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Editorial 7 MIN READ

Washington in late 2025: the $70 annual report and the B&O problem

A low formation cost, a low annual fee, and a gross-receipts tax that changes the calculus entirely

The Editors
Staff, Incorporator.org
7 min read Updated
Contents 6 sections
  1. The annual report mechanics
  2. Where the state actually makes its money
  3. The capital gains tax, and the case that upheld it
  4. Washington versus Delaware on the actual math
  5. Who this state actually makes sense for
  6. Sources

Washington LLC costs $200 to form online and $70 a year to keep active, and the annual report is due by the last day of the entity's anniversary month. Those are the numbers the Secretary of State publishes, and they are the easy part.

The harder part is that Washington does not have a corporate income tax. It has a Business and Occupation tax on gross receipts, which reshapes how any entity formed here actually gets taxed. Anyone choosing between Delaware and Washington on headline filing fees alone is reading the wrong column.

The annual report mechanics

For LLCs, the Washington annual report is governed by RCW 25.15.071, part of the state's Revised Uniform Limited Liability Company Act (Ch. 25.15 RCW, enacted 2015). The filing is due each year by the end of the month in which the LLC was formed or first registered in the state. The Secretary of State's filing fee is $70 for online renewal. A paper filing runs higher, and a late filing carries a $25 penalty before the entity slips into delinquent status and, eventually, administrative dissolution.

For corporations, the parallel obligation sits at RCW 23B.16.220 under the Washington Business Corporation Act. The annual report fee is also $70, with the same anniversary-month deadline structure. The form captures the governor or director list, the registered agent, and the principal office address. Every entity that wants to stay in good standing files one.

There is no franchise tax. There is no publicly filed annual financial statement. Compared to Delaware's $300 LLC tax or California's $800 minimum franchise tax, $70 a year is at the low end of what any state charges a functioning entity. The state makes its money elsewhere.

Where the state actually makes its money

Washington has no personal income tax, which is a headline feature of living and working here. It also has no corporate income tax in the form most other states impose. Instead, under RCW 82.04.230 through 82.04.298, the Department of Revenue collects a Business and Occupation tax on gross receipts from virtually every business activity conducted in the state.

B&O rates are graduated by activity classification rather than by income. The retailing rate is 0.471%. Wholesaling is also 0.484%. The service and other activities category, which catches most professional services and software-as-a-service, runs 1.5% for businesses over the small-business threshold. Manufacturing is 0.484%. A handful of niche classifications run as low as 0.138%. These are taxes on revenue, not on profit, and that distinction is where founders coming from income-tax states consistently get the math wrong.

A Seattle consulting LLC billing $500,000 a year pays B&O at the 1.5% service rate. That is $7,500 to the state before a dollar of income tax at the federal level. The same LLC in California pays the $800 franchise minimum plus income tax on net profit. In a thin-margin service year, Washington can be worse. In a high-margin software year with significant operating expenses, it can be much better. The comparison depends entirely on the ratio of gross revenue to net income.

There are credits and small-business thresholds that reduce this in practice. The B&O small-business credit, the filing-frequency reductions for entities under certain revenue levels, and the multiple-activities tax credit for manufacturers who also sell retail all pull the effective rate down. A founder should not model Washington using the posted B&O rate as a flat tax; the Department of Revenue's guidance on classifications and credits is where the real number comes from.

The capital gains tax, and the case that upheld it

In 2021, the legislature enacted a 7% tax on long-term capital gains above a per-individual threshold, codified at RCW 82.87.040. The threshold is indexed annually and sits at approximately $270,000 for the 2024 tax year, rising with inflation. Gains below the threshold are exempt. Real estate gains are exempt. Retirement-account gains are exempt. The tax applies primarily to sales of stock and other financial assets held more than a year.

The tax was immediately challenged as an unconstitutional income tax under the state constitution's uniformity clause, which has historically been read to forbid a graduated income tax. The Washington Supreme Court upheld it in Quinn v. State, 526 P.3d 1 (Wash. 2023), holding that the capital gains tax is an excise tax on the transaction rather than a property tax on income. The reasoning is contested in the academic literature and has drawn national attention, because if a capital gains tax can be framed as an excise, the state constitutional doctrines in other no-income-tax states come under pressure too.

For a founder forming here in late 2025, Quinn is now settled state law. A sale of founder stock in excess of the threshold is subject to the 7% rate. Qualified Small Business Stock under IRC § 1202 remains federally exempt; Washington has not broadly conformed to QSBS for purposes of this tax, so the state layer may apply even when the federal one does not. Plan accordingly before signing a purchase agreement.

The LLCTA-analog proposal in SB 5329 (2023), which would have layered additional entity-level surcharges on certain large pass-through entities, has not advanced and remains pending. It is worth tracking if you are forming a large operating LLC, but it is not current law.

Washington versus Delaware on the actual math

The intuitive comparison, Delaware at $90 to form and $300 a year against Washington at $200 to form and $70 a year, makes Washington look cheap. Over ten years, the Delaware LLC will have paid roughly $3,090 in state maintenance and the Washington LLC roughly $900. Delaware's franchise regime is the expensive piece.

That comparison holds only until the entity has revenue. A Delaware LLC operating in Washington still owes Washington B&O on every dollar of in-state gross receipts, because B&O is imposed on business activity in the state, not on the entity's place of formation. Forming in Delaware to escape Washington tax is a common first-time-founder idea and a reliably expensive one. The Department of Revenue expects an out-of- state LLC with substantial nexus in Washington to register, file, and pay B&O like any domestic entity.

The right frame is this: pick the state of formation on the corporate-governance question (Chancery access, investor comfort, conversion costs) and price the operating tax bill separately. For an operational business whose customers and employees are in Washington, forming in Washington eliminates the foreign-qualification filing and the redundant registered agent without changing the tax calculus at all. For a company that expects venture financing, the usual Delaware default still applies, and the Washington B&O liability attaches the same way regardless.

Who this state actually makes sense for

Washington makes the most sense for three kinds of filers in late 2025.

An operating business with customers and employees in the state should almost always form here. The annual cost is low, the compliance burden is administrative rather than computational, and there is nothing to gain from a foreign Delaware structure unless a fundraising round demands it.

A holding LLC for Washington real estate belongs here, because real property in Washington is taxed locally regardless of entity domicile, and there is no asset-protection gain from forming elsewhere that survives foreign qualification. The excise-tax character of the capital gains regime does not reach real-property sales, which removes a meaningful state-level drag at exit.

A professional services practice with a thin net margin should model the B&O carefully before forming. If gross receipts are high and margins are modest, the 1.5% service classification may cost more than a net-income tax would in a neighboring state. That is a live decision for accountants, lawyers, and agencies; it is rarely the decision a software founder should worry about.

Everyone else, the one-person e-commerce LLC, the freelance consultant whose clients are out of state, the side-project venture that might never have revenue, can form here and pay $70 a year without much thought. The capital gains tax only bites on a realization event above the threshold. The B&O only bites on Washington-source revenue. If neither condition is triggered, the Washington entity is among the cheapest and simplest in the country to maintain.

If you are forming this quarter and the business will operate in Washington, file online through the Corporations and Charities Filing System this week, calendar the anniversary month for the annual report, and register with the Department of Revenue for your B&O account at the same time. The $70 number is the easy part. The B&O classification you pick, and the capital gains exposure you plan around, are what matter at the exit.

Sources

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