Why So Many Founders Choose January 1st to Form Their Company

Every year, our firm helps form more than 50 new legal entities for small business owners and startup founders. And every year, more than 20 of those are formed on January 1st.

That’s not a coincidence. It’s a rational choice driven by two forces: saving money and saving time.

Below is the straightforward breakdown to help you decide whether a January 1st formation makes sense for your business

1. It Could Save You Thousands of Dollars

In California, forming a corporation or LLC in December doesn’t just mean getting a jump on the new year. It means you immediately owe two things for that partial year:

• You could be required to pay the $800 minimum franchise tax even if your company exists for only a few days in that calendar year.
• You may have to file a corporate tax return for that short year, which many CPAs charge around $2,500 to prepare.

That’s $3,000 to $4,000 burned before your business has even opened its doors.

By instead forming your company effective January 1st, you could avoid both the prior-year $800 franchise tax and corporate tax return entirely.

The closer we get to the end of each year, the more founders see the math and reach the same conclusion: it is better to wait until January 1st.

2. It Saves Time And Mental Bandwidth

Money isn’t the only resource worth protecting.

Preparing and reviewing a corporate tax return (even for a company that existed for a few days) takes time and attention. Most small business owners and founders would rather spend that time on anything other than reviewing a corporate tax return.

As December approaches, clients increasingly realize:

Why rush to form now when they can start effective on January 1st without the extra paperwork?

So they ask us to get all their legal documents prepared so they’re fully ready to launch effective January 1st without the unnecessary filing obligations.

If you would like to discuss the strategy of forming your legal entity, please contact us at info@bendlawgroup.com. We would be happy to get all of your documents in place now so you can hit the ground running on January 1st.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal or tax advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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