Should I Incorporate Year End or Next Year?
If you’re gearing up to incorporate year end or next year and get your business off the ground at the start of 2019, you might be wondering when to file your business formation paperwork. Can you submit your forms now and request a delayed filing (also called a “delayed effective date”)? After all, the end of the year tends to be ultra-busy, and who wants to be completing forms and managing all the details in the midst of that chaos? I applaud you for thinking proactively! Not only is choosing the right business entity type for your business a critical decision, so is determining when to file your forms with the state. In this article, I’ll give you information to answer the burning question:
Should You Incorporate Year End or Next Year?
Depending on the state in which a business is located, there may be two options to incorporate year end or next year that allow for an effective date of filing in early 2019.
1. Delayed Filing
Fortunately, most states offer the option of a delayed filing, whereby business owners either complete a field on their business registration form or add a provision to request an effective date in the future.
What is a Delayed Filing
With a typical business registration filing, an LLC or corporation becomes effective on whatever date the state processes the company’s forms. The amount of time may vary between only a few days to several weeks depending on what services are requested. If expedited, a filing will typically be completed within 5 – 10 business days.
A delayed filing, however, provides control over when a corporation or LLC goes into effect. In states that allow delayed effective dates, business owners can set the date when they want their company to be officially recognized.
Choosing an effective date of January 1 makes things nice and clean. However, entrepreneurs may select a different date if they wish. Either way, they can get all of the paperwork done ahead of time and focus on other aspects of launching their businesses whether they decide to incorporate year end or next year.
Advantages of filing paperwork to form an LLC or incorporate end year with a delayed effective date in the next year include:
- Streamline the tax filing process. Especially for businesses that are changing their business entity type, an effective date of January 1 simplifies matters at tax time. For example, say Janessa Roberts is selling gourmet dog treats as a sole proprietor and has decided to transition to an LLC with S Corp election. If she were to form her LLC in the middle of the calendar year, she would need to make two separate tax filings for the fiscal year 2018: one for her sole proprietorship for the period that she operated as such during the year and the other for her LLC with S Corp tax treatment for the duration it was in effect. With a delayed filing requesting an effective date of January 1, 2019, however, there would be a clean break, and Janessa would only have one tax filing (as a sole proprietor) to make in 2018.
- Avoid paying state franchise taxes for the year in which registration forms were submitted. For example, if a business files its LLC formation paperwork in November 2018 but requests an effective date in January 2019, the LLC won’t have to pay a state franchise tax for 2018.
- Avoid filing an Annual Report in the state of incorporation or fulfilling other corporate formalities for the calendar year when the formation documents were filed.
- Avoid the processing delays due to the backlog that many states encounter at the beginning of the new year. The beginning of the year tends to be an immensely busy time for secretary of state offices, so by submitting paperwork in 2018 to be effective in 2019, a business can better ensure its filing will get processed promptly.
- Have ample time to sort out other requirements such as writing bylaws, creating operating agreements, establishing a board of directors, scheduling a shareholders meeting, etc.
All of the above can save a company hundreds of dollars where the option of a delayed filing exists. And what startup can’t benefit from some extra money in the bank?
When Should You Submit a Delayed Filing to Incorporate Year End and Have an Effective Date Next Year?
Different states have different rules as to how far in advance they will receive a delayed filing. Usually, the requirement is to file between 30 to 90 days before the desired effective date. So, for business owners wanting an effective date of January 1, 2019, now is an excellent time to check out the rules that apply to them as we’re in that 30- to 90-day window now. Check with your state or contact my team at CorpNet to find out how far in advance you can file.
Below are a few examples of how far ahead of time states will allow delayed effective date requests:
- Alabama – Up to 90 days
- California – Up to 90 days
- Delaware – Up to 180 days
- Florida – Up to 90 days
- Illinois – Up to 60 days
- New Jersey – No limit
- Pennsylvania – No limit
- Rhode Island – Up to 30 days
- Texas – Up to 90 days
- Virginia – Up to 15 days
States that do not allow a delayed effective date include:
2. CA Only-File After December 17 with No Franchises Taxes owed for 2018
The State of California, will consider LLCs and corporations to be in business effective January 1, 2019, if they submit their incorporation or LLC formation forms after December 17, 2018—provided they aren’t conducting business between December 17 and December 31.
What If I Have an Existing Business and Want to Change My Business Entity Type Effective January 1, 2019?
Often, entrepreneurs who start as sole proprietorships find out that operating as such won’t serve their needs for the long term. As they grow their businesses, they decide they want to have personal liability protection, more growth potential, more credibility, and tax flexibility. Therefore, they opt to change their business entity type.
Deciding whether to incorporate year end or next year, a delayed filing option requesting a January 1 effective date when changing an existing business’s structure can help entrepreneurs avoid a lot of headaches and confusion at tax filing time. When changing a business entity type mid-year—such as from a sole proprietorship to a corporation—two tax returns (individual tax forms for the period when operating as a sole proprietor and then corporate tax forms for the time operating as a corporation) would need to be filed. As if tax time isn’t “taxing” enough!
However, when the effective date is January 1, filing taxes becomes far simpler because there’s just one entity type for which to prepare records and file in that current tax year.
How to File for a Delayed Effective Date
To incorporate year end and have the business effective next year, the required online forms to form an LLC or incorporate a business should indicate the number of days after filing that the business structure should be effective. When registering the business entity for a delayed start date, an LLC’s Articles of Organization and corporation’s Articles of Incorporation must reflect that effective date.
Below are the key steps in filing for a delayed effective date:
- Choose the business structure. This will require research and likely guidance from an attorney and tax advisor or accountant because there are pros and cons to each type of entity. This decision will impact a business and its owners legally, financially, operationally, and administratively, so it must be taken seriously and with careful consideration.
- Decide on the effective date. Again, this can have an impact on tax filings and reporting requirements.
- Submit the required paperwork (with the delayed effective date identified on the forms) and fees to the proper department within the state where the business is to be registered.
While these steps are relatively simple, mistakes or omissions on the forms will cause issues when the state is processing the documents and it could result in additional fees, as well. Also, consider that completing paperwork requires time—something that is often in short supply with busy entrepreneurs.
Rather than trying to handle it all on your own after you decide to incorporate year end or next year, you can ask our team at CorpNet to fill out and submit your LLC formation or incorporation forms for you. We do this for entrepreneurs in all 50 states, so we have the process down pat—and it will likely cost you much less than if you were to ask an attorney to file your forms for you.
Other CorpNet Business Formation and Compliance Services
CorpNet can also assist you with the many other registration and compliance filings related to starting and running a business. I’ve listed a few of them below, and we can do much more.
- DBAs (fictitious name registrations)
- EIN (Employee Identification Number)
- Business licenses and permits
- Initial reports
- Annual reports
- Articles of Amendment
- Corporate name search
- Trademark registration
- S Corp election
- Foreign qualification
- Registered agent services
- Articles of Dissolution
No Better Time to Consider a Delayed Filing
With some time left in the fourth quarter of 2018, I encourage you to consider the benefits of a delayed filing if you have your sights set on either starting a business or changing the legal structure of your existing business in the upcoming new year. You still have time to submit a delayed filing for January 1, 2019, and CorpNet is here to help you get it done on time and accurately. Contact us today to get your business’s entity type underway with a delayed effective date that will get your company off on the right foot in 2019.