Legal Question in Business Law in California

The tax and accounting run simultaneously from the time the corporation is formed until the time the proprietorship business is poured into the corporation, i.e., the corporation assumes the assets, liabilities, operations and possesses the properties from the proprietor and the proprietor receives compensation (usually, common stock) from the corporation.

Obviously, the corporation's books will contain a lot of zeros until the "pouring in" occurs, but it cannot be totally disregarded as an entity while it is just sitting there, waiting to be used. It has an asset (its own organization) and a balancing liability and/or equity entry or entries, and is accruing, or has, a liability for franchise tax.

Nevertheless, until the corporation begins to transact business, most entrepreneurs who are not accounting purists will not do any formal book entries and will treat the new corporation as dormant until it acquires business assets and liabilities and issues more than a nominal amount of stock.

It is often a good idea to launch the corporation as an active entity by selling it the former proprietorship business and issuing stock to the former proprietor as of the end of a month, a calendar quarter, a pay period, etc., to simplify accounting and avoid short-period statements.

Be sure you have your new taxpayer ID, sales tax permit and EDD account (if you have employees). Comply with the bulk sales law if it applies to this business. Make sure you close (and pay off) any accounts on which you are personally liable. If you have leased business premises, make sure your lease is amended to show that the tenant is now a corporation. Your landlord may require a personal guarantee.

Most attorneys will tell you this is more of an accounting question than a legal question. Your sole proprietorship already has an established cut off date (December 31st). Once the corporation's articles are filed, you can elect a calendar year (ending December 31st) or a fiscal year (the end of any other month besides Dec. 31st). The election is specified in the initial tax return filed for the corporation. Consult with a CPA or a tax attorney in your area for specific advice.

Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise

Franchise Attorney

Kevin B. Murphy, B.S., M.B.A., J.D. - Mr. Franchise

Franchise Attorney