If you have decided to incorporate your business, take a look
at this article to discover the best time to incorporate.
Tax Trap #1 -- Waiting to Incorporate: What A Difference A
Date Can Make
NOTE: This is the first in a series of 5 articles: "Small
Business Tax Traps and How To Avoid Them"
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
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.
(For more about the potential tax savings of a corporation, see the second
article in this series -- "Tax Trap #2: Double Taxation -- Isn't Once Enough?"
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 2005 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 2005, 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 2005 is far outweighed by the legal
and tax advantages of incorporating.
Keep in mind, too, that 2005 will be the only year you have to do this
"double duty". In 2006 you will only have to file the corporate income tax
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
Wayne M. Davies is author of 3 tax-slashing eBooks for the self-employed,
available separately or as a 3-volume set, "The Ultimate Small Business Tax
To get your free copy of Wayne's 25-page report, "How To Instantly Double
Your Deductions" visit:
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