When to Incorporate: Filing Today (2006)Vs.The New Year (Jan 1, 2006)

Incorporating AFTER Jan 1. 2006:

• payment of franchise or corporate taxes for 2006
• corporate record and minutes requirements
• annual reporting requirements and other informational filings
• payment resident agent fees

The BAD NEWS: In January, state offices are EXTREMELY BACKLOGGED and may require in excess of 60 DAYS to incorporate your business.

The GOOD NEWS: The "Delayed Filing" Option!

Submit your filing today as a "Delayed Filing" and in most cases your corporation or LLC can be formed in the early part of January ... avoiding the January RUSH.

More details, examples, and "big words" discussing tax issues below...

• Tax Benefits of Incorporating after Jan. 1, 2006
• State Office Backlog and Excessive Processing Delays
• Tax Benefits of Incorporating in 2006
• Relevant IRS Publication Links

Tax Benefits & Breaks of Waiting

For small businesses, corporate and LLC filing requirements are usually simple to observe. In addition, these entities are usually required to pay minimum state filing fees that may range from $50 to $800 or more annually depending on the structure and location of your business. Thus, the simplest method for avoiding responsibility for these filing requirements and taxes is to wait until next year (2006) to file your incorporation or LLC formation documents.

End-of-the-year Delays in ALL State Filing Offices

The upcoming months (December and January) are THE busiest months of the year for state filing offices. Last January, for example, MyCorporation.com processed most customer requests within 24 hours. However, many STATE offices responsible for certifying incorporation documents required 6 to 12 weeks in addition to their standard processing time requirements.

Thus, everyone forming a corporation or LLC is at the mercy of the state office backlog and will experience excessive delays in filings submitted in early January.

The Delayed Filing Option

If you would like to form your corporation or LLC in January 2006 or later, we STRONGLY urge you to submit your information today as a "DELAYED FILING." Under this option, MyCorporation.com will process your file within 24 hours. Your documents will be placed in a queue with the state office "to be held for filing on or after January 1, 2006."

Incorporating TODAY

Claiming Losses for the 2006 Tax Year

In general, shareholders of a corporation do NOT receive a deduction or a carryover for losses sustained by a corporation. However, business losses in an S-Corporation or LLC COULD carry-over and inure to the benefit of its shareholders/owners.

Thus, barring a specified exception, a shareholder in an S-Corporation that incurred $5,000 in business expenses without any corporate income SHOULD be able to apply the $5,000 loss toward his/her personal income tax liability for the year. However, the IRS does NOT consider startup costs an expense.

Startup Costs vs. Expenses

While legitimate business expenses are deductible and thus directly reduce your taxable income, a taxpayer has the right to elect whether to amortize the start-up expense over a specific period of years as mandated by the IRS (usually 60 months or more). Startup costs are defined as those costs spent "creating an active trade or business."

Amortizable Startup Costs

• State incorporation/filing fees;
• The cost of an incorporation service (such as MyCorporation.com);
• The cost of hiring temporary directors;
• The cost of conducting organizational meetings;
• The cost of retaining accounting services for setting up the corporation;
• The cost of legal services (such as drafting the charter, bylaws, terms of the original stock certificates, and minutes of organizational meetings);
• Advertising costs for the opening of the business;
• Salaries and wages for employees who are being trained and their instructors;
• Travel and other necessary costs for securing prospective distributors, suppliers, or customers; and
• Salaries and fees for executives and consultants, or for similar professional services.

NOTE: A corporation using the cash method of accounting can amortize organizational costs incurred within the first tax year, even if it does not pay them in that year.

Non-Amortizable Costs (Capital Expenditures)

• Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs;
• Costs associated with the transfer of assets to the corporation;
• Business Assets: The cost of any asset you use in your business is a capital expense. There are many different kinds of business assets, such as land, buildings, machinery, furniture, trucks, patents, and franchise rights; and
• Improvements: The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Repairs, however, are often deductible as an expense if they keep your property in a normal efficient operating condition.

Conclusion: Incorporate Now or wait until 2006?

Incorporating your business may have a drastic impact on your tax liability and the manner in which you will conduct business in the future. The decision to incorporate should be thought out and well informed.

However, as the year comes to a close, many business owners recognize that the deadline for accumulating tax deductions approaches as well. Thus, please consider the following:

Speak with an accountant or an attorney about your particular situation. If, based on your current financial composition, she advises you to incorporate or form an LLC, visit MyCorporation.com and we'll be eager to assist you.

If you decide that waiting until 2006 is your preferred route, please consider submitting a Delayed Filing dynamoRequest. As a delayed filing:

1. You will avoid 2006 tax and reporting requirements because your corporation or LLC will NOT be formed in 2006; and
2. You will avoid excessive delays in January 2006 since your documents will be submitted to the state office ASAP and held in a queue for filing AFTER January 1, 2006.