Should You Incorporate at Year End or Wait Until Next Year?

Choosing the right business entity type for your business is a critical decision, and so is determining when to file your forms with the state. In this article, I’ll give you information to help you get your to-dos in a row before the season’s most hectic days arrive.

Depending on the state in which a business is located, there may be two options that allow for an effective date of filing in early 2024.

Consider a Delayed Filing

Fortunately, most states offer the option of a delayed filing, whereby business owners either complete a field on their business registration form or add a provision to request an effective date in the future.

With a typical business registration filing, an LLC or corporation becomes effective on whatever date the state processes the company’s forms. The amount of time may vary between just a few days to several weeks, depending on what services are requested. If expedited, a filing will typically be completed within 5 – 10 business days.

A delayed filing, however, provides control over when a corporation or LLC goes into effect. In states that allow delayed effective dates, business owners can set the date they want their company officially recognized as an entity.

Choosing an effective date of January 1 makes things nice and clean. However, entrepreneurs may select a different date if they wish. Either way, they can get all the paperwork done ahead of time and focus on other aspects of launching their businesses.

Advantages of filing paperwork filing formation documents with a delayed effective date of incorporation:

• Streamline the tax filing process. An effective date of January 1 can simplify matters at tax time, especially for businesses changing their business entity type. I’ll share more details about this later in this article.
• Avoid paying state franchise taxes for the year in which registration forms were submitted. For example, if a business files its LLC formation paperwork in November 2023 but requests an effective date in January 2024, the LLC won’t have to pay a state franchise tax for 2023.
• Avoid filing an Annual Report in the state of incorporation or fulfilling other corporate formalities for the calendar year when the formation documents were filed.
• Avoid the processing delays due to the backlog that many states encounter at the beginning of the new year. The beginning of the year tends to be an immensely busy time for secretary of state offices. By submitting paperwork in 2023 to be effective in 2024, a business can better ensure its filing will get processed promptly.
• Have ample time to sort out other requirements such as writing bylaws, creating operating agreements, establishing a board of directors, scheduling a shareholders meeting, etc.

All of the above can save a company hundreds of dollars where the option of a delayed filing exists. And what startup can’t benefit from some extra money in the bank?

When Should You Submit a Delayed Filing?

Different states have different rules as to how far in advance they will receive a delayed filing. Usually, the requirement is to file between 30 to 90 days before the desired effective date. So, for business owners wanting an effective date of January 1, 2024, now is an excellent time to check out the rules that apply to them as we’re in that 30- to 90-day window now. Check with the state for details, or contact my team at CorpNet to find out how far in advance you can file.

Below are a few examples of how far ahead of time states will allow delayed effective date requests:

• Alabama – Up to 90 days
• California – Up to 90 days
• Delaware – Up to 180 days
• Florida – Up to 90 days
• Illinois – Up to 60 days
• New Jersey – No limit
• Pennsylvania – No limit
• Rhode Island – Up to 90 days
• Texas – Up to 90 days
• Virginia – Up to 15 days

States that do not allow a delayed effective date include:

• Alaska
• Connecticut
• Hawaii
• Idaho
• Louisiana
• Maryland
• Minnesota
• Nevada

California Note: The State of California will consider LLCs and corporations to be in business effective January 1, 2024, if they submit their incorporation or LLC formation forms after December 18, 2023. This is only valid for companies that do not conduct business between December 18 and December 31.

What If I Want to Change My Existing Business Entity?

Often, entrepreneurs who start as sole proprietorships find out that operating as such won’t serve their needs for the long term. As they grow their businesses, they decide they want to have personal liability protection, more growth potential, more credibility, and tax flexibility. Therefore, they opt to change their business entity type.

A delayed filing to request a January 1 effective date when changing an existing business’s structure can help entrepreneurs avoid a lot of headaches and confusion at tax filing time. When changing a business entity type mid-year—such as from a sole proprietorship to a corporation—two tax returns (individual tax forms for the period when operating as a sole proprietor and then corporate tax forms for the time operating as a corporation) would need to be filed.

However, when the effective date is January 1, filing taxes becomes far simpler because there’s just one entity type for which to prepare records and file in that current tax year.

For example, say Janessa Roberts is selling gourmet dog treats as a sole proprietor and has decided to transition to an LLC with an S Corporation election. If she were to form her LLC before this calendar year ends, she would need to make two separate tax filings for the fiscal year 2023:

• One for her sole proprietorship for the period that she operated as such during the year
• And the other for her S Corporation for the period it was in effect S Corporation

However, there will be a clean break if she requests a delayed effective date of January 1, 2024. Janessa would only have one tax filing (as a sole proprietor) to make in 2023.

How to File for a Delayed Effective Date

To incorporate by year-end and have the business effective next year,  the required online forms to form an LLC or incorporate a business should indicate the number of days after filing that the business structure should be effective. When registering the business entity for a delayed start date, an LLC’s Articles of Organization and a corporation’s Articles of Incorporation must reflect that effective date.

Below are the key steps in filing for a delayed effective date:

• Choose the business structure. This will require research and likely guidance from an attorney and tax advisor or accountant because there are pros and cons to each type of entity. This decision will impact a business and its owners legally, financially, operationally, and administratively, so it must be taken seriously and with careful consideration.
• Decide on the effective date. Again, this can have an impact on tax filings and reporting requirements.
• Submit the required paperwork (with the delayed effective date identified on the forms) and fees to the proper department within the state where the business is to be registered.

While these steps are relatively simple, mistakes or omissions on the forms will cause issues when the state is processing the documents, and it could result in additional fees. Also, consider that completing paperwork requires time, which is often in short supply with busy entrepreneurs.

Rather than trying to handle it all on your own, you can ask our team at CorpNet to fill out and submit your LLC formation or incorporation forms for you. We do this for entrepreneurs in all 50 states, so we have the process down pat—and it will likely cost you much less than if you were to ask an attorney to file your forms for you.

Now Is the Perfect Time to Consider a Delayed Filing

With some time left in the fourth quarter of 2023, I encourage you to consider the benefits of a delayed filing if you have your sights set on either starting a business or changing the legal structure of your existing business in the upcoming new year. You still have time to submit a delayed filing for January 1, 2024, and CorpNet is here to help you get it done on time and accurately.