The best time of year to form an LLC depends on several factors, including the business’s needs and the owner’s preferences. For some businesses, it may be best to form one at the beginning of the year for tax purposes. Ultimately, it all depends on the business’s specific circumstances.
So, when is the best time of year to form an LLC?
What Is an LLC?
A Limited Liability Company (LLC) is a business organization that protects owners from liabilities such as debts. LLC is a combination of:
- Partnership and,
- Sole proprietorship.
These features make them perfect for small businesses and startups. Limited Liability Company owners are referred to as members, and many states have no restrictions regarding how many people can be members. However, some entities such as banks and insurance companies are exempt from forming LLCs.
Advantages of Forming an LLC
An LLC protects your assets by separating them from the business, protecting you from legal suits. It has an unlimited number of members, unlike in S-corporation, where the limit is 100 shareholders.
LLCs are flexible, allowing you the freedom to:
Decide How Taxes Affect Your Enterprise
LLC owners can choose not to pay federal taxes directly and may instead opt to report their profits and losses on their tax returns.
Choose How Many Owners Are Involved and How to Run the Company
LLCs do not limit how many people can register as owners. In addition, you can run the business as the owner or delegate the role to a manager. Moreover, you can divide the profits as you choose; for example, you may divide it amongst the owners depending on your agreement.
Limit Your Personal Liability
LLCs allow you to have protection from personal liability. For example, if someone decides to sue your business, you won’t be forced to pay the settlement from your pocket – provided your enterprise is registered as an LLC.
One last feature that makes LLCs perfect for startups and small businesses is that they don’t require much paperwork. Similarly, its administrative needs are less restrictive compared to other business structures.
When Is the Best Time of Year to Form an LLC?
The best time is on January 1st. Here’s why:
- Forming an LLC in January streamlines your accounting and does bookkeeping and filing your taxes easier.
- Paperwork is more accessible to process in January than in other months, so the best alternative is to form your LLC at the end of the year. That way, your paperwork gets processed faster. (The earlier you file, the faster the processing).
- Forming an LLC on January 1st gives you more time to sort out your documents and other requirements.
- Filing your registration documents on January 1st exempts you from paying the annual franchise tax in most states.
- Forming an LLC on the first day of January gives you time to file your articles of organization at the end of the year.
Steps for Forming an LLC
What does it take to get an LLC? Here’s how:
Decide on a Name
The first thing owners or members must do is choose a name, specifically one that isn’t already registered. You can reserve the name for a limited period if you are not ready to register. However, the reservation period varies according to state.
Get a Registered Agent
A registered agent can be an individual or company who will receive official documents on your behalf. They have to be in your state and act as an intermediary.
Draft an LLC operating agreement
Some states may require you to chart an LLC operating agreement that summarizes your plan to run the enterprise. The document also contains other essential details such as:
- Board of managers
- Division of company profit and losses
- Business organization
- Voting requirements.
Ensure all the members involved sign the operating agreement before filing it.
File the Articles of Organization
You’ll need to submit documents known as articles of organization. These articles include:
- Name of the registered agent
- LLC members’ names and addresses
- Rights, obligations, and powers of the members
- Statement of purpose.
Register for an EIN
Once you’ve submitted these documents, you’ll get an employer identification number (EIN). An EIN is a nine-digit code used to identify a business entity to the IRS.
Register for Licenses and Permits
Business permits might be necessary for forming an LLC. First, check whether your state legally requires you to apply for them.
Set up a Bank Account for Your Business
Although LLCs protect you against personal liability in the event of legal troubles, it’s wise to separate your personal funds from the business. A business expense or checking account is perfect for that.
So When Is the Best Time to Form an LLC?
January is indeed the best time of the year. Paperwork processing is much faster and you get plenty of time to sort out all the formalities.