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What is the best time of year to incorporate?

The best time of the year for companies to incorporate depends on what makes the most sense for the company.

Typically, when you make the switch from a sole proprietorship to a corporation or limited liability company, your company is treated differently from a tax perspective. If you can get your paperwork ready to incorporate as of January 1, your life might be a little easier come tax time because you'll be prepared with a full year of information rather than just a partial year. However, the benefit of making your taxes a bit simpler for a January 1 start time might be outweighed by the benefits of incorporating right away.

When you incorporate your business, regardless of whether you are creating a corporation or a limited liability company, you get strong liability protection for your personal assets. In fact, incorporation is a fantastic liability risk management tool. By creating a separate legal entity, you limit your liability for any debts or other legal obligations of your business to just your business assets. As a sole proprietor, your personal assets (like your bank account, home, and vehicle) are at risk for liabilities associated with your company. If you want liability protection immediately, you may want to incorporate right away.

What are some perks to filing in December?

Getting your incorporation documents ready and filed before the end of year has a few advantages. First off, in January of each year, tax professionals and CPAs begin to work on income and business tax returns. They often continue to get busier and busier until the individual income tax filing deadline around April 15. That means if you want a CPA's help to work on your incorporation, finding someone available from January to April can be a challenge, or cost you more due to the demand. If you are counting on dedicated assistance from a CPA, your best option may be to seek help in November and December before tax season starts up in January.

The incorporation process, at the state level, sometimes slows down as the new year begins. The first part of the year is a popular time to incorporate, which sometimes delays normal processing times. It can lead to weeks or even months of idle time while you wait to hear back from state agencies. By filing before or in December, you may avoid some of the rush and might be able to finish the entire process faster compared to filing in January.

What are the benefits of a January 1 start date?

Incorporating as of January 1 allows you to align your business start date with the first day of the calendar year. In most situations, you can get all of your incorporation paperwork ready now (like your Articles of Incorporation Worksheet and corporate bylaws) and then designate January 1 as your effective date. This delayed filing allows you to put everything together now so that it is ready to go when the new year starts. This action comes with a few helpful benefits.

It lines your fiscal year up with the calendar year.  

A fiscal year is your business's one-year reporting period for accounting purposes. Your internal fiscal year may not be the same as the calendar year, but, in most situations, you are required to report your personal income taxes on a calendar-year basis.

While your company might not have to use a calendar year as its reporting year, it can quickly become confusing if you use a different fiscal year for it. Ultimately, an aligned fiscal and calendar year can simplify your company's internal finances and overall tax reporting requirements.

When your fiscal year and calendar year line up, there is no need to file two tax returns for the first year of operation as a corporation or LLC. When they don't, you may have to file a part-year Schedule C (for your sole proprietorship) and a part-year filing that involves your new incorporated company. While this process is doable, it is more complicated.

It lines up with state agency requirements.

Not only do individual income tax requirements operate on a calendar-year basis, but many state and local requirements do as well. For example, permits and licenses generally operate on a calendar year. If you can line up your business operations with annual renewals of your permits and licenses, it is easier to track and manage these necessary legal requirements to ensure they don't unexpectedly lapse.

Where can I go for tax advice about incorporation?

It is no secret that taxes are complicated. They become even more complex when you involve both your individual and business tax obligations. Learning about the costs, added paperwork, and legal issues involved with incorporation may make the entire process seem overly complicated. Fortunately, professional advice can help you not only meet your tax obligations but also save money at tax time by fully taking advantage of deductions and credits that apply to your situation. Incorporation filing services simplify the process, and can provide you with the right professional help and resources so you understand the benefits and drawbacks.

If you have more questions about the incorporation process, reach out to a Rocket Lawyer network attorney for affordable legal advice.

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.

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