Forming a Corporation or LLC in January 2011? File Now: Avoid Long Waits

by Matthew Burgess on November 14, 2010

Are you ready to form a new corporation or LLC, but you’re waiting to file your Articles of Incorporation or Organization until January to avoid the $800 California Minimum Annual Franchise Tax?

Well, there are a couple things you might want to consider.

1. Do You Really Want to Wait?

First, if you need the protection of a legal business entity now, then you need it now. Sure, I can understand the desire to wait a couple months and avoid having to pay 2010 franchise tax. But if you are conducting business activities that you feel warrant the protection of an LLC or corporation, is it really worth waiting to save 800 bucks?  Maybe it is, maybe it isn’t. Please consult an attorney about the right timing for you.

2. Long processing times in January. File Now with Future File Date.

There have been budget cutbacks, and the California Secretary of State has closed offices and consolidate document processing unit. If January 2011 is anything like January 2010, if you file Articles in the January, plan to wait 45-65 business days to be officially formed. This wait could slow the launch or growth of your business and even put you at risk.

There is an option: file now with a “future file date.” You can file your Articles for your new LLC or corporation now, with a request of a specific file date. In fact, you don’t need to ask for January 1, 2011: any entity formed after 12/17 is considered to not have a 2010 tax year.

This should speed things up considerably. If you file now, with a 12/18 file date request, you might even have a 2011 LLC or corporation before 2011 is even here.

3. Bonus to this plan: 2010 Tax Deduction.

Business startup costs are tax deductible. So why not deduct these expenses from your taxes sooner rather than later?

Update: The following is a comment from Matthew Berger, an attorney based in Carpinteria, CA. We thank him for his contribution to the conversation and encourage you to see his website if you have questions for any attorney.

This works only if the entity doesn’t do any business until 1/1/11. The entity won’t avoid the minimum franchise tax (MFT): the issue is when the corporation or LLC is required to pay its first MFT, and that depends on when the government …considers the entity to have its first year. A corporation or LLC formed after 12/18/10 and not doing business until 1/1/11 will be deemed to have its first year beginning 1/1/11.

The rules for when the MFT is first due are different for corporations and LLCs. A corporation does not have to pay its MFT for the first year (until 4/15/12, if incorporated after 12/18/10 and not doing business until 2011), whereas the LLC doesn’t get its first year for free and will have to pay the MFT on the 15th day of the fourth month of existence, which will be 4/15/11 if deemed to have been formed on 1/11/11. By forming after 12/18/10 and not doing business until 2011, the corporation and LLC will not be deemed to have formed in 2010, and thus can put off payment of its first MFT to 2012 for a corporation and 2011 for a LLC.

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