to any other business name on record with the D.C. Department of Consumer and Regulatory Affairs (DCRA).
Can not contain specific words or phrases, such as "bank" or "insurance,” without the appropriate authorization or licensing
If you have a name in mind, conducting a company name search is essential to determine if any other Washington, D.C.-based companies are using the same one. You can check your name by using our free Swyft Filings business name search tool.
If your desired business name is available, you can submit a Name Reservation Request with the DLCP to reserve it for up to 120 days.
Although it’s not necessary, it’s a good idea to consider trademarking your company name to safeguard your brand and stop others from using a similar name. You can file for a trademark with the United States Patent and Trademark Office (USPTO).
Step 2: Appoint Directors and a Registered Agent
When forming an S corporation in Washington, D.C., you must appoint directors and a registered agent. Unlike LLCs, S corporations have shareholders who elect a board of directors. Directors are essential to the decision-making process and ensure the company complies with all applicable state and federal legislation.
Appointing Directors
The number of directors required for an S corporation in Washington, D.C. depends on the corporation’s bylaws, but there must be at least one.
The shareholders elect directors, who usually hold office for a specified time. They are responsible for shaping the corporation’s future direction, selecting executives, and monitoring its overall performance.
Registered Agent
An individual or organization designated to receive legal and tax paperwork on a business’s behalf is a registered agent. Every Washington, D.C. corporation must have a registered agent. The registered agent must also be accessible during business hours and have an address in the District.
Having a registered agent is crucial for businesses. It ensures you promptly receive critical documents such as legal notices and tax forms. A company that doesn’t have a registered agent risks fines, penalties, and possibly losing its good standing with the state.
Although business owners can serve as their registered agents, using a third-party agency is usually more practical. Instead of having to be accessible during typical business hours to receive critical paperwork, the business owner can concentrate on running their company. Also, using a professional registered agent service, such as Swyft Filings, can provide added privacy and security for the business.
Step 3: File Articles of Organization
When forming an S corporation in Washington, D.C., filing Articles of Organization is crucial. The Articles of Organization, also known as a Certificate of Formation, is a legal document that formally establishes the business’s existence. This document protects the business owner and assures that the company is considered a distinct legal entity.
You must submit your Articles of Organization to the Department of Licensing and Consumer Protection (DLCP) with your name, address, registered agent, and the company’s members or management included. There is an associated filing fee, which varies depending on the entity type.
Along with the required filing fee, you have the option to either file the documents through the Department of Licensing and Consumer Protection (DLCP) website or send them by mail to the address stated below:
Corporations Division
P.O. Box 92300
Washington, DC 20090
It’s vital to remember that since S corp status is a tax classification, business owners must first register their company as an LLC before requesting S corp status. Business owners must also pay an initial franchise tax and file an annual report to retain good status with the state after filing.[9]
Step 4: Create an S Corp Operating Agreement
An operating agreement outlines an S corporation’s ownership and management structure. This legal document often contains details about the owners’ responsibilities, how earnings and losses will be allocated, and how the company will run.
On the other hand, bylaws provide more detailed guidelines for how the company should run daily. Although they resemble an operating agreement, bylaws are frequently more formal and have legal force.
The importance of drafting an S corp operating agreement lies in its ability to outline the rights and obligations of the business owners. It can also aid in conflict avoidance and offer a clear path forward for the company.
Overall, an operating agreement is an essential tool for any business owner looking to protect their interests and ensure business success.
Step 5: Apply for an Employer Identification Number
An EIN is a unique nine-digit number assigned to businesses, non-profit organizations, and other entities by the Internal Revenue Service (IRS). This nine-digit number is primarily used to identify businesses for tax reporting.
You need an EIN if you have employees to report employment taxes to the IRS, such as Social Security and Medicare taxes. Other uses for an EIN include:
Creating a business bank account
Obtaining company credit
Submitting license and permit applications
We can obtain an EIN for you on your behalf, or you can apply directly with the IRS.[10]
Step 6: File Form 2553 for S Corporation Election
One of the most crucial tasks in registering for your business entity's S corporation status is filing Form 2553. This form, which you must submit to the Internal Revenue Service (IRS), entails the choice to be treated as an S corporation for federal tax purposes.
To file Form 2553, your company must meet specific requirements, such as having no more than 100 shareholders and just one class of stock. Also, for the S corporation election to be effective, you must file Form 2553 no later than two months and fifteen days after the start of the tax year.[11]
If you have an LLC that you want to classify as an S corporation and the LLC has passed the deadline for filing Form 2553, you must file Form 8832.[12]
Washington, D.C. S Corp vs. Washington, D.C. LLC
Understanding the pros and cons of each choice is crucial when determining whether to set up an LLC or an S corporation in Washington, D.C.
Advantages of Starting an LLC in Washington, D.C.
The simplicity of organization and management is a significant benefit of establishing an LLC. Compared to S corporations, LLCs have fewer formalities and restrictions.
Furthermore, LLCs are subject to pass-through taxation too, which means that income and losses are reported on individual members’ tax returns rather than being subject to corporate tax.
Online filing services like Swyft Filings simplify the process of forming an LLC and help you successfully finish your business creation journey.
Disadvantages of Starting an LLC in Washington, D.C.
S corporations' potential tax benefits are not always available to LLCs. For example, S corporation shareholders who are also employees may be able to avoid paying self-employment taxes, as opposed to LLC members who may be required to pay them on all income.
Advantages of Forming an S Corporation in Washington, D.C.
Unlike LLCs, S corporations may provide tax benefits since income and losses are passed directly to shareholders’ individual tax returns, preventing double taxation. S corporations could also be qualified for certain credits and deductions.
Disadvantages of Forming an S Corporation in Washington, D.C.
Meeting tight qualifying standards, such as having no more than 100 shareholders and just one class of stock, is a prerequisite for forming an S corporation. S corporations are also subject to more regulations and formalities than LLCs.
Ready to File for an S Corp Status Washington, D.C.?
If you want to apply for S corp status, Swyft Filings formation service can help simplify the process. Our service will handle all the paperwork and make sure everything is submitted accurately and on time.
With our assistance, you can concentrate on expanding your company while we take care of the rest. Our service is customized to address the specific demands of small businesses and is tailored to those needs. To learn more about how we can assist you with obtaining S corp status in Washington, get in touch with us right away.
Maximize Tax Benefits: Experience pass-through taxation with Washington D.C. S corp status and avoid double taxation.
Access a One-Stop Solution: Establish an LLC or C corporation easily and then transition to S corp status, all within our platform.
Stay Compliant: Our compliance alerts help keep you up-to-date on all the complex compliance requirements of an S corp so you can stay on the government’s good side.
Frequently Asked Questions
What is an S corporation in Washington, D.C.?
An S corporation in Washington, D.C. is a tax classification that allows small businesses to avoid paying federal income tax at the corporate level. Note that an S corporation is not a business entity.
Does Washington, D.C. recognize S corporations?
Yes, Washington, D.C. recognizes established S corporations.
What is the turnaround time for filing for S corp status with the IRS?
Typically, it takes 60 days to process an IRS application for S corp classification.
What is the difference between an S corp and an LLC?
An S corp is a tax classification, while an LLC is a formal business entity.
What are the requirements for an S corporation in Washington, D.C.?
To qualify as an S corporation in Washington, D.C., you must meet the IRS qualifying standards:
Be a domestic entity structured as a corporation or a limited liability company (LLC)
Have no more than 100 stockholders who are citizens or residents of the United States
Have just one type of stock.
Adopt a calendar year as their tax year unless they can demonstrate a business purpose for using a fiscal year
Are taxes for LLCs and S corps the same?
No, taxes for LLCs and S corps aren’t the same. While both companies can choose their tax treatment, S corps have particular tax advantages that LLCs do not.
What is the S corp tax rate?
The S corp tax rate varies depending on the tax bracket of each shareholder, but the company itself does not have to pay tax on its revenue.
How do I dissolve an S corporation in Washington, D.C.?
To dissolve an S corporation in Washington, D.C., you must file Articles of Dissolution with the Department of Licensing and Consumer Protection, along with the cancellation of all applicable licenses and permits.
Bibliography
IRS. “S Corporations.” Accessed April 5, 2023.
LLC University. “District of Columbia LLC Biennial Report.” Accessed April 5, 2023.
Cornell Law School. “Pass-through taxation.” Accessed April 5, 2023.
IRS. “About Form 1120-S, U.S. Income Tax Return for an S Corporation.” Accessed April 5, 2023.
DC.Gov. “D-20 District of Columbia (DC) Corporation Franchise Tax Forms and Instructions.” Accessed April 5, 2023.
IRS. “About Schedule SE (Form 1040), Self-Employment Tax.” Accessed April 5, 2023.
Startupsavant. “How to Start an S Corp in Washington D.C.” Accessed April 5, 2023.
DC.Gov. “Office of Tax and Revenue, New Business Registration.” Accessed April 5, 2023.
Department of Licensing and Consumer Protection. “Corporations Division: Business Registration FAQs.” Accessed April 5, 2023.
IRS. “Apply for an Employer Identification Number (EIN) Online.” Accessed April 5, 2023.
IRS. “About Form 2553, Election by a Small Business Corporation.” Accessed April 5, 2023.
IRS. “About Form 8832, Entity Classification Election.” Accessed April 5, 2023.
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