With the end of the year approaching, is it a good time to form a limited liability company or LLC? While any time is good to form an LLC, when starting an LLC at the end of the year, you could also delay the effective date to January 1. This can allow you to beat the rush of new businesses in January while gaining advantages like simplified administration and savings on franchise taxes. Read on to understand the benefits of forming an LLC at the end of the year and the steps to take to save more.
Can You Start an LLC at the End of the Year?
You can form an LLC business entity anytime during the year, including at the end. Some business owners prefer to delay the effective date of the LLC to January 1, to save on franchise tax and annual reports for the calendar year. However, if it’s early in the year, there’s no reason to wait until the end of the year to form an LLC.
Why Should You Consider Starting an LLC at the End of the Year?
If the end of the year is approaching, waiting to start an LLC at the end of the year can be advantageous for several reasons. For one, many states have a backlog and longer processing times in January, so filing at the end of the year can ensure you get the effective filing date you want. Likewise, you can save some money on franchise tax.
1. January 1 Effective Date
Most companies consider forming an LLC at the end of the year to have that January 1 effective date. This can simplify administration and ensure you don’t have to pay taxes or file an annual report for just a few months of the year.
2. Favorable Tax Benefits
Starting an LLC at the end of the year allows business owners to potentially benefit from tax deductions and credits for the current tax year. In states that charge franchise tax, it also means you won’t have to pay the annual franchise for just a couple of months of operations. Learn more about how LLCs are taxed, sales tax by state, or annual LLC filing fees and recurring fees to understand your potential tax savings.
3. Clean Bookkeeping and Accounting
Starting an LLC at the end of the year (with January 1 as the effective date) can provide you with clean, streamlined bookkeeping and accounting, as the LLC will coincide with the calendar year and the individual tax financial year. With the simplicity of filing LLC taxes with personal taxes, a January 1 filing date further simplifies bookkeeping.
4. Obtain LLC Benefits
Starting an LLC at any time of the year offers significant benefits, including liability protection and simplified compliance. It separates personal funds from business funds while offering simplified pass-through taxation. Forming an LLC at the end of the year provides you with all the common benefits of an LLC.
5. Beat the Rush
Many companies and small business owners plan for a January formation. With many new companies in formation, the Secretary of State can get backlogged in processing. Starting an LLC at the end of the year helps you beat the rush, increasing the chances of getting the formation date you want.
6. Plan for Future Growth
Establishing an LLC at the end of the year sets a solid foundation for the business’s growth and goals in the upcoming year. It builds credibility with clients and employees. Establishing an LLC also allows you to set up systems like business credit and a business bank account that can allow for further growth and simplified administration.
How to Set Up an LLC at the End of the Year?
If you’re ready to set up an LLC at the end of the year, there are a few simple steps you’ll need to take. Learn more about how long it takes to get an LLC,
1. Choose a Business Name
Choosing a unique business name is not only a requirement but can help set your business apart. You’ll want to choose a business name that reflects the company’s offerings and values. In most states, the business name will need to include “limited liability company” or one of its abbreviations.
Double-check that no businesses are registered in the state with the name. You can also check the United States Patent and Trademark Office to ensure the name isn’t trademarked. Finally, you may want to do a web search to check available web domains and see other businesses with similar names.
2. Hire a Registered Agent
To register the LLC, you will need a registered agent with a registered office in the state. The registered agent must be available during regular business hours. You can choose to act as your LLC’s registered agent or hire a registered agent for around $40 to $100 a year.
3. Prepare and File LLC Articles of Organization
While procedures vary by state, you must usually file the LLC’s articles of organization with the Secretary of State. This is the step required to register and create the LLC formally. You’ll also need to pay state filing fees ranging from $40 to $500. Most states allow you to file the Articles of Organization online, in person, or by mail.
When you submit a filing with the state, it goes into existence whenever the state reviews and processes the application, usually the same day or within six weeks, depending on the state. However, you have the option to delay the effective date.
Usually, there’s a box to check to delay the effective date when filing the Articles of Organization, such as for January 1. If you don’t see that option, you can contact your Secretary of State for the procedure to delay the effective date.
4. Draft an LLC Operating Agreement
An LLC operating agreement is a signed legal document that outlines the management and operations of the LLC. All LLC members must agree to and sign the operating agreement.
Common topics covered in an operating agreement include:
- The LLC’s vision and mission
- Percentage of ownership for each member
- Voting rights
- Responsibilities of each member
- Appointment of managers
- Powers and duties of managers
- Distribution of profits and losses
- Meeting schedule and requirements
- Buyout and buy-sell rules
- Policies on dissolution
5. Apply for EIN
You need an employer identification number or EIN to file taxes, hire employees, build a business credit score, or open a business bank account. You can apply for an EIN online with the IRS or through mail with IRS Form SS-4.
6. Open a Business Bank Account
Once you have an EIN, you can open a business bank account with a local bank, credit union, or online bank. Opening a business bank account is an essential step to separate personal finances from business finances. It also makes business accounting simpler.
7. Acquire Necessary Licenses or Permits
Depending on the business, you may need either state or local business licenses or permits. Check with the Secretary of State and the local government for application requirements and any associated fees.
8. Get Business Insurance
Business insurance is essential to protect your company. If you have employees, most states require that you have worker’s compensation insurance. Other types of business insurance that can protect your company include general liability insurance or property insurance.
Depending on the business structure, other business insurance options include:
- Professional liability insurance
- Umbrella insurance
- Directors and officers’ liability insurance
- Property insurance
- Commercial vehicle insurance
- Business owner’s policy
- Cyber insurance
Should You Start an LLC at the End of the Year?
There’s no wrong time to start an LLC, but there are advantages to starting an LLC at the end of the year. An LLC offers numerous benefits to protect your assets and add credibility to your business. doola business and LLC formation services can help. With doola, you get fast formation in all 50 states. You’ll also get help getting an EIN, opening a business bank account, and continued compliance support so you can focus on building and growing your business.
Are there any advantages to starting an LLC at the end of the year?
When you start an LLC at the end of the year, you can expense state fees to the current tax year, potentially saving some money. You could also get the paperwork processed faster.
Are there any specific tax requirements for an LLC formed at the end of the year?
All LLCs must prepare and file taxes, regardless of when it’s formed in the year. According to the IRS, a short tax year is any year less than 12 months. In that case, you might have to file a short-period tax return if the LLC wasn’t in existence for the entire year. Some states, like California, charge a franchise tax but waive it for the first year.
How much does it cost to start an LLC at the end of the year?
The amount it costs to start an LLC at the end of the year is the same as at any other time. Depending on the state, filing fees range from $40 to $500.
How long does it take to form an LLC at the end of the year?
Depending on the state, processing business filings typically takes a week to 10 business days. Some states offer immediate formation when you file online, while others offer expedited one to three days of filing.
Is it necessary to have a physical office address to start an LLC at the end of the year?
Yes, you must have a physical office address to start an LLC. However, if you don’t have a physical business location, you could hire a registered agent with a registered office to form the LLC.