Should You Incorporate Now or in 2012?

It’s almost time to turn the page on 2011. But before you start thinking about your New Year’s resolutions, it’s a good time to take stock of various odds and ends that should be completed while it’s still 2011.

incorporate

Perhaps you have been considering incorporating or forming an LLC for your business, but you haven’t yet made the time in your daily calendar or maybe you just aren’t sure when is the best time to do so.

There’s a simple answer to when to incorporate, and that’s right now. After all, the sooner you incorporate or form an LLC, the sooner you can start reaping the rewards of your business structure – whether that’s potential tax savings or lowering your personal liability.

But, as in all tax and legal matters related to your business, the answer isn’t always so simple. There are other considerations that can influence the optimal timing for your business structure.

Your incorporation date isn’t retroactive

Your corporation’s “start date” is not retroactive. Your new legal structure and any tax benefits you might receive apply from the date you incorporated. This typically means filing two business income tax returns for the year. For example, if your corporation was formed on December 15, you’ll need to file as a sole proprietor (or whatever your previous entity may have been) from January 1 to December 15 and then file as a corporation from December 15 to December 31.

To ease the paperwork burden, many small business owners look to incorporate on the most logical start date of all…January 1. For this reason, January is the absolute busiest time of the month for your state’s Secretary of State office, and you’ll be at the mercy of any backlog. It’s not uncommon for it to take up to 40 to 60 business days to bring a corporation or LLC into existence after submitting your filing documents to the state office. And as state offices grapple with budget shortfalls and employee cuts, wait times will only get longer.

Consider a delayed filing

There’s an interesting option that can fast-track your application to the front of the line come January. Provided by an online legal document filing service, a “Delayed Filing” lets you complete your paperwork and submit your application with a document filing service now, and then delay your actual incorporation date until the new year.

A delayed filing is a great option, as you can effectively choose the date of incorporation or LLC formation. And by getting your paperwork in now, you can cross one more thing off your list, and avoid having to file multiple business income tax statements and an annual report for 2011.

Of course, a delayed filing is not for everyone. If you fall into any of the following categories, you should look to incorporate sooner, rather than later:

  • You’re a consultant or other professional who needs to form a corporation in order to be awarded a particular job.
  • The tax benefits associated with incorporating are so significant that it makes no sense to wait (and your tax advisor has advised you to incorporate now).
  • You feel you need the legal protection of your own personal assets from any liability owed by the company–sooner rather than later.

But for those of you who see no pressing need to fast track your incorporation or LLC formation, consider the delayed filing option and ask your document filing service about this feature. You can get your paperwork completed right away, select your preferred effective date, and be ready to start fresh with your business in 2012.


Incorporate Photo via Shutterstock

6 Comments ▼

Nellie Akalp


Nellie Akalp Nellie Akalp is CEO of CorpNet, her second incorporation filing service based on her strong passion to assist small business owners and entrepreneurs in starting their business. Free guides, advice and videos on small business legal topics are available at her Small Biz Corner.

6 Reactions

  1. Already incorporated in January of this year, so it’s like I took the advice 12 months ago!

  2. Nellie,
    Your article is very valuable to entrepreneurs considering the formation of an entity before the end of the tax year.
    For readers in such a situation, I encourage them to discuss with their CPA the recent release of the final regulations related to Elections to Deduct Start-up and Organization Expenses for the current tax year (2011).
    In summary, if an entity has been formed and the business has been opened, the taxpayer has the opportunity to elect to deduct Start-up Expenses up to $10,000 in 2011, reduced by the amount by which the Start-up Expenses exceed $60,000. They also may elect to deduct Organization Expenses up to $5,000 in 2011, reduced by the amount by which the Organization Expenses exceed $50,000. The remainder of the Start-up and Organization Expenses must be deducted pro-ratably over 180 months.
    This recent regulation to elect to deduct such costs is very beneficial to new entrepreneurs and such favorable tax rules may not be available to them in the future.
    Thank you for your timely article Nellie.
    All the best,
    Holly Magister, CPA, CFP
    http://www.ExitPromise.com

    • Holly,

      Thank you for your kind words and for reading my article and taking the time to write this comment to you. I so appreciated it and please feel free to reach out if I can or my company can be of any assistances to you in any way. We are document filing service specializing in business formations and filings. Warmest wishes to you and your family on this holiday season.

      My best,

      Nellie

  3. The biggest reason to incorporate by year end is the stimulus bill tax provisions (1202 of the tax code) that provide that qualified small business stock issued prior to year end may qualify for full exclusion from capital gains if held five years – that’s right, potentially no federal tax on sale.

  4. Sam,

    The tax incentive you are speaking of in your comment applies to “Qualified Small Business Stock”. It should be noted that a QSB is defined as an acquisition or a new corporation formed after 9/27/2010 and before 1/1/2012 and it must be a C Corporation, among other requirements.

    It has been my experience that very few entrepreneurs choose this form of entity structure for various reasons. Most choose pass through entities, such as S Corporations, LLC’s, and Partnerships.
    Also it should be noted that a QSB will not apply to service businesses, banking, farming, lodging, and certain mining and natural resource operations.

    Despite the wonderful opportunity to potentially save taxes with this strategy when the business is ultimately sold, my advice on this topic is to obtain guidance from your CPA before you proceed.
    All the best,

    Holly Magister, CPA, CFP
    http://www.ExitPromise.com

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