When’s the Best Time of Year to Form an LLC?

Have you been thinking of launching a new business or changing your existing Sole Proprietorship to a formal business entity type like a Limited Liability Company, S Corporation, or C Corporation? Are you concerned that you might not be selecting the best time of year to form the new business?

There’s never a bad time to register your business as a legal entity because doing so helps protect your personal assets and might offer some tax advantages, as well. But filing your paperwork to make it effective before the New Year has its perks! So if you are considering starting a new business, right now might just be the best time of the year to form an LLC.

On the flip side, it’s not great fun needing to file taxes as one type of business for a portion of the year and as an LLC for the remaining months. But there is a great option for this exact situation.

Consider a Delayed Filing

Many states allow you to process a delayed filing when forming your LLC. This means the business registration form has a provision to request an effective date in the future. This would allow you to process paperwork for your new LLC now, but not have it effective until 2024.

Choosing an effective date of January 1, 2024, 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.

Here’s a great video where I talk through what a delayed filing is and why it might be perfect for late year LLC registrations.

So, let’s not waste any time! To help you decide if forming an LLC now is right for you, let’s review what an LLC is, its potential benefits, an overview of how to start one, and what you need to do to keep it in good standing. As with any legal or financial decision that’s critical to your business’s success, I encourage you to talk with an attorney and accounting professional before deciding if the LLC structure will be a good match for you.

What is an LLC?

A Limited Liability Company (LLC) is the simplest formal business structure. To register a business as an LLC, you must file formation documentation with the state(s) in which you wish to operate and complete a variety of other tasks to ensure your LLC is legally compliant. LLCs can be single-member (one owner) or multi-member (more than one owner).

Benefits of forming an LLC:

• You Reduce Your Personal Liability Risk – When you run your business as a Sole Proprietorship or Partnership, you and your business are legally considered one in the same. That can expose your personal assets (like your home, car, retirement accounts, etc.) to risk in the event of a lawsuit against your business or if your business encounters financial difficulties. But, because an LLC is considered a separate legal entity, you insulate your personal property from being taken as payment for legal matters or debt.
• An LLC is Simple to Manage – With many of the same advantages as a corporation but without the complexity, it’s no wonder this business entity type has become a popular choice for small business owners. An LLC has fewer formation and ongoing compliance requirements than a corporation does, and that’s attractive to entrepreneurs who don’t want to deal with time-consuming formalities.
• You Have Tax Treatment Options – As an LLC, your business can choose to be taxed at the federal level as either a Sole Proprietor (or Partnership if multiple members) or a Corporation. With Sole Proprietorship or Partnership tax treatment, you would report your LLC’s income and losses on your personal income tax return forms. Rather than your LLC paying taxes, you and other members pay them at your individual tax rates and according to your ownership percentage of the LLC. As self-employed individuals, you and other members of your LLC must pay the full Social Security and Medicare taxes on your taxable income.
• Avoid Double Taxation – If you opt for corporate tax treatment, your LLC will file its own tax returns and pay income tax at the applicable corporate tax rate. Paying taxes as a corporation results in double taxation on some business earnings; income that’s paid to members as salaries gets taxed at the corporate rate and then taxed again at the individual tax rates applicable to its members.
• You Have Management Flexibility – As an LLC, you can choose whether members will handle your business’s day-to-day management responsibilities or if you’ll designate a person (or persons) to manage your company. Unless your formation paperwork specifies that you want a “manager-managed” LLC, most states will consider your company “member-managed” by default. You should describe what authority and responsibilities your members and managers have in your LLC operating agreement.

Possible disadvantages of forming an LLC:

None of the business entity types are perfect and that includes the Limited Liability Company. Although the LLC helps safeguard you from responsibility for the debts or legal liabilities of your business, that protection could be challenged under certain circumstances.

For instance, if you personally did something (or neglected to do something) in the course of doing business that harmed someone, a court might decide you should personally be held responsible. Another possible scenario is if you would personally guarantee a loan for your business. If your LLC couldn’t make the payments, you might need to use your own personal funds to cover the debt.

What Steps Should You Follow To Start Your LLC?

Now that you know some of the pros and cons of operating as an LLC, let’s talk about what you need to do to start one. The requirements vary by state, but I’ve provided an overview of the main steps below.

1. Secure Your Business Name – Don’t take this step lightly! Your business name will represent your brand, so put a lot of thought into it. And as you think about a name for your LLC, check your Secretary of State’s database or do a free corporate name search via CorpNet to make sure another LLC or corporation isn’t already using (or has filed to use) your desired name. Also, consider using CorpNet’s free trademark search tool so you can see if any other businesses have filed for a trademark on the name. If you aspire to expand your business into other states, I encourage you to think about getting a trademark to protect your name in all 50 states.
2. Obtain an EIN – You can obtain an Employer Identification Number from the Internal Revenue Service or ask CorpNet to request one for you. An EIN is a unique identification number for your business (similar to individuals’ Social Security Numbers). You need an EIN to hire employees, open a bank account, file for permits and licenses, and move forward with certain other business activities.
3. Select a Registered Agent – Most states require that an LLC has designated a registered agent to accept service of process (legal and tax documents, etc.) on its behalf. The registered agent must be a person or company with a physical location within the same state where your LLC is registered. Your registered agent must be available from 8 a.m. to 5 p.m. on Mondays through Fridays to receive notices for your business. If your LLC is registered in multiple states, you may find it helpful to have a registered agent service (like CorpNet) who has a presence in all 50 states.
4. Submit Articles of Organization – To officially form your LLC In the state(s) where you wish to operate your LLC, you must file Articles of Organization. By submitting your paperwork now with an effective date of January 1, 2023, you’ll ring in the New Year with your new LLC. If you file your Articles of Organization after December 17, most states will consider your LLC effective January 1 even if you don’t specify an effective date. In the interest of time and accuracy, consider asking CorpNet to help you complete and submit your LLC formation documentation, so you don’t miss the opportunity to get a fresh, clean January 1st start for your LLC.
5. Prepare an Operating Agreement – Even though most states don’t require LLCs to have Operating Agreements, I highly recommend them for keeping everyone involved in your business on the same page. An LLC Operating Agreement defines the roles and responsibilities of your members and managers. It’s particularly helpful for multi-member LLCs, so all members are clear about what’s expected of them and what authority they have in decision-making.
6. Apply for Business Licenses and Permits – Depending on where your LLC is located and the nature of the business you’re conducting, you may need business licenses and permits to legally operate your company. Check with your local municipality, county, and state to see what requirements apply to you. Some businesses need federal licenses, as well. To make things easier, you can ask CorpNet for information about licenses and permits.
7. Set Up a Business Bank Account – To preserve the personal liability protection that you get by having an LLC, you need to keep your business and personal finances separate. Establish a bank account that is exclusively for your LLC, and don’t pay personal expenses from your business checking account or business expenses from your personal funds.

Don’t Forget to Keep Your New LLC Compliant

After you fulfill your startup requirements, you will have compliance tasks to tend to on an ongoing basis. Ask your attorney about what compliance formalities your LLC must complete, so you don’t jeopardize your company’s status of good standing with the state.

Some of your LLC’s compliance obligations might include:

• Renewing licenses and permits
• Filing taxes
• Filing annual reports with the state (which may be required each year, bi-annually, or on some other schedule)
• Holding member meetings and taking meeting minutes
• Updating the state about major changes (such as a change in address or adding a new member)

Comply with the rules, or you could encounter some significant penalties. Why face fines, lawsuits, or possible suspension of your business? A little effort and organization to keep current will save you from a heap of problems later!

CorpNet’s online compliance tool, CorpNet Compliance Portal, can help you keep track of the filings and renewals that apply to you so you won’t miss important deadlines.