One of the most important decisions you will make as a small business owner is how to structure your company. Should you file as a sole proprietor, partnership or LLC (Limited Liability Company)? The answer is not always cut and dry.
The good news is that even if you initially set your business up as a sole proprietor or partnership, you can transform into an LLC at any time. However, how do you know if now is the right time to form an LLC or not?
What Is an LLC?
An LLC is a business structure that combines many of the features of a sole proprietor or partnership with those of a corporation. One of the best benefits of forming an LLC is that it limits the personal liability of the owner for any business debts or other liabilities. In addition to liability protection, forming an LLC may offer several tax benefits, such as flow-through taxation.
When Is the Best Time to Form an LLC?
Once you decide that you want to form an LLC business structure, at least at some point in the future, you also must consider when is the best time to start the process.
Ideally, the best time to form an LLC is before you open for business. If you have not started your business yet, you should consider this option very carefully. Forming an LLC from day one will avoid the need to make this transformation as your business is growing.
January 1
If your business is already up and running, then it may be smart to wait until January 1st to make the transition to an LLC. Otherwise, you will be required to file two separate tax reports, one as a sole proprietor or partnership and one as an LLC. Since it can take a few months to complete the LLC formation process, the government allows what is referred to as “delayed filing.” With delayed filing, you can start the LLC formation process months in advance, but request the incorporation date to be set for January 1st of the following year.
As Soon as Possible
There are, however, times when waiting until January 1st is not recommended. If you are in a high liability industry, if you are worried about your personal liability associated with your business or if forming an LLC offers significant tax benefits, then forming an LLC as soon as possible may be the best solution for you.
No matter when you decide to form an LLC, we recommend you seek out professional assistance to complete the necessary forms. This will ensure everything is completed properly without any unnecessary delays.