Starting or incorporating a business on January 1 has several advantages, the most notable being tax breaks and startup cost savings. However, beginning the process in the last few months of the year is the most beneficial by utilizing Pennsylvania’s “delayed-effective date.”
Delayed-effective filing allows you to select a future date for the business filing to be considered effective, reducing taxes and personal liability because your business starts in the first month of the calendar year. Pennsylvania has no limit to how far ahead you can forward-date the filing, providing you with valuable time to get a head start on setting up the business, and ensuring the business is approved and formed by the start of the new year. Advantages of a January effective date include:
Streamlining the Tax Process
Business owners must file tax returns for every year of the business’s existence, regardless of profit or revenue. Starting a business in the middle of a calendar year has negative tax repercussions by requiring you to file taxes in two separate periods: one for the term you operate as a sole proprietorship and another for the period after incorporation. In addition, owners of limited liability companies (LLC) are required to declare any profits and losses on their personal income taxes as well. Setting an effective date in the first month of the year eliminates the need for two separate tax filings during the fiscal year and possibly reducing the overall amount of tax owed.
Many entrepreneurs choose to start their business in January for the reasons previously stated, however, a large majority wait until January to start the filing process. As a result, state corporation offices experience a backlog in the first few weeks of the new year, creating longer wait times for officially establishing your business. This can result in delayed profits and two tax filings. Filing in late fall and selecting a January 1 effective date avoids waiting in the backlog as state offices can process the filing in the order they receive it, thereby avoiding the new year rush.
State Compliance Advantages
Businesses are required to maintain compliance with state regulations to remain in good standing and operate legally, including identifying a registered agent, filing annual reports, and paying state franchise taxes. Typically, annual reports and state tax returns are not due until the first anniversary of the business’s formation. Just as the federal tax filing, choosing a January 1 effective date avoids the need to file franchise taxes and filing fees with multiple agencies for only a few months of operation.
Additional Preparation Time
Choosing a delayed-effective date several weeks ahead gives you extra time for preparing all other essential aspects of your business, such as:
- Bookkeeping and payroll requirements
- Business and financial plans
- Creating a webpage
- Developing employment contracts and hiring staff
- Developing trademarks
- Entering contracts with external vendors and customers
- Establishing bylaws
- Establishing lines of credit or securing capital
- Naming the business
- Obtaining business insurance
- Organizational shareholder meetings, if applicable
- Purchasing inventory
- State and federal tax registrations
Philadelphia Business Lawyers at Sidkoff, Pincus & Green P.C. Help Clients Establish New Businesses
Starting a business is an exciting new adventure for entrepreneurs, and one of the most important factors is determining the most advantageous time to start. At Sidkoff, Pincus & Green P.C., our Philadelphia business lawyers advise and assist new business owners with becoming established. Contact us online or call 215-574-0600 for an initial consultation. Located in Philadelphia, we serve clients throughout Pennsylvania and New Jersey.