"Timing is everything." We've heard this turn of phrase often in all sorts of scenarios. And if you have clients who are starting a new business or transitioning from a sole proprietorship or partnership to an LLC or corporation, it's absolutely relevant!
Whether someone incorporates their business now as the year comes to a close or waits until the new year can affect their company in various ways.
First things first, let's discuss the three timing options business owners have when forming an LLC or corporation — midyear, end of year or January 1 (a.k.a., the start of the new year).
1, Midyear. Registering a business entity with a midyear effective date means the company will be subject to all the tax and reporting requirements associated with their LLC or corporation for that year. And existing businesses that switch to an LLC or corporation mid-year must submit two sets of income tax returns: one for the business structure it operated as during the months before its incorporation date and another set for the remainder of the year when it operated as an LLC or corporation.
2. End of year. December is an extremely hectic month for Secretary of State offices across the country, which can create a backlog of filings and potentially result in an effective date a month or more into the new year. Typically, states must receive and process an entity's registration form before it's considered effective. So, even if someone requests an effective date in December or on January 1, the actual effective date might be later if the state is unable to process the registration before the requested effective date. In other words, states generally do not make effective dates retroactive.
3. January 1. A January 1 effective date has some perks. It gives the LLC or corporation a clean start — e.g., existing businesses only have one set of tax forms for the tax year versus the two required if switching entity types midyear. Also, in states that levy LLC franchise taxes, an LLC that files with an effective date of January 1 would not have to pay those fees for the previous year. For example, if a business files its LLC formation paperwork in November 2024 but requests an effective date in January 2025, the LLC won't have to pay a state franchise tax for 2024. Likewise, the LLC or corporation's other corporate formalities kick in for that year rather than for the year before.
How to ensure a January 1 effective date
Typically, a business registration filing will be effective on the date the state processes the forms. The processing time may vary between just a few days to several weeks, with expedited filings completed in five to 10 business days.
A delayed filing, however, gives business owners some control over when their corporation or LLC goes into effect. In states that allow delayed effective dates, business owners can submit their formation paperwork in advance and set a future date for when they want their entity to be officially registered. Different states have different rules for when they'll accept a delayed filing.
For example, here are several states' requirements for how far in advance business owners may request a delayed effective date:
- Alabama: Up to 90 days before the requested effective date;
- California: Up to 90 days before the requested effective date (note that in California, LLCs and corporations that submit their formation paperwork after December 18 will be considered to be in business effective January 1 the next year, provided they do not conduct business between December 18 and December 31 of the current year);
- Florida: Up to 90 days before the requested effective date;
- Illinois: Up to 60 days before the requested effective date;
- Pennsylvania: Up to 90 days before the requested effective date;
- Rhode Island: Up to 90 days before the requested effective date;
- Texas: Up to 90 days before the requested effective date; and,
- Virginia: Up to 15 days before the requested effective date.
The following states do not allow delayed effective dates:
- Alaska;
- Connecticut;
- Delaware;
- Hawaii;
- Idaho;
- Louisiana;
- Maryland;
- Minnesota;
- Nevada; and,
- New Jersey.
How can your clients request a delayed filing?
As your client or their representative completes the forms to establish their LLC or corporation, they should consider their desired effective date and make sure they submit their delayed filing within the state's acceptable time frame. For instance, if someone wants to form an LLC in Rhode Island with an effective date of Jan. 1, 2025, they can submit their delayed filing as early as Oct. 2, 2024. The company's articles of organization (LLC) or articles of incorporation (corporation) should reflect the desired effective date. If the state doesn't have a designated field on its form to request an effective date, your client can add a provision to request a specific date (if the state will allow it).
Whether a delayed filing makes sense for a client depends on their situation. As we discussed, submitting business formation paperwork before the end of this year to request a January 1 effective date next year can make tax filing time less cumbersome and potentially avoid some extra compliance fees. But sometimes, a delayed filing won't be the way to go. For example, some consultants or other professionals may not want to wait that far in the future to get their entity up and running because they need an earlier effective date to secure a significant client.
Final thoughts
Delayed filings provide business owners with control over the official registration date of their business entities. By filing business formation ahead of time and requesting a delayed effective date of January 1, business owners may avoid potential paperwork processing backlogs at the state and eliminate extra paperwork at tax filing time. Moreover, it enables entrepreneurs to file their registration forms before the end of the current year for the following year without being on the hook to pay certain fees (like an LLC franchise tax) and submit certain reports (like annual reports) for the year when the registration forms were filed because the entity was not yet effective then.
As with all business concerns with legal and financial ramifications, your clients should seek expert professional guidance when considering whether a delayed filing will be advantageous for them. That's where your expertise can make a tremendous difference! And for any questions beyond the scope of the matters you're licensed to address, please direct your clients to the appropriate resources.
