December. The last month of the year. In approximately 31 short days from when this blog article is published, we will enter the 2018 new year. For business owners, January 1st, 2018, represents more than simply a Happy New Year. In fact, December 31st, could be a very important deadline for some business owners.
Are you such a business owner?
- Doing Business as a Sole-Proprietorship or Partnership? Forming a limited liability company (i.e. LLC) or corporation (such as a S-Corp or C-Corp) is easier and less expensive than you think, and aside from the highly beneficial liability protection, such entities may reap strong tax incentives if Congress ultimately passes a tax reform bill. To do this, there are a few steps you need to take. First, you need to Form a LLC or Form a Corporation. Second, you will need a new FEIN because you have a new entity. Third, you will need to check in with your bank and merchant account providers — some will permit your existing accounts to inherit a new FEIN, others will require new accounts. Fourth, conduct business under the new corporate entity. Ideally, you will accomplish all of these steps by December 31st.
- Adding or Removing a Partner? Adding or removing partners or owners in a business at the end of the year greatly simplifies taxes for all partners and the company. Typically, you need some form of “purchase agreement” (if one individual is buying ownership from another) or a “redemption agreement” (if the company is buying the ownership back). Sometimes a “separation agreement” is appropriate for a departing owner. Do not simply think changing the names on the Articles, Bylaws or Operating Agreement will accomplish adding or removing partners.
- Want to Change Entity Types? Some business leaders want to switch from a LLC to a Corporation, or visa-versa. There are several ways to accomplish this. One is a “conversion,” if the state your company is formed in supports it. Such a conversion will act like a merger, and the company will keep its same Tax ID, banking accounts, merchant accounts and more. You can do this whenever is convenient for you. If, however, you wish to form a new company, and have the new company acquire the assets of the old company, then it makes a lot of sense to finalize this on December 31st. Otherwise, you will have two sets of taxes to submit in 2019, as well as potentially two sets of books to maintain for the old and new business through 2018.
- Buying or Selling a Business? If you can finalize closing by the 31st, this will simplify taxes for the buyer, seller and the business.
- Want to Change the Tax Status? If you have a CPA, talk to him or her to understand the tax consequences of changing status, and consider making the change upon the new calendar or tax year. Contact us, and we’ll be happy to refer you to an outstanding CPA.
- Want to switch accounting methods? Are you using a cash or accrual method of accounting? In general, you cannot switch in the middle of your fiscal year, so gear up to make the switch at the new year. Most businesses maintain cash-basis accounting, but may reach a point where they are actually required switch to accrual accounting. Other businesses may benefit by switching their accounting methods, especially if they operate on a cash-basis and have trouble managing their profits and losses. Consult with your CPA. Read more on this topic.
Good luck to you, and may the New Year bring you continued success in your business venture!