If you're a sole proprietor, perhaps you've considered
incorporating your small business or self-employment activity.
And so maybe you've been wondering, "When is the best time to
incorporate?"
From a legal standpoint, any time is the best time. The sooner
you incorporate, the sooner you make the move from the world of
unlimited liability to the world of limited liability.
From a tax savings standpoint, any time is the best time. The
sooner you incorporate, the sooner you will start putting more
money in your own pocket and less in Uncle Sam's.
But from a **tax reporting** standpoint, there is one time of
year that stands out as best: January 1st.
Why is that?
Assuming you have a sole proprietorship (or other entity, such
as a partnership) that is up and running as of January 1, and
assuming you then incorporate that existing entity on any date
other than January 1, you face the possibility of filing not one
but two business income tax returns for that year.
Here's an example to clarify this important point . . .
Let's say you've been operating your sole proprietorship for a
few years, and in early 2006 you decide to incorporate. In
January you get around to starting the paperwork, but life gets
in the way and you finally get it done in late February. By the
time your state processes the Articles of Incorporation, the
start date of your new corporation is March 1.
For 2006, you must file a Schedule C for the period of January 1
through February 28, when your business was still a Sole
Proprietorship. And you must also file a corporate income tax
return for March 1 through December 31.
Maybe that's no big deal. Maybe you enjoy filing one business
income tax return so much, filing a second one doesn't bother
you. And it may be that the inconvenience of filing two tax
returns in 2006 is far outweighed by the legal and tax
advantages of incorporating.
Keep in mind, too, that 2006 will be the only year you have to
do this "double duty". In 2007 you will only have to file the
corporate income tax return.
But if you are thinking about incorporating, the best time to do
it, from a tax paperwork standpoint, is as of January 1. Only
then do you have a "clean break" from the old sole
proprietorship to the new corporation.
This timing issue can also be relevant if you decide to make the
switch late in the year. If the effective date of the
incorporation is November 15, you will have to file a Schedule C
for January 1 through November 14, and a corporate return for
November 15 through December 31. In that scenario, you should
ask yourself, "Do the benefits of incorporating outweigh the
convenience of waiting until January 1?"
So before you decide when to incorporate, take a moment to
reflect on the tax reporting consequences of incorporating on
January 1 vs. any other date.
Sometimes it may make sense to wait a few weeks (as in the
second example), and sometimes it makes sense to "do it now",
especially when January 1 is nearby.
About the author:
Wayne M. Davies is author of 3 tax-slashing eBooks for small
business owners and the self-employed. For a free copy of
Wayne's 25-page report, "How To Instantly Double Your
Deductions" visit http://www.YouSaveOnTaxes.com
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