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How to Start and Run a Business in Washington State

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DragonImages/Getty Images
  • Washington state has a higher-than-average unemployment rate of 4.6%.
  • A booming tech industry drives more than 17% of Washington's annual economic activity.
  • A robust network of accelerators and incubators helps connect startups to local resources and capital investment.

Washington state hosts 608,956 small businesses that employ 1.4 million workers, which is more than half of the state's private-sector workforce. These small businesses represent 99.5% of all Washington-based businesses, more than half of which maintain less than 100 employees. Washington's economy is worth $563.2 billion, making it the 12th largest economy in the U.S. In 2018, real GDP grew by 5.7%, far outpacing the national average of 2.9%.

The unemployment rate in Washington is 4.6%, which is low by historic standards, but a full point higher than the national average of 3.6%. This means that while the Washington economy demands a significant number of jobs, small businesses shouldn't expect the same level of fierce competition in the labor market as found in other states. However, while the labor market might be relatively flexible, small businesses must compete with a high concentration of large companies, especially in the tech sector, for access to top talent.

Washington's economy is extremely healthy in a time of relative economic success for businesses across the country. How are entrepreneurs taking advantage of the robust growth that is ongoing in Washington state? What challenges have they encountered as they've launched and grown their businesses? Business News Daily reached out to some of the entrepreneurs based in Washington to find out more about their everyday experience.

A burgeoning technology industry in Seattle has driven the state's economy forward and attracted new talent to Washington. That trend is a boon not only to those in the tech industry but also to entrepreneurs who indirectly benefit from the growth in that sector. As profits rise, startups open and more people flood into the state to seek jobs, entrepreneurs in other industries see their customer bases expand and their clientele's disposable income rise.

"We're seeing massive growth right now driven by the tech industry," said Nipul Patel, co-founder and chief operating officer of entrepreneurial network Townsquared. "It's accompanied by population changes to the younger side and higher incomes, which is having a huge impact in many ways. People have more discretionary income. They have more income to spend on the products and services small businesses carry."

The Puget Sound region of Washington is well known as a tech hub, hosting companies including Amazon, Microsoft, Google and Facebook. Collectively, tech companies are responsible for hundreds of thousands of jobs in the state and are rapidly growing. Washington's tech industry includes about 14,000 businesses that add more than $75.2 billion to the state economy annually, which represents 17.4% of the state's economy. 

Another residual benefit of the tech boom is the support network that comes with it. A number of accelerators and development centers have opened their doors in Washington in recent years, offering entrepreneurs the opportunity to refine their ideas and access experienced mentorship, not to mention pitch their products and services to potential investors.

"If you look at the landscape five years ago, there wasn't a lot of startup activity, but now we're seeing more local businesses," said Katya Constantine, founder and owner of small business marketing company Digishop Girl Media. "On the startup scene, we actually have a vibrant and growing community. There's a real estate infrastructure, a ton of coworking spaces and a lot of accelerators. Also, there's a lot of tech talent and education with a focus on entrepreneurship. We've seen amazing growth in the startup community in the last couple of years."

9Mile Labs is a startup accelerator that specializes in helping B2B companies grow, with a focus on the tech industry. Sanjay Puri, co-founder of 9Mile Labs, said the reason the accelerator opened its doors three years ago is that he and his partners saw great promise in the entrepreneurial community of Washington.

"We believe the region has a lot of promise," Puri said. "If we could help address these issues of [starting up and finding investors], we believe that there is a lot of opportunity."

Patel added that the state's culture encourages support for local, independent businesses, which helps small business owners succeed.

"I think Washington state is in a place where people very much value local economies by shopping local and supporting local businesses," Patel said. "So many new small businesses and independent stores are succeeding because people value the character and uniqueness."

Washington's entrepreneurs report a robust pool of talent to draw employees from. Many attribute the wealth of knowledge and skills to local and regional universities, as well as high turnover within the large companies based in the state. As experienced employees leave big businesses to either start their own companies or work in a more intimate setting, entrepreneurs benefit from the skills coming out of the corporate world.

"Training and networking are big opportunities [in Washington]," said Joan Woodward, president of small business advocacy organization The Travelers Institute and executive vice president of public policy at Travelers. "The employee pool is strong and skilled. Silicon Valley has the opposite problem, where they have to steal people from each other."

The local talent has contributed to the wealth of startups in the state, Puri said. He believes skilled employees are one of the key attributes of a successful startup. In Washington, he said, entrepreneurs have every opportunity to put together a well-rounded team.

Washington also has one of the higher unemployment rates in the country, although it remains at a healthy 4.6%. This means that, while the labor market is somewhat competitive, there are more opportunities to recruit top talent for open positions than in many other states throughout the country. Still, the unemployment rate is low by historic standards, and, given the concentration of large businesses in the state, small companies might find it challenging to secure the talent they need.

While the big companies sometimes generate stiff competition for small and midsize businesses, most of the entrepreneurs who spoke with Business News Daily reported that the large companies based in Washington offer a net positive for their enterprises.

For one, many entrepreneurs in Washington, particularly in the Seattle area, take advantage of the opportunities presented by large companies such as Amazon and Microsoft. Many small businesses offer the B2B services that the state's larger companies need. This provides a reliable and deep-pocketed customer base for small B2B businesses.

Small business owners also reported that they have benefited indirectly from big businesses' out-of-state recruitment efforts. By bringing in talent from elsewhere, large companies attract skilled labor to Washington, and many times, those employees will eventually find their way to small businesses.

"Companies like Amazon and others are pushing up the job market so much that it's great for the city," said Dave Parker, CEO of developer training center Code Fellows. "We're starting with something that drives market growth."

Entrepreneurs in Washington reported a friendly business environment and relatively low taxes. In particular, they cited the absence of personal or business income tax as beneficial. Instead, the Washington Department of Revenue levies about 60 different taxes and fees, such as a business and occupation (B&O) tax, sales and use taxes, property taxes, and a variety of industry-specific taxes.

"The lack of personal income tax in the state is attractive from an employment point of view," said Kristen David, a business consultant and former trial lawyer. "In addition, the corporate tax structure is relatively straightforward." 

Small businesses that choose to place their companies just outside of Seattle will still have access to the largest and most affluent market in the state without the added costs of doing business within city limits.

"For having a progressive state of mind, our tax burden isn't that bad compared to other states," said Tom Sternod, owner of a Washington-based Five Star Painting franchise. "We've chosen to locate our business 10 miles outside of the city limits of Seattle, which allows us to avoid paying the much higher taxes."

However, sometimes, the lack of a corporate or personal income tax can also present a problem for early-stage companies. While established small and midsize businesses report benefiting from the B&O tax, which essentially levies a tax on volume of revenue rather than profits, startups may struggle with the tax, as they want to reinvest as much revenue as possible.

"Washington doesn't do a personal or corporate tax off of your profit; it does it off of the top line of sales," said Jeremy Ames, president and co-founder of Guidant Financial. "It's not based on profitability; it's just based on volume. For a business of our size [about 90 employees], it ends up being quite favorable. For your really small businesses, as they're getting up off the ground, it's probably more of a negative than it is positive for a business that's something under $600,000 in revenue."

Another byproduct of the state's economic gains and the rebounding real estate market is the need to better compensate employees, both through salary and benefits. The challenge is compounded by nearby large companies' ability to offer more attractive compensation, making it easier for them to recruit and putting the pressure on small business owners to offer their employees something extra to retain them. And even though the labor pool is vast and skilled, the demand is high, making it extremely competitive to recruit new employees, particularly in the tech space.

In addition, Seattle's city council adopted a mandatory $15 hourly minimum wage for employees, which began to phase in at $11 per hour as of April 1, 2015. Small business owners said the added expenses are reflected in their prices.

"It's a high cost to do business here," said Tija Petrovich, owner of Seattle Fitness. "And we have the $15 minimum wage."

Most businesses in Seattle are now required to pay their employees $15 per hour, while small employers (those with less than 500 employees) who contribute to employee medical benefits and where workers receive tips are currently required to pay employees $12 per hour. Those businesses will be required to pay $15 per hour by 2021. Under Seattle law, the minimum wage will be adjusted each year on Jan. 1 based on the Consumer Price Index in the Seattle Tacoma Bremerton Area.

Although capital is available in Washington, entrepreneurs report having a tougher time finding investors than entrepreneurs would in other tech hotspots like Massachusetts or San Francisco. Accelerators help connect small businesses to venture capitalists and angel investors, but acceptance into those programs is limited and investments are not guaranteed. Further, because of the competitive atmosphere, investors have a multitude of options when deciding whether to invest in a new company.

"We found that early-stage companies out here lack capital," Puri said. "That's kind of surprising, because there is a lot of wealth accumulated over generations. But because of the way it has been accumulated, that's how it's also being invested — low-risk types of investments, rather than high-risk areas like entrepreneurship."

"Here are some nuances we see: Overall lending volumes to small businesses have grown," Ames added. "But in reality, for most of our clients who are in the sub-$1 million range of annual revenue, lending has actually dropped significantly and sort of flatlined. It's much more difficult for smaller businesses to get capital."

These questions are commonly raised by entrepreneurs who are interested in starting a business in Washington. The answers below will help you file the necessary documents, pay the appropriate fees and understand the basics of starting a business in Washington.

Starting a business in Washington requires you to select a business structure and file the appropriate tax and employer identification documents.

Not every business in Washington is required to have a business license. Only those that meet any one of the following criteria must apply for a business license:

  • Businesses that gross $12,000 or more in revenue per year
  • Businesses operating under a name that is different from their legally registered name
  • Businesses that plan to hire employees in the next 90 days
  • Businesses that sell a product or provide a service that is taxable by the Department of Revenue
  • Businesses that require a specialty license through the state Business Licensing Service

These requirements cover most businesses in Washington. However, if you don't meet any of these criteria, you are free to operate indefinitely without applying for a business license. If you expect to soon meet one or more of these criteria, consider applying for a business license immediately.

Registering a trade name or business name in Washington state begins with the business license application. While filling out the application, search existing business licenses to confirm your intended business name is available. You can then register your intended business name online with the Department of Revenue. In addition to the $19 fee associated with the business license application, you will also have to pay a $5 fee per business name registered.

In Washington state, most small businesses are not required to carry commercial general liability insurance to cover property damage, personal injury and legal defense expenses. Businesses that maintain at least one employee must provide workers' compensation insurance. If a business uses vehicles in the course of its operations, it is also required to maintain a commercial vehicle insurance policy.

In Washington state, a Unified Business Identifier (UBI) is a nine-digit number that registers a business with state agencies and allows operations throughout the state. A UBI is often referred to as a tax registration number, business registration number or business license number. A UBI can be received through the state by applying through the business license application.

Generally, LLCs are considered "pass-through entities," meaning they are charged no income tax. Instead, LLCs members pay a personal income tax on all income derived from the business. In Washington state, there is no personal or corporate income taxes. However, LLCs and other companies are required to pay the B&O tax, which applies to the gross revenue of a business.

An LLC annual report or annual renewal is a document that must be filed online with the Washington Secretary of State. The initial annual report is due 120 days after your business is registered. Subsequently, you should receive a notice from the secretary of state more than one month in advance of when your annual report is due. The filing fee for annual reports is currently $71 plus a convenience fee for credit card transactions.

Washington state's current minimum wage is $12 per hour. However, that number will increase to $13.50 per hour in 2020. Local minimum wage laws fluctuate. For example, Seattle maintains a $15 per hour minimum wage, which is pegged to the Consumer Price Index of the surrounding area and set to increase on Jan. 1 of every year.

All LLCs operating in the state of Washington are required to name a registered agent who maintains a physical address in the state. The registered agent is responsible for receiving all communications from the state, including annual reports and notices from the secretary of state's office.

If you're a small business owner in Washington looking for resources to help you move forward, here are a few organizations you might want to learn more about.

SCORE's volunteer business professionals and expert mentors give counsel and guidance to entrepreneurs looking to start or expand their businesses. The services are entirely free and volunteer-driven. Here are some of the chapters in Washington: 

The U.S. Small Business Administration (SBA) offers financing and grants, as well as consultations and counseling services. There are also opportunities to apply for federal government contracts through the SBA and avenues for obtaining assistance in the wake of natural disasters.

9Mile Labs, mentioned above, is an accelerator in the Greater Seattle area that focuses on startups, particularly in the tech space. After a four-month program, participating entrepreneurs have the opportunity to pitch their idea to hundreds of investors as well as tap into the mentorship network that 9Mile Labs has cultivated.

Washington hosts SBA-affiliated development centers for small business. Each is dedicated to supporting the development and retention of small business, helping entrepreneurs do everything from craft business plans to navigate the state's tax code. You can find your region's small business development center at the link below.

Startup Washington is a program run by the state Department of Commerce that helps connect entrepreneurs to useful resources, data, funding sources, VCs, accelerators, workspaces and more. 

Adam C. Uzialko

Adam C. Uzialko, a New Jersey native, graduated from Rutgers University in 2014 with a degree in political science and journalism and media studies. He reviews healthcare information technology, call centers, document management software and employee monitoring software. In addition to his full-time position at Business News Daily and business.com, Adam freelances for several outlets. An indispensable ally of the feline race, Adam is owned by four lovely cats.

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