Washington state hosts 647,639 small businesses that employ 1.4 million workers – more than half the state’s private-sector workforce. These small businesses represent 99.5% of all Washington-based businesses, more than half of which maintain fewer than 100 employees.
Washington’s economy is worth over $668 billion, making it the 14th largest economy in the U.S. In 2021, the real GDP grew by an impressive 6.7%, outpacing the overall U.S. change of 5.7%.
The unemployment rate in Washington is 4.1%, low by historical standards but higher than the national average of 3.6%. This means that, because Washington’s economy demands many new jobs, small businesses shouldn’t expect the same level of fierce competition in the hiring process found in other states’ labor markets. However, small businesses must compete with a high concentration of large companies, especially in the tech sector, for access to top talent.
What advantages and challenges have business leaders encountered in Washington during this period of robust growth? Business News Daily reached out to some Washington-based entrepreneurs and small business owners to learn more about their everyday experiences, including the upsides and challenges of doing business in Washington state.
Seattle’s burgeoning tech industry has propelled the state’s economy forward, attracting new talent to Washington. That trend is a boon for tech industry businesses and entrepreneurs who indirectly benefit from tech industry growth. As profits rise, startups launch and more people flood the state seeking jobs, entrepreneurs in other industries see their customer bases expand and customers’ disposable incomes rise.
“We’re seeing massive growth right now driven by the tech industry,” said Nipul Patel, a media consultant for software companies who co-founded the 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 is well known as a tech hub, hosting campuses for huge companies such as Amazon, Microsoft, Google and Meta. Collectively, rapidly growing tech companies are responsible for hundreds of thousands of jobs in the state. Washington’s tech industry includes over 13,000 businesses, accounting for more than $103.5 billion annually and representing over 20% of the state’s economy.
The tech sector attracts Gen Z workers, who are up to speed with the latest technology and social norms, but any business that wants them to stick around needs to understand and prioritize what Gen Z wants in the workplace.
Accelerators, business incubators and development centers have opened their doors in Washington, offering entrepreneurs a chance to refine their ideas, find mentors and pitch business ideas to potential investors.
“On the startup scene, we actually have a vibrant and growing community,” said Katya Constantine, founder and owner of small business marketing company Digishop Girl Media. “There’s a real estate infrastructure, a ton of co-working 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.”
9Mile Labs is a tech industry-focused startup accelerator specializing in helping B2B companies grow. Sanjay Puri, co-founder of 9Mile Labs, said that the accelerator opened its doors because he and his partners saw great promise in Washington’s entrepreneurial community.
“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 treasures and supports local independent businesses, helping 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 talent pool from which to draw employees. Many attribute the wealth of knowledge and in-demand career skills in the area to local and regional universities and high employee turnover within the large companies based in the state. As experienced employees leave big corporations to start a business or work in a more intimate setting, entrepreneurs benefit from the skills emerging from the corporate world.
“Training and networking are big opportunities [in Washington],” said Joan Koas 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.”
Local talent has contributed to the wealth of startups in the state, Puri said. He believes skilled employees are critical to a startup’s success. In Washington, 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 4.1%. 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. However, the unemployment rate is low by historical standards. Given the concentration of large corporations in the state, small companies might still find it challenging to secure the talent they need.
Even though the state’s labor pool is vast and skilled, the demand is high, making employee recruitment extremely competitive, particularly in the tech space.
Because of the state’s economic success, businesses must provide employees with more compensation, which means higher salaries and expanded employee benefits. Because larger corporations can offer higher compensation, it’s easier for them to recruit, so small businesses feel pressured to offer employees competitive wages and benefits to retain them.
Additionally, Seattle’s minimum wage increases annually based on the inflation rate. This is due to a mandatory minimum wage ordinance the city council adopted in 2014 to help workers afford the high cost of living. Under Seattle law, the minimum wage is adjusted yearly on January 1 based on the Consumer Price Index in the Seattle-Tacoma-Bremerton area.
While some smaller businesses have a slightly lower minimum wage, small business owners say the area’s higher wages are a substantial expense to consider. “It’s a high cost to do business here,” said Tija Petrovich, owner of Seattle Fitness.
Most businesses in Seattle are now required to pay their employees $17.27 per hour. Someone who works at a company with fewer than 500 employees and either earns at least $1.69 an hour in tips or receives at least $1.69 from their employer toward medical benefits, must be paid at least $15.25 an hour.
Washington state as a whole has likewise raised its minimum wage to $14.49 per hour as of January 1, 2022, so businesses throughout the state must pay employees much more than the federal minimum.
While big companies sometimes generate stiff competition for small and midsize businesses, most entrepreneurs who spoke with us reported that the large companies based in Washington offer a net positive for their enterprises.
Increased talent pool: Small business owners also say they’ve benefited indirectly from big businesses’ out-of-state recruitment efforts. By bringing in talent from elsewhere, large companies attract skilled labor to Washington, and those talented workers often 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, former CEO and current board member 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 their interviews with us. They emphasized that Washington does not have personal or corporate income taxes. Instead, the Washington Department of Revenue levies about 60 different taxes and fees, such as business and occupation (B&O), sales and use, property, and 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.”
However, companies located in Seattle must contend with high sales and property taxes. Savvy entrepreneurs can reduce tax liability by moving outside city limits. Small businesses that place their companies just outside Seattle still have access to the state’s largest and most affluent market without the added costs of doing business within the city.
“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, the lack of corporate or personal income tax can sometimes present a problem for small business taxes. The B&O tax essentially levies a tax on revenue volume rather than profits. While established small and midsize businesses benefit from this structure, 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, chief procurement officer 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 under $600,000 in revenue.”
Although capital is available in Washington, entrepreneurs report having a tougher time finding investors here than 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. Because of the state’s competitive atmosphere, investors have many new companies to consider.
“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 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 selecting a business structure and filing the appropriate tax and employer identification documents.
Here are some helpful resources:
Not every business in Washington is required to apply for a Washington business license. Only those that meet any one of the following criteria must apply for a business license:
These requirements cover most businesses in Washington. However, if you don’t meet these criteria, you can operate indefinitely without applying for a business license. If you expect to meet one or more of these criteria soon, 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 that 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.
Regarding small business insurance 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) number is a nine-digit number that registers a business with state agencies and allows operations throughout the state. A UBI number is often referred to as a tax registration number, business registration number or business license number. You can receive a UBI number through the state when applying for a business license.
LLCs are considered “pass-through entities,” meaning they are charged no income tax. Instead, LLC members pay a personal income tax on all income derived from the business. In Washington, there are no personal or corporate income taxes. However, LLCs and other companies are required to pay the B&O tax, which applies to the business’s gross revenue. [Related article: What LLC Taxes Must Your Business File?]
An LLC annual report or annual renewal is a document businesses must file 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’s office more than one month before your annual report is due. The filing fee for annual reports is currently $60, plus a convenience fee for credit card transactions.
All LLCs operating in the state of Washington must 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.
While tech is crucial to Washington’s economy, many other industries thrive across the state. For example, Washington is one of the leading states in clean energy development, producing a quarter of the country’s total hydroelectric power. Clean energy and environmental conservation companies will find ample support in the state. The state’s diverse landscape also offers abundant opportunities in maritime trades, forestry and agriculture. Finally, the influx of workers across industries also increases the demand for restaurants, coffee shops and bars.
If you’re a small business owner in Washington looking for resources to help you move forward, here are a few organizations to consider:
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, business grants, 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 and tap into the mentorship network that 9Mile Labs has cultivated.
Washington hosts SBA-affiliated development centers for small businesses. Each is dedicated to supporting the development and retention of small businesses, helping entrepreneurs do everything from craft business plans to navigate the state’s tax code.
Startup Washington is a program run by the Department of Commerce that helps connect entrepreneurs to useful resources, data, funding sources, venture capitalists, accelerators, workspaces and more.
Washington state’s economy has blossomed into a hub for tech startups and small businesses across many industries. Despite high unemployment, the state’s tech giants make hiring competitive, and businesses are responsible for paying employees relatively high wages.
However, reasonable business tax rates, combined with the state’s substantial community of investors and small business networks, have fostered an atmosphere that encourages small businesses to thrive.
Cailin Potami contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.