Apr 7, 2011

When to Incorporate: Timing Matters

[caption id="attachment_393" align="alignright" width="311" caption="When should you incorporate?"]

[/caption] Every December, business owners wonder whether they should hurry to form corporations or limited liability companies (LLCs) before the close of the calendar year, or whether they should wait to start fresh in the upcoming new year. Why wait until December to think about when to incorporate? Sort it out now with these factors in mind.

If you own a business that is already up and running, the primary benefit to incorporating immediately, rather than waiting until January, is to protect your personal assets. “Any minute you wait before incorporating or forming an LLC is another minute you are exposed,” said Glen Ross, a New York CPA.
The owner of an active company that incorporates before year’s end must prepare two tax returns: one as the proprietorship/partnership and one as the new corporate entity. However, the potential savings on the “self-employment tax” may trump the cost of preparing the additional returns. “Self-employed business owners must pay 15.3 percent of their earnings to cover Medicare and Social Security obligations,” Ross said. “Contrast this with the business owner who chooses to incorporate or form an LLC before year-end. He no longer pays self-employment tax on any profit that remains in the corporation or LLC. If the business owner incorporates during November or December rather than waiting until the following year, he stands to save on self-employment tax for that portion of the corporate profit that is not distributed as salary.”
It may make sense for the aspiring business owner to wait until January to incorporate or form an LLC if the business is not yet operating. Because there is no business activity, the risk of waiting is reduced.
One drawback exists for those who plan to wait until January to file: January is a busy month for state offices across the country. States often develop backlogs and long waits for corporations and LLC formations at the start of the year. Good news: An incorporation service company can help you avoid the rush by placing your order in advance and submitting your company formation for you immediately upon start of the year.

In summary, owners with businesses already in operation may prefer to incorporate before year’s end to minimize personal-asset exposure and to maximize self-employment tax savings. Owners of businesses that are not yet active may prefer to incorporate in January to avoid the costs associated with submitting tax returns for the prior year for their inactive companies. The Company Corporation^® furnished this article. The Company Corporation^® is a service company and does not provide legal or financial advice.