Incorporation is a major step that can put your company on firm legal grounding, while providing a solid foundation for growth. Whether you’re just starting your business or you’ve been operating for years, the advantages of incorporation are undeniable: protection from liability, tax benefits, protection of personal assets, and much more.
So when is the best time to incorporate?
If you are not doing it today, January would be the next best option. Just as the new year is a great time to reevaluate our personal lives, it’s also a great time to reevaluate your business.
Why in January?
Whether you’re already operating a business or simply launching a new venture, there are a few key benefits to officially starting your company in January. In addition to the legal protection that incorporation provides, filing in January can help to simplify your taxes for the coming year. For example, if you incorporate in the middle of the calendar year but do business as a sole proprietorship before your incorporation effective date, you’ll likely have to make two separate tax filings for the fiscal year: one for your sole proprietorship and the other for your freshly incorporated entity. With your start date set in January, you’ll get to make a clean switch over to the new year. Don’t want to wait? The good news is that you can get a head-start now and still reap all the benefits of filing in January by choosing a delayed effective-date.
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What is delayed-effective filing?
Delayed-effective filing lets you select a date for the filing to take effect. Note that delaying your effective date also means that you’ll be delaying the benefits of incorporation until that date, so you’ll have to decide if the risk outweighs the reward. If you’re unsure about what’s right for you, ask a lawyer.
What are the benefits of a delayed effective-date for January?
In addition to streamlining your tax preparation for the year, waiting until January can help also you avoid paying an extra year of your state’s annual franchise tax. Some states impose this annual tax on corporations, and if you file your incorporation at the end of the year, you may end up paying the tax even though you’ve only done business for a small portion of the year.
Delaying your filing date to January 1st means that you may not have to pay this tax for the partial year.
Filing early also can also help get your incorporation paperwork processed more quickly. January is the busiest time of year for Secretary of State offices, so if you want your effective date to be in January, it makes sense to file at the end of the prior year with a delayed effective date. In general, the earlier you file, the faster you’ll get your incorporation paperwork processed. If you wait until January to file, it might take longer for the Secretary of State to process the paperwork, and you may not get the effective date you want.
If you are still thinking about incorporating but don’t want to over-complicate your taxes or want to beat the processing rush, get started on your filing today and choose a delayed-effective date in January. Getting the first step out of the way early will give you some extra time to make key decisions about your new business entity, including defining your operating procedures in the form of an LLC Operating Agreement or Corporate Bylaws, so you can hit the ground running in the coming year.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.