By Joe Wallin | April 2026 | ~9 min read
For years, the standard advice for Washington startup founders was simple: if you're raising venture capital, form a Delaware C corp. If you're running a services business or a bootstrapped company, consider an S corp or LLC.
Washington had no income tax, so entity choice was driven almost entirely by federal tax considerations, investor expectations, and liability protection. The state-level tax picture was limited to the B&O tax, which applies regardless of entity type.
That era is over. With the passage of ESSB 6346 on March 30, 2026, Washington now imposes a 9.9% income tax on individuals earning more than $1 million. And because the tax reaches different entity types in fundamentally different ways, entity choice now has a state tax dimension that didn't exist before.
How the Tax Hits Each Entity Type
To understand the entity choice question, you first need to understand how Washington's income tax interacts with each structure.
C Corporations
A C corporation is a separate taxpaying entity for federal purposes. It pays federal corporate income tax (currently 21%) on its profits. Shareholders are taxed again when those profits are distributed as dividends or when they sell their shares at a gain.
Under Washington's new income tax, the entity itself does not owe Washington income tax. Washington taxes individuals, not corporations. But the tax reaches C corp owners in two ways.
First, W-2 compensation. If you're a founder taking a salary from your C corp, that salary is part of your federal adjusted gross income (AGI), which is the starting point for Washington's tax. If your total AGI exceeds $1 million, the salary is subject to the 9.9% tax — and there is no entity-level deduction or PTE election available to reduce it. The tax hits you at the individual level, period.
Second, dividends and capital gains. Qualified dividends and gains on the sale of C corp stock flow into your federal AGI. If they push you over $1 million, they are taxed at 9.9%. (QSBS gains excluded under Section 1202 are currently excluded from Washington's tax base as well — but that could change.)
The key point: C corp owners have no access to the PTE election. The entity-level tax workaround under §502 of ESSB 6346 is available only to partnerships, LLCs taxed as partnerships, and S corporations. If you're in a C corp, every dollar of Washington income tax you pay is subject to the federal SALT cap on your individual return.
S Corporations
An S corporation does not pay federal corporate income tax. Instead, its income passes through to shareholders, who report it on their individual returns and pay tax at their individual rates.
Under Washington's income tax, S corp income flows into each shareholder's federal AGI. If a shareholder's total AGI exceeds $1 million, the pass-through income is subject to the 9.9% tax.
But here is where S corps gain an advantage: S corporations are eligible for the §502 PTE election. The entity can elect to pay the 9.9% tax at the entity level, deduct it as a business expense on its federal return (bypassing the SALT cap), and each shareholder receives a credit on their Washington return.
For a shareholder in the 37% federal bracket, this reduces the effective Washington tax rate from 9.9% to approximately 6.2%. That is a meaningful structural advantage over the C corp path.
For more on the mechanics, see our standalone piece on the PTE election.
LLCs (Taxed as Partnerships)
A multi-member LLC taxed as a partnership works similarly to an S corp for purposes of Washington's income tax. Income passes through to members, and if their AGI exceeds $1 million, the 9.9% tax applies.
Like S corps, LLCs taxed as partnerships are eligible for the §502 PTE election. The same entity-level deduction mechanics apply, and the same effective rate reduction to ~6.2% is available.
LLCs have some additional flexibility that S corps do not. They can allocate income and losses among members in ways that don't have to track ownership percentages (within the limits of the Section 704(b) substantial economic effect rules). This can create planning opportunities for managing which members cross the $1 million threshold and when.
Single-Member LLCs
Single-member LLCs are disregarded for federal tax purposes — meaning the IRS treats them as if they don't exist, and all income flows directly to the owner's individual return. Washington's statute follows this treatment.
The open question is whether a single-member LLC qualifies for the §502 PTE election. The statute references partnerships and S corporations, and a disregarded entity is neither. Until the Department of Revenue provides guidance, single-member LLC owners should assume they do not have access to the PTE election and plan accordingly.
If the PTE election matters to you, converting to a multi-member LLC or electing S corp status may be worth considering.
The New Math: A Side-by-Side Comparison
Let's make this concrete. Assume a Washington-resident founder earning $2 million in business income, with no other significant income sources. Here's how the Washington income tax plays out across entity types:
Scenario: $2M in Business Income
C Corp (salary + dividends path):
- Founder takes $500K salary, company retains $1.5M
- Washington tax on salary: $0 (AGI under $1M from salary alone in this year)
- But: retained earnings create deferred tax liability — when distributed as dividends or when shares are sold, gains hit the founder's AGI and trigger the 9.9% tax
- No PTE election available — all Washington tax subject to federal SALT cap
- Effective Washington rate on distributed income: 9.9% (no federal offset beyond SALT cap)
S Corp with PTE election:
- $2M passes through to founder's individual return
- Entity elects to pay 9.9% at entity level on income above $1M = ~$99,000
- Entity deducts $99,000 on federal return → federal savings of ~$36,630 (at 37%)
- Founder receives §206 credit, owes no additional Washington tax
- Effective Washington rate: ~6.2%
LLC (partnership) with PTE election:
- Same economics as S corp
- Effective Washington rate: ~6.2%
- Additional flexibility in income allocation among members
The difference between 9.9% and 6.2% on $1 million of income above the threshold is $37,000 per year. Over a decade, that compounds to hundreds of thousands of dollars.
But Wait — What About the C Corp Advantages?
Entity choice was never just about state taxes, and it still isn't. C corps retain important advantages that can outweigh the PTE election benefit:
Venture capital compatibility. Most institutional investors require a Delaware C corp. They want preferred stock, liquidation preferences, anti-dilution provisions, and a clean cap table. If you're raising a Series A, you're almost certainly forming a C corp regardless of Washington's tax.
QSBS eligibility. Section 1202 — the qualified small business stock exclusion — can eliminate up to $10 million (or 10x basis) in federal capital gains tax on the sale of C corp stock. Washington currently excludes QSBS gains from its tax base as well. For founders expecting a large exit, the QSBS benefit can dwarf the PTE election savings. See our QSBS guide for a deep dive.
Lower corporate rate. The 21% federal corporate tax rate is meaningfully lower than the top individual rate of 37%. For companies that reinvest profits rather than distributing them, the C corp structure defers individual-level tax.
Simpler cap table management. S corps have restrictions — no more than 100 shareholders, no nonresident alien shareholders, only one class of stock. These constraints make S corps impractical for many venture-backed companies.
When the Calculus Shifts Toward Pass-Through
The PTE election advantage is most powerful for:
Professional services firms. Law firms, accounting firms, medical practices, consulting firms, and other service businesses that distribute most of their income to owners annually. These businesses typically don't need VC, don't benefit from QSBS (which requires a C corp), and generate high pass-through income. The PTE election is a no-brainer.
Bootstrapped software companies. If you're building a profitable SaaS company without outside capital, an S corp or LLC with the PTE election can save you 3.7 percentage points on every dollar above $1 million — every year.
Real estate holding companies. LLCs are already the default for real estate, and the PTE election adds another reason to keep it that way. (Note: real estate gains may also be subject to Washington's capital gains tax.)
Investment partnerships. Fund managers and investment partnerships with Washington-resident partners above the $1 million threshold should be modeling the PTE election into their fund structures.
When to Stay in a C Corp
The C corp remains the right choice when:
- You are raising or plan to raise institutional venture capital
- QSBS eligibility is a core part of your exit tax strategy
- You are reinvesting profits and don't plan to distribute income for years
- You need multiple classes of stock or have foreign shareholders
- Your expected exit value makes the QSBS exclusion worth far more than annual PTE savings
For many VC-backed founders, the honest answer is: the C corp is still correct, but you need to be intentional about compensation planning (salary vs. dividends vs. deferred comp) to manage your Washington AGI.
The Hybrid Approach
Some founders are exploring hybrid structures — for example, a Delaware C corp for the operating company (preserving VC compatibility and QSBS eligibility) alongside an S corp or LLC for consulting income, advisory fees, real estate, or other income streams.
This can work, but it adds complexity and cost. The entity-level election, filing obligations, and potential B&O tax overlap all need to be modeled. Don't do this without a CPA who understands both federal and Washington state tax.
The B&O Tax Wrinkle
Remember that Washington's B&O tax applies to all entity types based on gross receipts, not net income. Starting in 2028, pass-through entities that elect the PTE will be paying both:
- B&O tax on gross receipts (rates vary: 1.5% for services, 0.471% for retail, etc.)
- The 9.9% entity-level income tax on net income above $1M per owner
Section 204 of ESSB 6346 provides a credit to partially offset this double layer, but the credit is imperfect. Service businesses (which pay the highest B&O rate) get the most relief. Retail and manufacturing businesses get less.
This is another reason to model your specific situation rather than relying on general rules.
What to Do Now
If you are forming a new company in Washington in 2026, the entity choice question now requires state tax modeling that it never required before. Here is a framework:
If you're raising VC: Form a Delaware C corp. Focus your Washington tax planning on compensation structure, QSBS qualification, and timing of liquidity events.
If you're building a services business: Strongly consider an S corp or LLC with the PTE election in mind. The 3.7-percentage-point annual savings on income above $1 million is significant and recurring.
If you're doing both: Talk to your CPA about whether a hybrid structure makes sense for your specific income streams.
If you have an existing entity: Revisit your structure now. Converting from a C corp to an S corp has tax consequences (built-in gains tax, among others), but for some businesses the long-term PTE election savings may justify the conversion cost. This analysis should be done before January 1, 2028.
For more on Washington's income tax and planning strategies, see our Washington State Taxes pillar page and our Tax Planning Guide for High Earners.
This post is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified tax professional regarding your specific circumstances.
