Registering a company is a starting point, not a complete tax plan. The right setup connects ownership, legal structure, federal tax classification, state registrations, payroll, and bookkeeping before the first busy filing season.
An LLC is a legal structure, not an automatic tax-saving election. Forming an LLC does not automatically make the business an S corporation, turn personal spending into deductions, or eliminate self-employment tax. Legal liability questions belong with an attorney; tax classification needs a separate analysis.
1. Choose legal structure and tax treatment separately
- Sole proprietorship: An individual generally reports business activity on Schedule C, subject to the activity's actual character. No separate corporation is created.
- Single-member domestic LLC: Generally disregarded for federal income tax unless it elects corporate treatment. Employment and certain excise taxes have separate rules.
- Multi-member domestic LLC: Generally taxed as a partnership unless it elects corporate treatment. Special rules can apply, including certain spousal ownership situations.
- Corporation: Generally taxed as a C corporation unless it qualifies for and elects S status. C corporations pay entity-level income tax, and shareholder distributions can create another layer of tax.
Model expected profit, owner compensation, reinvestment, administrative costs, investor plans, and the eventual exit. An entity that suits a venture-backed startup may not suit a solo consultant or family-owned store.
2. Evaluate S corporation eligibility before filing an election
An S election is not available to every owner group. Shareholder eligibility, residency, number of shareholders, and stock rights matter. Nonresident alien shareholders are generally prohibited. An eligible LLC may elect S status using Form 2553; do not assume both Form 8832 and Form 2553 are always required.
The general Form 2553 deadline is no later than two months and 15 days after the start of the tax year for which the election should apply, or during the preceding tax year. New entities and late-election relief require attention to the actual facts and current instructions.
Shareholder-employees performing services generally must receive reasonable compensation before non-wage distributions. Payroll filings, retirement contributions, health insurance treatment, state costs, and bookkeeping can offset projected savings. There is no universal profit threshold or salary percentage that makes the election correct for everyone.
3. Complete the registrations that formation does not cover
- Formation documents: Confirm the legal name, owners, registered agent, governing documents, and actual start date. Obtain legal advice about agreements and ownership rights.
- EIN: Determine whether an employer identification number is required and apply through the IRS after forming the entity where applicable. An EIN is not a business license.
- State and local accounts: In Washington, review Secretary of State filings where applicable, the business license and UBI, DOR tax accounts, city endorsements, and employment-related registrations.
- Operating footprint: Forming in another state does not necessarily remove registration or tax obligations where you actually operate. Employees, inventory, and customer activity can create additional obligations.
- Compliance calendar: Track annual reports, income tax returns, information returns, payroll deposits, state excise returns, and applicable ownership-disclosure rules. Verify current FinCEN requirements rather than relying on an old incorporation checklist.
4. Set up books before owner money starts moving
Open separate business banking and payment accounts. Record owner contributions, documented loans, distributions, and reimbursements distinctly. A sole proprietor's draw is not a wage expense; a loan repayment is not automatically deductible.
Keep formation fees, pre-opening operating expenses, equipment, and inventory in separate categories. Startup and organizational expenditures have specific deduction and amortization rules; equipment may require capitalization or an available expensing election. Do not assume every formation-related payment is immediately deductible.
5. Prepare for the first return, including low-activity years
A corporation or partnership may have filing obligations even when revenue is low or the company is not profitable. Foreign ownership can trigger additional reporting: for example, certain foreign-owned U.S. disregarded entities may need Form 5472 attached to a pro forma Form 1120 for reportable transactions, including some owner funding. Review this before accepting money, not after a penalty notice.
Give your CPA the formation documents, ownership percentages and tax residency, EIN letter, election confirmations, bank statements, startup receipts, loan agreements, payroll records, and activity in each state. Confirm who is responsible for each filing.
Official sources
- IRS: LLC classifications
- IRS: Form 2553 and instructions
- IRS: S corporation compensation
- IRS: Form 5472
- Washington DOR: Open a business
- FinCEN: Current beneficial ownership information requirements
Related reading
Business incorporation intake | Monthly bookkeeping checklist | 2026 business tax update