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The beginning of the year has always been a popular time to start a business. If you’ve been considering forming an LLC or incorporating, but are curious about the benefits of starting up in January, look no further. We’ll catch you up on the biggest reasons why entrepreneurs like forming new business entities in January. And, with a surge in new startups resulting from COVID-19, we’ll help you beat the bureaucracy at state agencies so you can get your new company up and running faster.
Tax and bookkeeping benefits
Entrepreneurs are known for capitalizing on a market opportunity. When the idea arises, they act. At the beginning of the year, entrepreneurs are rewarded with additional tax and accounting benefits. This results in less paperwork, lower cost, and fewer headaches involved in starting up, and can lead to advantages in cash flow and quicker time-to-revenue.
Forming a company with a January start date provides a clean state. The company can start earning revenues and tracking expenses in the new year without the worry of bookkeeping for a few weeks or months at the end of the year. At the same time, the first federal tax returns generally aren’t due until the year following formation. This means the business defers tax preparation and the resulting service fees and payments for an entire year. On the other hand, forming an LLC or incorporating in December typically means a return is due within a few months.
Additionally, depending on the type of business, the business owner may be able to take advantage of further tax deductions for startup costs. In light of COVID-19, with so many companies being run virtually, entrepreneurs may be able to deduct home office space in addition to things like professional service fees, software and equipment, and government filing fees to register a business.
State compliance benefits
Starting a business in January doesn’t just simplify federal tax return filing and internal accounting practices. There are additional benefits at the state level, as well.
Like federal tax returns, a January start date typically means the business’s first state income or franchise tax return isn’t due until the following year. This immediately saves additional paperwork and expense, especially in states like California, which has an $800 minimum annual franchise tax. In future years, the startup will have to file taxes as a regular part of its ongoing responsibilities, but simply choosing a different date on its charter can result in an immediate improvement in cash flow.
In addition to state taxes, most states require business entities to file an annual report with the Secretary of State to remain in good standing. The annual report is a reasonably straightforward filing that updates the state with the company’s address, registered agent and officers and ownership. There is also a filing fee, which ranges from a few dollars to a few hundred dollars. In most states, the first report is due in the year following formation/incorporation. Again, by choosing to start their business in January, entrepreneurs in most states can defer that first report and filing fee until the following year.
Overall, while every organization’s needs are different, the beginning of the year gives the new business the most time to achieve profitability. Entrepreneurs can focus on client acquisition and growing revenues while minimizing (or at least deferring) paperwork and expense.
How to beat the rush when filing with state agencies
If you’ve read this far, and it all sounds good, you may be wondering how to make it happen.
In January, state agencies get overwhelmed with new business filings made by ambitious entrepreneurs just like you. As a result, Secretary of State offices experience processing delays, which sometimes extend several weeks into the new year. For new and experienced business owners alike, the wait for an approved business filing is frustrating. Waiting for paperwork to come back from a state agency only delays the business from operating and starting to earn revenue.
Since states process documents in the order they are received, entrepreneurs that want to get up and running faster should not wait until the calendar year 2021 to file.
What’s the secret? It’s called a “future effective date,” which allows the business owner to tell the state when they would like their business to come into existence. But, they can still file now and beat the rush!
Here’s how it works:
- The organizer or incorporator (aka the individual who legally creates the business entity) designates a date in the future directly on their articles of organization (for LLCs) or their articles of incorporation. For example, the business might select January 1, 2021.
- When the state receives the filing, their examiners process it in the order received. That means they will review (and hopefully) accept your document now. However, with a future effective date, the entity is not officially “in existence” until that date. This secures the exact date you desire and also minimizes the chance of a bureaucratic delay.
- When you receive your filing back from the Secretary of State (or look up your company in state records), you will see a nice, clean effective date that will match what you’ve designated.
And that’s it – it really is that easy. The only caveat is that a small handful of states do not allow future effective dates. Entrepreneurs in those states simply have to wait. If you’re nervous about getting your new business formed on time, consider enlisting a professional service or law firm to create your company for you. Remember, rejections send new business filings to the back of the queue. Ensuring your formation documents are correctly prepared helps secure your preferred effective date and avoid further delays for a returned filing.
Taking the leap
Starting a business is an exciting time in an entrepreneur’s life, but it’s also a big decision. The benefits and tips presented in this article are general. Every business, especially yours, is different. Be sure to talk to an accountant and attorney to ensure the best time and place to start your business.
If you discover that starting a business at the beginning of the year is right for you, now is the time to act. Don’t let paperwork slow you down at the beginning of the year. With these tips, you can get started faster, start making money, and pursue your dreams!
Originally published Dec. 28. 2020.