The decision when to open or close your business could have significant implications on your tax, legal, and financial situation.
While many business owners do wait until the new year, there are many advantages to opening or closing at year-end. Here are five to consider.
1. The Holiday Season Is a Good Litmus Test for Your Business
Starting a business shortly before year-end means doing so in the thick of the holiday season. If you're starting a retail-oriented business, you may be able to generate a significant profit during the holiday season to sustain your new enterprise in the leaner months after the new year.
Even if your business is more service-oriented than retail-oriented, you may still be able to do some holiday marketing to drum up new clientele going into the new year. For example, you could explore a partnership with a local charity during the holiday season to increase awareness of your brand.
On the other hand, if you're considering shutting down your business, the holiday season can be a final push to determine if your business is viable. If you're in retail and your business has low or no cash flow during the holiday season, this may be a sign that it's unlikely to survive in the new year. View the fourth quarter as a final chance for your business to thrive, and if it does not, consider filing your dissolution before year-end.
2. You Could Save on Taxes
Starting a business before year-end means that you can possibly get a tax deduction for some of your initial startup costs this year.
Keep in mind that if you incur more than $5,000 in startup costs or more than $5,000 in organizational costs, you may not be able to deduct all of that at once but may have to amortize them over 180 months.
Closing a business before year-end could also mean additional tax savings as well. For example, if you have costs associated with winding down your business such as legal fees or cleanup costs, taking care of these expenses before year-end means you get to deduct them this year rather than next.
Also, closing a business before year-end means that you don't have to worry about filing taxes for your business next year, which can save you on accounting and tax preparation fees. You may also save on other costs such as filing fees you may have to pay with your annual report.
3. You Can Set Up a Solo 401(k) & Begin Reaping the Benefits
Business owners have many tax-advantaged retirement options available to them, and the solo 401(k) is one of the most attractive.
Unlike SEP IRAs, a solo 401(k) allows business owners to contribute up to 100% of their earned income (to a certain periodically adjusted amount). On top of that amount, they can contribute an additional 25% of their compensation paid from their business or 20% of their net self-employment income up to a statutory maximum to a solo 401(k) for a given year.
This means that at lower levels of compensation or net self-employment income, a business owner will generally be eligible to contribute more to a solo 401(k) than to a SEP IRA. Another advantage of the solo 401(k) over a SEP IRA is that you can borrow from it.
The choice of solo 401(k) vs. SEP IRA relates to timing of opening or closing a business because of the regulations around opening a solo 401(k). While you can open or contribute to a SEP IRA at any time on or before the extended tax filing deadline for that year, a solo 401(k) must be opened before year-end. Also, to open a solo 401(k), you must have a business.
If you're closing a business, doing so means winding down your solo 401(k) before year end as well, which can save you on the following year's solo 401(k) administrative fees.
4. You Can Take Advantage of Holiday Sales
Starting a business is expensive.
But if you start your business at or near year-end, you can take advantage of retail sales that occur on Black Friday, Cyber Monday, and the days immediately after Christmas to cut down on your startup costs.
And if you're closing your business, you can take advantage of the holiday spending frenzy by selling your old business equipment on eBay before year end.
5. You Avoid the Uncertainty of Potential Fee and Law Changes
Every state charges some fee for setting up a business entity such as an LLC or corporation. While states generally don't increase their LLC formation or incorporation fees every year, it's possible that your state may make an increase effective Jan. 1.
Of course, this could work the other way around. It's rare, but states occasionally decrease formation fees in order to encourage people to start businesses.
Research any possible business formation fee changes in your state so you can make an informed decision about when to start your business.