As we get closer to the end of the year, clients continue to inquire about forming new Delaware companies, and one important decision that clients need to make while forming towards the end of the year is whether they would like their company to be effective immediately in Delaware or as of January 1st of the new year.
When forming Delaware companies, Harvard Business Services, Inc. (HBS), can file formation documents with the Delaware Secretary of State for approval with an effective date of the first of the new year 60 days prior to that date. Clients typically initiate this request in November and December.
Filing new Delaware formations with an effective date of January 1st is the most popular effective date request and in theory, sounds great. While this decision is vital when forming your Delaware company around the end of the year, it’s important to note that they’re some positives and downsides to consider when deciding if you want to form the company with an effective start date at the first of the new year.
If your company does not plan to conduct business throughout the rest of the current year, clients sometimes do decide to form a new Delaware company with an effective date of January 1st. An advantage of this decision is that clients that form with this specific effective date would not have to pay the Delaware Franchise Tax for the year the formation document is filed with the state for approval since the company is effective the first of the new year. For example, if a client wishes to form a Delaware LLC, ABC Financial Services LLC in November 2022 but wants the Certificate of Formation filed with an effective date of January 1, 2023, the LLC would not owe the 2022 Delaware Franchise Tax by June 1, 2023. The Delaware Franchise Tax for the LLC would be due for the first time by June 1, 2024.
While forming the Delaware company with an effective date of January 1st may help you save on the annual Delaware fees, it’s possible that you could also lose potential opportunities and revenue, which is why forming without the effective date can drastically outweigh the benefits of forming with a business start date of the 1st of the year.
What if you plan to conduct any type of business activity with your new Delaware company prior to the end of the year? Perhaps, you plan to work with potential clients/customers, or to sign contracts, and maybe issue invoices, etc. If this is the situation, clients oftentimes decline to form their new Delaware company with an effective date of January 1st.
Also, when clients need to Foreign Qualify their Delaware company to physically operate in another state, some states require that a Delaware Certificate of Good Standing be submitted along with that state’s application. The Delaware Certificate of Good Standing can not be obtained until the company is considered active in Delaware, which could delay the foreign qualification process further. If the formation document was filed with an effective date of January 1st in Delaware, the Delaware company would not be considered active until that date.
Obtaining the Foreign Qualification right away may be essential to some clients so that they can open a business bank account or begin conducting business physically in that state with their Delaware company.
When clients work with various banks, depending on the bank’s requirements, the bank may inform clients that they cannot assist with opening the account until the company is considered an active entity. Clients generally consult with multiple banks prior to visiting to determine their exact requirements since they do differ from bank to bank.
If you plan on forming a new Delaware company and obtaining an EIN, or if you have any questions regarding the formation process and an effective date filing, we can be reached at 1-302-645-7400 or 1-800-345-2677 ext. 6900 or via email at firstname.lastname@example.org. We can also be reached via skype at delawareinc.
*Disclaimer*: Harvard Business Services, Inc. is neither a law firm nor an accounting firm and, even in cases where the author is an attorney, or a tax professional, nothing in this article constitutes legal or tax advice. This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances. Any action taken or not taken based on this article is at your own risk. If an article cites or provides a link to third-party sources or websites, Harvard Business Services, Inc. is not responsible for and makes no representations regarding such sourceâ€™s content or accuracy. Opinions expressed in this article do not necessarily reflect those of Harvard Business Services, Inc.