How to Incorporate in DC vs. How to Start a DC LLC

People looking to start a business often ask whether they should set up an LLC or incorporate for their new venture. Like everything else in life, the answer depends. Below you’ll find the three general factors we think will help you make an informed decision.

• Ease of maintenance
  LLCs have the appeal of providing entrepreneurs lower overall annual maintenance and paperwork, creating a big selling point for the LLC structure. Corporations require annual meetings, directors meetings, recorded meeting minutes, and a notable amount of paperwork, while LLCs have little to no maintenance of this type. LLCs not only require less resolutions, but can make executive decisions without the need to hold an official meeting.
• Desired tax structure
  Unlike a corporation, which must pay its own taxes, LLCs are known as pass-through entities, meaning their tax structure is designed to have its profits, losses, credits, and expenses pass directly through to the owners, who report them on their personal income tax returns (similar to if the owners had a partnership or sole proprietorship). Corporations have a default tax structure known as the C corporation. This structure imposes a double-taxation, where the net income is initially taxed, and then taxed a second time as personal income after the profits and losses are distributed to the shareholders. At first glance, double taxation may seem like a downside, but for the right business it can provide advantages, such as reinvesting profits into the business.
• Investors
  Investors and shareholders often prefer doing business with corporations. The structure of a corporation is reputable and familiar. Investors know exactly where their time and money will be going with a corporation. LLCs can still be divided into percentages for members, but there is more trust behind the prominence of investing in stock within a corporation. Consider a corporation if you are serious about attracting investors.

Let’s also not downplay the notion of prestige. When you hear the word corporation, many people think of Amazon, Apple, Walmart, and Nike. While the LLC is perfect for the small to medium-sized business, it doesn’t carry the same weight as the corporation. While LLCs first came into being in the late 1970s, the corporation is the oldest recognized business entity in the US.

Note that whether you form an LLC or a corporation, you’ll need to file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN) once your company is officially formed with the state of Alabama. This report provides the federal government with identifying information about your company and those with the most control over profits and business operations. However, unlike state filings, the information shared in your report does not go on the public record and there is no filing fee. (Though if you don’t want to file this on your own, we offer BOI filing service for just $25.)

While we’ve already broken down the differences between an LLC and a corporation, we’re going to dig a bit deeper into the pros and cons of forming an Washington DC LLC or corporation. Take a look below to see what makes DC LLCs and corporations unique:

• Biennial Report
  Most states ask that businesses file annual reports, but DC makes it a bit easier. Every two years you have to check in with DC and pay a $300 filing fee. The report is pretty simple and asks if there have been any changes to your business, be it members, owners, directors, addresses, etc… This can be viewed as a benefit, in that you have two years to get all your ducks in a row and don’t have DC breathing down your neck asking for yearly filing fees.
• Flat Corporate Tax
  DC’s 8.25% corporate flat tax is good for a number of reasons, simplicity being one. The current U.S. tax system is so complicated that it costs taxpayers a lot just to implement it. Another benefit to a flat tax is improved fairness. An investigation by “Money” magazine showed that when 45 different tax professionals prepared the same return, it resulted in 45 different tax calculations. Even a Treasury Department study found that callers to the IRS toll-free help lines got the wrong answers 25% of the time. So those with the most sophisticated tax preparers pay the least in taxes, resulting in increased income inequality. In short, a flat corporate tax is good for business owners.
• Graduated Income Tax
  DC’s income tax rate starts at 4% and rises to 8.95% on income of over $1 million. A DC LLC won’t have to bother with the flat corporate tax, so if you’re LLC is bringing in over $60,000 in taxable income, you’ll be taxed .25% more than a corporation’s flat rate, but you won’t be subject to it’s double taxation, which is a win in our book.

DC LLC or DC Corporation? Our Final Answer.
The LLC provides excellent liability protections for the small business owner, without all of the formal hoops one has to jump through to form and maintain a Tennessee corporation. When you factor in an LLC’s ease of maintenance, desired tax structure, and not having to go out and woo business suit-wearing investors, the Washington DC LLC is a pretty awesome.

To start a corporation in the District of Columbia, you must file Articles of Incorporation with the Department of Consumer and Regulatory Affairs (DCRA). You can file the document online or by mail. The Articles of Incorporation cost a minimum of $220 to file. If you hire Active Filings, we’ll make sure the process of incorporation is as painless and straightforward as possible, and as a bonus you’ll get to use all of our info on the submission documents, which means we’ll insulate you and your business from getting hit with junk mail and annoying sales calls.

Your DC Articles of Incorporation must include the following details:

To form your LLC in the District of Columbia, you have to file Articles of Organization with the Department of Consumer & Regulatory Affairs (DCRA). You can file the document online, by mail or in person. The Articles of Organization cost $220 to file. If you hire Active Filings, we’ll make sure the process of forming your LLC is as painless and straightforward as possible, and as a bonus you’ll get to use all of our info on the submission documents, which means we’ll protect your privacy.

The purpose of Washington DC’s Biennial Report is to make sure your business records with the state are current. This allows creditors and other interested parties to look up your business address in case they need to contact you. The IRS uses this information to track the payment of your company’s state taxes.

What is the DC Biennial Report?
DC requires all businesses doing business within it’s boundaries file a report every two years. The report is a biennial renewal of your company’s registration with DC and reserves your right to keep your business name and updates DC on any changes your business may have had in the last year. When you hire Active Filings, you receive guaranteed on time filing, so that you won’t have to pay late fees, or worry about your business.

What information do I need when I’m filling out the annual report?
Your business’s name and address.
Names and addresses of officers and directors (if a corporation).
Names and addresses of managers or members (if an LLC).
Name and address of your registered agent.

How do I file my biennial report?
Here’s a quick how-to:

Go online to the DC Department of Consumer and Regulatory Affairs (DCRA) website. If you don’t already have an account, you will need to create a user account with a user name and password. Once you’ve created an account you can log into your DCRA account, select your company and enter the following information:

Name and address of the company.

Name and address of your registered agent in DC. (You can change your registered agent information on this form, if applicable).

State business purpose, use some amount of specificity.

List all entity governors. At least one name is required if the entity is a business corporation, nonprofit corporation, Professional corporation, general cooperative association, or LLC.

In the case of a qualified foreign entity, a statement that the entity is in good standing in its state of formation or, if the entity is not in good standing, a description of the efforts of the entity to bring itself into good standing. To finish, all you have to do is sign the report and you’re done.

How much does the report cost?
DC charges a $300 filing fee for all corporations, LLCs, and partnerships (domestic and foreign). Non-profits pay $80.

When is the report due?
April 1st every other year. When you form your LLC or corporation in DC, all new entities must file their first report by April 1st of the year following the year they were filed. Let’s say you form your company in 2020, you will file in 2021, and then you will next file in 2023.

How do I file my report?
You can file online at the DCRA website or you can walk in and file directly with a human.

Paying taxes is like going to the dentist. No one wants to do it. Taxes are, however, an integral part of successfully doing business in America. While we’re not tax professionals, we definitely will do our best to try and explain what kind of taxes your business will be expected to pay.

How will my corporation be taxed?
Corporations face “double taxation.” First they pay taxes on net profits from the business, and then get hit a second time when taxed on the dividends they receive from those earnings. Dividends are taxed at the shareholder’s personal tax rate. An LLC doesn’t have this problem, which means anyone looking to form a corporation should take note of a state’s corporate income tax and personal income tax.

How will my LLC be taxed?
Single member LLCs, meaning it’s just you running your business, are treated like sole proprietorships by the IRS. This means that any profits or losses your LLC experiences, will pass-through to you as the single owner. All you have to do is file a Schedule C, which reports profits or loss from your business, with your personal tax return (IRS Form 1040).

What if my LLC has more than one member?
As with a single member LLC, the IRS will view your multi-member LLC as a partnership. The LLC will retain it’s pass-through tax status, with a few wrinkles with regards to paperwork. Instead of one member filing a 1040, instead each member will have to file a Return of Partnership Income form (IRS Form 1065). This document lets the IRS check and make sure each owner is reporting their income properly. Beyond that, each LLC owner will attach a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) to their Form 1040. This form shows the IRS each member’s share of the LLC’s profits and losses.

Here’s a tip: If your LLC is going to have more than one member, it would be a good idea to draw up a simple operating agreement. Most states don’t require an LLC to have one, but with so many cooks in the kitchen, you’ll want clear documentation with regards to ownership percentage, voting rights, distribution of profits and losses, as well as rules for buying out a member. You won’t be require to file the agreement, but it should be signed by each member and kept with the LLC’s important documents.

Beyond the basic information you’ll also need:
• payroll documents
• bank and credit card statements
• accounting documents
• partnership agreements
• depreciation schedules
• gross receipts
• checking and savings account interest

What tax forms do I need to file?
Corporations: Form D-20
LLCs: Form D-40

What’s the DC corporate tax rate?
DC taxes corporations at 8.25%. Corporations must pay a minimum tax as follows:

$250 minimum tax, if DC gross receipts are $1 million or less.

$1000 minimum tax, if DC gross receipts are more than $1 million.

DC calls their 8.25% tax a Franchise Tax but it’s really just a plain old tax. The fact that it is flat across the board is kind of nice. If your company has $100,000 in taxable income, your corporation will be on the hook for $8,250. That’s a pretty simple calculation. You can almost do it in your head.

What does DC’s income tax look like?

$0 – $9,999                       4.00%

$10,000 – $39,999           6.00%

$40,000 – $59,999           6.50%

$60,000 – $349,999         8.50%

$350,000 – $999,999       8.75%

$1,000,000+                     8.95%

When are my tax returns due?
Washington DC tax returns are due by April 15th.

What if I need an extension?
If you cannot file by this date, you can get a tax extension. A Washington DC extension will give you 6 extra months to file, moving the due date to October 15th. To request a Washington DC personal extension, file Form FR-127 (Extension of Time to File a DC Income Tax Return) by the original deadline of your return (April 15th). Note that an extension of time to file is NOT an extension of time to pay. If you have a Washington DC tax balance due, it must be paid with your extension request. Failing to pay your DC tax on time will result in penalties and interest.