Should You Form a Corporation or LLC Before Year's End?

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If you’re ready for your business to become a corporation or a limited liability company (LLC), the best time for you to start the process is most likely now before the close of 2010. Why? Quite simply, in most cases, the sooner you can begin taking advantage of the benefits of becoming a corporation or LLC the better. There are other considerations, though, so read on.

Limited Liability

Assuming you follow the formalities of running a company, one of the most significant advantages of incorporating or becoming an LLC is that you are no longer personally liable for the debts of the business. With a corporation, shareholders are not personally responsible for company debts whereas an LLC, “members” have limited liability.

Accordingly, if it is imperative that you protect your personal assets because of company debts, you probably should consider pushing ahead on the paperwork to make your business a corporation or LLC as soon as possible.

Tax Considerations

Tax considerations may also weigh in favor of forming an LLC or corporation before year’s end. With an LLC, income and losses can be passed through to members; forming a corporation could mean significant self-employment tax savings.

On the other hand, if you incorporate or become an LLC now, you will be responsible for filing tax returns for the company as well as for the sole proprietorship the business was for the other part of the year; in that sense, if you don’t want to make your business a corporation or LLC immediately, you should at least have everything ready for January 1 to avoid double the paperwork the following tax year.

That said, it is important that you weigh the tax consequences and money savings against the potential hassle of filing more returns; it just may be that the paperwork hassle is financially worth it now.

The Paperwork

Speaking of paperwork, do consider, though, that getting through all the paperwork for filing for LLC or incorporated status could take some time, so the earlier you start, the better, especially if you want to have everything completed by December 31.

If you’re ready to take the next step, but not sure whether a corporation or LLC would be better for your business and/or when you should file, consider your choices carefully. Both corporations and LLCs have their own advantages and disadvantages, so it’s important to evaluate your particular business, operational needs and tax strategy to make the best decision for you.