Insight
LLC vs. S-corp vs. C-corp: choosing a Washington business entity
Three founders make the same decision and walk out with three different answers. Here is how the choice actually breaks down in Washington.
Published
June 11, 2026
Updated
June 12, 2026
Three founders make the same decision in the same week. One forms an LLC. One incorporates and elects S-corporation status. One sets up a C-corp. None of them is wrong. The structure that fits a family that owns three rental properties is the wrong structure for a startup raising a seed round, and the entity built to issue stock options is overkill for a two-person consultancy.
Before going further, clear up the confusion behind most of these searches: an LLC and a corporation are business entities you form with the state, while an S-corp is a federal tax election, not an entity. "LLC vs. corporation" is a question about legal form; "LLC vs. S-corp" is really a question about tax.
"LLC vs. S-corp vs. C-corp" is two questions, not one
Both entities are creatures of Washington statute. You form an LLC under the LLC Act (RCW 25.15) and a corporation under the Business Corporation Act (RCW 23B), each by filing with the Washington Secretary of State. The S-corporation is the outlier: it is a federal tax election under IRC section 1361 that an LLC or a corporation can choose, not a separate entity you form.
So the real decision has two layers: which entity you form under state law, and how you ask the IRS to tax it. Most people searching "LLC or S-corp" are really asking a tax question about a business they will run as an LLC. Keep the two layers separate and the rest gets easier.
LLC vs. S-corp
By default, a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership. The profits flow through to your personal return, and all of them are subject to self-employment tax.
Electing S-corp status changes that math. You pay yourself a reasonable salary, which carries payroll tax, and take the remaining profit as a distribution that does not. For a profitable owner-operated business, that split can save real money once the profit clears the salary. The cost is compliance: payroll, a separate return, and an IRS expectation that the salary is genuinely reasonable. The S-election also comes with limits, no more than 100 shareholders, one class of stock, and U.S. citizens or residents only.
The election does not change what you formed. You keep the LLC and its operating agreement; you have only changed the tax treatment.
S-corp vs. C-corp
Both are corporations under RCW 23B. The difference is tax, and it is the cleanest fork in the whole decision.
An S-corp is pass-through. Profit is taxed once, on the owners' returns. A C-corp is taxed twice: the company pays the 21% federal corporate rate, and shareholders pay again on dividends. Double taxation sounds like a flaw to avoid, and for a closely held business it usually is. But the C-corp buys back three things the S-corp gives up: unlimited owners including foreign investors and entities, multiple classes of stock, and full eligibility for incentive stock options. Those are exactly the things an institutional investor and an option pool require.
Here is how the three most-formed Washington entities line up, side by side.
What changes in Washington
A lot of entity-choice advice on the internet assumes a state income tax. Washington does not have one. That removes a whole layer of the pass-through-versus-corporate calculation that drives the decision in California or New York.
What Washington does have is the Business & Occupation tax: a tax on gross receipts under RCW 82.04 that applies regardless of which entity you picked and regardless of whether you turned a profit. For the Bellevue and Seattle companies we form, the B&O tax is usually the bigger state-tax question, not the entity choice. Every Washington entity also keeps a registered agent and files an annual report under RCW 23.95, and most closely held companies now report their beneficial owners to FinCEN under the Corporate Transparency Act. The entity you choose changes your federal tax picture far more than your Washington one.
The QSBS question, and why startups pick C-corp
If a company expects to be acquired, one provision usually settles the entity question on its own. Qualified Small Business Stock, under IRC section 1202, lets a shareholder who holds C-corp stock for five years exclude up to $10 million of gain, or ten times their basis, from federal capital gains tax. Neither an LLC nor an S-corp can generate it. For a founder looking at an exit, that exclusion is often worth more than every year of double taxation combined. It is the single most common reason a venture-backed company is a C-corp.
How to choose
The honest version of the advice is that the facts decide, not a default. A few patterns hold up:
- Running a closely held business, holding real estate, or setting up a family entity: an LLC, taxed as a partnership, fits most of the time.
- Profitable, owner-operated, all U.S. owners drawing income from the business: form the LLC, then run the numbers on an S-election.
- Raising institutional money, granting stock options, or pointed at an exit: a C-corp, and usually a Delaware one, with QSBS as the reason that outlasts the tax cost.
The entity is not permanent. You can elect S-corp treatment later, or convert an LLC to a corporation before a raise. But conversions have tax consequences and timing traps, and the QSBS five-year clock only starts once the C-corp stock exists. The cheap move is to get it right at formation.
Frequently asked questions
Is an S-corp better than an LLC for taxes?
Sometimes. An S-election can cut self-employment tax once profit clears a reasonable salary, but it adds payroll, a separate return, and reasonable-compensation scrutiny. Below a certain profit, the compliance costs more than it saves.
Can an LLC be taxed as an S-corp or a C-corp?
Yes. An LLC can elect S-corp treatment (Form 2553) or C-corp treatment (Form 8832) and keep its LLC legal structure and operating agreement. You are changing the tax treatment, not the entity.
Why do startups incorporate as C-corps?
Investors buy preferred stock, which an S-corp cannot issue. Option pools need ISOs, which require a corporation. And QSBS under section 1202 only applies to C-corp stock. Those three together usually decide it.
Does Washington tax LLCs and corporations differently?
There is no Washington income tax for any of them. All pay the Business & Occupation tax on gross receipts under RCW 82.04. The meaningful tax differences are federal.
What is QSBS, and which entity qualifies?
Qualified Small Business Stock is C-corp stock that, held five years and meeting the section 1202 requirements, lets the holder exclude up to $10 million or ten times basis from federal capital gains. Only C-corp stock qualifies.
Choosing an entity is a federal tax decision wearing a state-law hat. Our business formation attorneys in Bellevue and Seattle handle both layers. Talk to us before you file, while changing course is still free.
