Have you been thinking of launching a new business? Then you must read this guide to select the best time of year to form an LLC.
What Is an LLC (Limited Liability Company)?
Almost all the states in the USA allow a business structure called the limited liability company (LLC). The idea of an LLC arose from business owners’ desire to have a business structure that will permit them to function just like a traditional partnership that already existed, intending to distribute income to the business partners. But the focal point of the idea was also to protect themselves from arising personal liability for the business’ payables and debts, as it was with the corporate business form.
Typically, unless the business owners plan to establish a wholly different and separate corporation, the principal owner and the partners (if there are any) assume total responsibility for all the liabilities and debts of the business.
However, under the LLC structure, the owner/partner/member of a business isn’t responsible for debts of the firm, provided that the obligations were not secured personally, as with a personal credit card, second mortgage, or by putting personal assets on the line.
At What Point Do You Need An LLC?
It is a frequently asked question – when should I consider an LLC? Well, exactly when you are planning to start your business, you should start thinking about getting your business registered as an LLC. Unless you are a bank or an insurance company, and you’re concerned with limiting personal liability as much as possible, LLC is for you. An LLC can be used to run and own almost every kind of business.
When you change your sole proprietorship or partnership to an LLC, you are signing up for protecting your savings, house, and car, increasing business growth, allowing for greater profits and accelerated growth, increasing your peace of mind, protecting your and your business’ privacy, and for an increase in the credibility of your business.
So, either you are planning to start a new business, or you’re already operating a business and want to make the most of the state laws for tax relaxations and limiting the personal liability, opting for an LLC business structure is your best bet.
Why is the New Year Is Best Time of Year to Form An LLC?
While there is never a wrong time to register your business as LLC, as it brings many perks for your business, including protecting your assets and offering tax benefits, but filing your paperwork to make it effective before the new year starts comes with loads of advantages.
Apart from giving you a clean start, registering your LLC in January will prevent many of your headaches during filing for various taxations. Otherwise, you have to do it if you register mid-year. Furthermore, there is a variety of reasons that make January the best time of year to form an LLC, and we will take a look at some of them here:
- The Comfort of Taxation and Bookkeeping
January means less red tape, and that is a dream of entrepreneurs. So, if you’re starting your LLC somewhere in the middle of the calendar year, you would be required to do excessive bookkeeping for various reasons.
However, if your LLC is starting from January 1, there is no need to go back and forth in your books, as the actual date of the formation of your LLC is also the official start of the year. So, you will have all your records written in one place, in an order.
In general, businesses, including limited liability companies, are required by law to file tax returns for every year, irrespective of the gains and losses in the industry. Furthermore, if it is an LLC, the owners of the LLC members must reflect their profits and losses from LLC in their tax returns.
Since there is no avoiding filing the tax returns, in either case, LLC owners are left with two options of either filing tax returns. The first one is to start their LLC in January and buy time to file their tax returns the following year, start the LLC in the middle of the year and file the tax returns right away.
No entrepreneur will want the latter option of filing the tax returns right for various reasons, and buying time for filing returns is always a wise choice. In this time, not only can you concentrate on other things regarding the LLC, but you can also consult tax professionals who can guide you on making an optimum strategy for filing tax returns that help you avoid incurring any additional taxes.
- Overcoming Busy Work in State Institutions
It is a fascinating yet very confusing phenomenon associated with the formation of your LLC in the new year. Well, yes, you would be thinking many things about the new year – aren’t the state agencies closed on the new year? Since the majority of the businesses will be filing in the new year, when will my turn come?
Well, yes, your questions are valid, but that’s not where your answer lies. The secret of registering on the new year lies totally within your filing document and not when the state agency approves it. So, suppose you have filed your paperwork on January 1 and have written the effective date of your LLC as of January 1, no matter when it is approved, in the official records. In that case, your LLC will be considered registered on January 1. So, file your registration documents before the new year with an effective date of upcoming January 1, and beat the rush.
However, there is something that you should consider here. Not all states will allow you to declare a future date as an effective date for your LLC, so you will need to be in the line for getting on the records on the first day of the year. However, these are a very handful of states, and all the mainstream states allow for the future date being declared as the effective date.
- The Advantages of Country Compliance
While you may think that forming your LLC is the end of significant filings and compliances, it is just the beginning. Once you have created your LLC, it will have an ongoing compliance obligation to continue operating legally and stay in good standing. This process involves appointing a registered agent for your LLC, filing and paying income and franchise tax, and filing annual reports with relevant authorities.
An LLC is bound to appoint a registered agent at the time of filing of the LLC, and if it fails to do so, the articles of the organization will not be accepted by the secretary of state office. Once they have been rejected, you will have to wait for a long queue to end to re-open your case of registration.
The majority of the states in the USA do not require annual reports and state tax returns until the year following the registration of the LLC. AS in federal tax returns, LLC owners may choose the first day of January to avoid filing hassle and then buy time to do the homework on registered agents properly, etc. It will ensure that the LLC has good standing with all the relevant agencies in its state.
When Should You Transfer a Business from A Sole Proprietorship To an LLC?
The reasons for changing your sole proprietorship to an LLC have already been discussed in the article. Now, to move to the question of the timing of changing the status of your sole proprietorship to an LLC, it needs to be understood that the process of changing your sole proprietorship to an LLC is just like the process of registering a new LLC altogether.
The best time to change the status of your sole proprietorship to an LLC is the new year. By filing for your LLC in the new year, you will get to avoid many hassles that you would otherwise face if you register your LLC midway through the year. Furthermore, it will come with additional benefits for your LLC, like good standing, state compliance, etc.
Is There a Time When You Should Not Form An LLC?
There is no such thing as the wrong time for registering your LLC. However, the more you drag the registration process deep into the financial year, the more problems you would have to face in keeping the compliance and filing your tax returns. So, it is always recommended to register your LLC at the start of the year, with January 1 being the optimum registration date.
Should I Incorporate Now or Choose a Delayed Filing?
It depends on the time of the year when you are asking this question. A delayed filing will allow you to define a future date as the effective date for the registration of your LLC. With the help of delayed filing, you can choose the new year as your effective date, thus avoiding much hassle that comes with the late registration of your LLC.
However, not all states allow delayed filing, and in certain states, you will need to be physically in the queue in the new year to register your LLC. Furthermore, if you have just passed the new year, delayed filing will not have any advantage unless you can wait one year and wait for the next new year’s day.
Frequently Asked Questions
In this section, we shall take a look into some of the frequently asked questions on the timing of registration of LLCs:
- Should I start an LLC before the end of the year?
If your state allows you for delayed filing, start your LLC registration process before the end of the year, but keep the effective date of your LLC’s registration as of January 1. However, if you don’t want to keep this effective date, there is no particular advantage of registering your LLC before the end of the year.
- How long will it take to create an LLC?
The formation process and time of your LLC will depend on your state. The average time in all the mainstream states is 7 to 10 business days, while some states could take 4 to 6 weeks. Some states will get your LLC off and running in a matter of two to three business days after you have filed your articles of organization.
- Can I back-date my LLC filing?
No, legally, there is no way you can back-date your LLC filing. Your LLC also cannot be back-dated to match the start date of your previous sole proprietorship. You need to know that your LLC is an entirely new business and has nothing to do with anything it might have been in the past.
- How to select A delayed effective date?
On the form of your LLC registration, you will find an option where it asks for the effective date of the LLC. It is where you can select the effective date of your LLC, and there is no other way for you to do it. So, when you are registering your LLC and filling forms, pay close attention.