March 4, 2016 Business Planning en_US Knowing when to incorporate your business can save you a lot of trouble come tax time. When Is the Best Time to Incorporate Your Business?
Business Planning

When Is the Best Time to Incorporate Your Business?

By QuickBooks March 4, 2016

I get asked all the time when the best time is to incorporate a business, and while my first answer is “before you start a business,” that might not apply to you if you are already in business. If that’s the case, the answer to the question is: at the end of the year.

Let’s look at both options, whether you haven’t launched or you’ve been in business for a while.

If You Haven’t Launched Your Business Yet…

Incorporating your business before you open your doors ensures that your business is starting off on the right foot, and that your personal assets are protected. Give your company every chance for success by taking care of this now, before you get swamped with business.

Because incorporating a business gives you a few other tasks to take care of, you can add them to your “starting a business checklist.” Once you get your incorporation paperwork approved, you can apply for an Employer Identification Number (EIN) and open a business bank account.

Yes, you need a business account that is separate from your personal bank account. It’s easiest to take care of all this now, because later you’ll be busy running your company.

Just make sure to allow enough time for your Secretary of State’s office to process your corporation application. Many states’ websites will give you an estimate on how long it’s currently taking to process applications. If you can’t wait, then hire a business filing company to expedite the process.

If You’re Already in Business…

Maybe you’ve been running your company for years and finally are ready to convert your sole proprietorship or partnership to a smarter business structure, like a corporation. It’s a good idea, and you’ll realize lots of benefits beyond protecting your personal assets. Some of those benefits will even favorably affect your taxes.

January 1 is the fresh new start of a new year, so when better to incorporate your new business structure?

Why the End of the Year Is a Great Time to Incorporate

There are a few reasons why you should take the trouble to set your new corporation to go into effect at the start of a new year:

  1. You’ll only have to file one set of tax forms for that year.
  2. You’ll start the year out with your business protected.
  3. You’ll have one less thing to worry about.

When you incorporate mid-year, you end up having to file two sets of tax forms: one for the part of the year you operated as a sole proprietor, and one for the portion of the year you operated as a corporation. Who wants to file twice as many tax forms and pay to file taxes two times? Not me, for sure.

And once you’re up and operating as a corporation, you can choose between incorporating as a C-Corporation or an S-Corporation. By opting for an S-Corp, you can avoid what’s called double taxation. That’s in contrast to C-Corps, in which profits are taxed first on the company level, then again for shareholders on their dividends.

How to Time Your Incorporation Paperwork Just Right

There’s no magic to setting up your corporation to kick into gear on January 1. Rather than having to guess when your Secretary of State will process your paperwork, you can take advantage of a solution called “delayed filing.”

With the delayed filing option, you submit your incorporation paperwork now—as in “Right now! Don’t wait!”—and set your effective filing date as January 1. Check with your state to see what the window is to take advantage of delayed filing. Typically it’s 30 to 90 days before the date you want it to go into effect, so the sooner you file, the greater your chance of getting that January 1 date honored.

And if you run on a different fiscal year, you can apply this same concept to whenever your new year begins. If it begins April 1, you’d need to file your corporation paperwork between January 1 and March 1 of 2018, depending on your state’s requirements.

It’s worth the effort to plan your incorporation timing to go into effect at the start of the new year. You’ll save yourself some hassle come tax time, and you’ll feel good starting 2018 with a new business structure that will keep your small business safe, secure and successful.

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