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By James Gilmer
Whether it’s hitting the gym, rekindling a relationship, or starting a new business, the beginning of the year signifies a fresh start. If you’ve been considering incorporating or forming an LLC, you may be wondering why so many entrepreneurs choose January as the formal “start date” of their new business. After all, we don’t all possibly have the exact same New Year’s resolution, do we?
The reality is there are distinct advantages to starting a business at the beginning of the year. Savvy entrepreneurs have goals just like the rest of us, but they time the filing of their legal entity paperwork to save on startup costs and take advantage of tax breaks. They also know how to get started now, before the year’s end, so they can hit the ground running in the new year.
1. Tax and bookkeeping benefits
Show me an entrepreneur who enjoys additional taxes and paperwork … I’ll wait. January is the best time to form a new business for this exact reason—there’s less red tape!
First, bookkeeping is much simpler. Rather than keep and close the books for a few weeks of a short year, many entrepreneurs like a clean January 1 start date.
In general, businesses are required to file tax returns for any years they existed, regardless of how much revenue or profit they brought in during that time. In addition, owners are required to declare any profits and losses from their LLC, or any shareholder income from their corporation, on their personal income tax returns. This leaves many entrepreneurs with a choice: to start the business late in the year and file the business tax return right away, or to choose a January start date for their business entity and file their first tax return the following year.
Many entrepreneurs have no practical reason to incur the additional taxes, professional fees, or overall complexity of filing a business tax return for a few short weeks of activity. As a result, they may elect to start their business in January and defer that headache until the following year. Additionally, entrepreneurs may be able to deduct additional startup expenses, like home office space, state registration fees, and professional service fees, so it’s important to seek guidance from an accountant or attorney on what is possible—and when.
2. Beating the rush at state agencies
By now, you may be thinking that starting your business on January 1 is a good idea. But wait, you say. Aren’t state agencies closed on New Year’s Day? How could I possibly secure that start date for my business? That’s a great question.
Also consider that thousands of people across the United States file business entity formation documents in the first few days and weeks of the new year. As a result, state corporation offices and their staff end up with a huge backlog of business filings each and every year. That means entrepreneurs face unusually long wait times for their businesses to be officially established. Those extra days—or even weeks—can lead to delayed profitability and immediate frustration.
The secret lies with the company’s formation document itself. Depending on the type of entity you form, and your state, you might find a question that looks something like this:
This example is from the Florida LLC articles of organization. You’ll notice the Department of State gives the organizer a choice: whether their office should approve the LLC when they receive this document, or at the date specified by the organizer.
In this example, an entrepreneur could enter January 1 as their desired effective date and file with the state now. State examiners will process the filing in the order they receive it (i.e., before the rush). However, entrepreneurs will be pleased to see their company appear in official state records with a clean January 1, 2021, formation date.
A word of caution: a small handful of states do not permit businesses to declare a future effective date. If that applies to your state, you may just need to wait in line. In all cases, if you’re forming a business, you should consult an attorney about when, where, and how to file your paperwork to form an LLC or incorporate.
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3. State compliance benefits
Once formed, business entities have ongoing compliance obligations to stay in good standing and to continue operating legally. This typically includes appointing a registered agent for service of process, filing annual reports with the secretary of state, and filing and paying state franchise and income tax returns.
Every business must appoint a registered agent at the time it files with the secretary of state. Without it, the business’s articles of organization or articles of incorporation will be rejected right out of the gate. At the beginning of the year, this has even greater consequences. Rejected and refiled business filings end up at the back of the queue.
In most states, secretary of state annual reports and state tax returns are generally not due until the year following business formation. Just like federal tax returns, entrepreneurs may choose a January 1 start date in order to avoid having to file with additional government agencies within a few months of starting out. Because most states assess a filing fee or franchise tax (which can be quite high, like in California), waiting may result in saved, or at least deferred, expense.
As we enter the holiday season, many of us, entrepreneurs included, are relaxing and hunkering down (safely) with family. During the extra down time, however, spending a few extra hours planning when to file for a new business can help get a new venture off the ground quickly in the new year. And as we all know, in a world of COVID-19 and uncertainty, any jump start may make all the difference.
RELATED: Should You Incorporate as a Sole Proprietor or LLC?
Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.
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