Incorporate Early, Incorporate Smart
Incorporating today means you can get immediate liability protection, legitimacy, and potential tax savings (for example, avoiding sole proprietorship self-employment taxes for the portion of the year that you're incorporated). But there are some instances when waiting might be the right decision, too.
Why Incorporate in January?
Delayed-effective filing lets you arbitrarily select a date for the filing to be considered effective—and in some cases, a date in January may be the most convenient date, especially if it's already November or December. While delaying your effective date also means you'll be delaying the benefits of incorporating until that date (such as reduced personal liability and the potential for reduced taxes during the period when you're incorporated); if you're just starting your business, it may make sense to delay the filing until the next year.
The Benefits of a Delayed January Effective-Date Include:
- A logical, intuitive cutoff point for paperwork. By making the filing effective in January, you streamline the taxation procedure because your business starts in the first month of the calendar year. If you incorporate in the middle of the calendar year and 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 the freshly incorporated entity, for example. The delayed January filing elegantly sidesteps this issue. From January onwards, you report just for the corporation.
- Getting 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—so you can start doing business. 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.
- Extra time to sort out your documentation and ensure that you have everything ready for the new business entity, including Bylaws, scheduling your shareholders meeting, issuing stocks and transferring your sole proprietorship assets into the corporation.
- Avoiding 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 to January 1st means that you may not have to pay this tax for the partial year as well as for the year starting on January 1st.
So if you're asking yourself, "When should I incorporate?" the answer is likely as soon as possible. By incorporating immediately you get immediate benefits of limited liability, for example, but January may be a good option because it can save you time when it comes to paperwork. Still, every business is different, so weigh the pros and cons. If you need free legal advice, we can help you find a lawyer to answer your specific questions.
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.