Washington State Tax-Free Holding Company
What is a Washington Holding Company?
A Washington holding company is simply a holding company formed in Washington state.
A holding companies are companies that holds assets; they don’t actively pursue profits or engage in business deals. Many people form holding companies to own assets like real estate, patents, copyrights, or other companies’ assets. Holding companies typically play a quintessential role in business’ asset protection plan.
Advantages of Holding Companies
Holding companies are often utilized as a way to double down on limited liability and asset protection. Many businesses are structured so that the entity actively engaged in business owns none of its assets—the holding company does. The theory is that should the company actually doing business be sued, none of its valuable assets would be up for grabs because it doesn’t own the assets. For the use of the holding company’s assets, the company doing business will often lease the assets (be it patents, copyrights, real estate, or physical items like manufacturing equipment) from the holding company. The only income the holding company receives is through the leases, and in some states, this income is not taxed. This liability theory also holds that if the company doing business owes debts to a third-party and that company holds no assets, the assets it leases from the holding company would remain protected in the holding company.
Holding Company Asset Protection with Washington State LLC
Washington State is one of the hidden gems for the whole industry of tax-free incorporating.
Washington State has a great nexus statute, stating that people who do not have nexus in the state do not owe any tax. Just because you incorporate in Washington, doesn’t mean you will be taxed in Washington.
Why is this important? People forming companies in Wyoming, Nevada, Delaware, and Florida are doing so because those states don’t have personal income tax. These same people also have trouble establishing the legitimacy of these companies as real companies. A lot of other state agencies look at Nevada LLCs as tax shelters for Californians.
Because Washington State has a gross receipt tax of 1.5% it is not looked at as a tax shelter. But Washington has no personal income tax for residents. Washington does not have corporate income tax, but it has a gross receipts tax called a Business and Occupation tax (1.5% of your gross income derived in WA State). Find our guide to Washington state business taxes to learn more.
The important part of this is WAC 458-20-19401 as described on the WA Department of Revenue website: http://dor.wa.gov.
WAC 458-20-19401 basically states that anyone having a holding company formed in Washington does not owe tax if they don’t meet any of the following thresholds:
- You have more than $50,000 of payroll in Washington State for your holding company
- You have more than $50,000 of property in Washington State for your holding company
- You have more than $250,000 of gross income in Washington State for your holding company
- At least 25% of your total property, payroll, or income in Washington State for your holding company.
This was recently clarified June of 2010 and gives people outside of Washington State a completely tax-free holding company from a state where people will view the company as a more legitimate entity than a Nevada holding company, Wyoming holding company, or Delaware holding company.
Washington Nexus and Holding Companies
Now if you’re going to live in Washington State and/or operate in Washington State, you’ll be completely taxable if you meet the above thresholds.
You can call the Department of Revenue for more clarification if you don’t want to take our word on it: 1-800-647-7706 or read the WAC here: http://apps.leg.wa.gov/wac/default.aspx?cite=458-20-194
What the recent law (Senate bill 6143, Chapter 23) enacted June of 2010 does do though, is basically screw over every rich person in Washington State that has holding companies in other states. It states that a person who is a resident or domiciled in the State of Washington and running or owning another company then creates nexus for that company…
Chapter 23 of the same bill states that corporate directors must pay B & O tax for their compensation (1.8%) if more than $12,000 a year.
What Washington has failed to understand is that there are a lot of well-off people in Seattle that drive the Washington economy and happen to own a lot of assets outside of this state. This bill tries to reach farther into their pockets and get more tax out of them. The plus side is that it further clarifies that people not doing business in Washington are tax-free.
The bottom line:
If you’re never going to work in Washington State, it’s a great place to form a Washington LLC or start a Washington corporation. The annual report fee is only $71, or $72.78 if filed online with the state. In comparison, Nevada’s is $325, Delaware is $250 for an LLC, and could be a lot more for a corporation if you have a lot of shares, and Wyoming is still the cheapest at $52. The main point of setting up an asset protection holding company in Washington State is having it look like a more normal business than something set up in Wyoming, Nevada, or Delaware.
Our Washington Holding Company Formation Services
When we form the Washington holding company, we’ll set up the company with our address, hide your address on all the state documents, and if you’d really like, you can sign up for our economical mail forwarding service and have all your regular mail sent to us and forwarded on to you (State of Washington mail is always included in our $65 a year registered agent service). You can choose to have your Washington holding company formed as an LLC or corporation, though, we do recommend LLCs as they are easier to maintain and offer the same asset protection of a corporation.