Although it may be too late for sole proprietors to gain the tax advantages of forming an LLC or corporation in 2008, it’s not too early to begin adopting these changes for 2009.

Converting a sole proprietorship to an LLC  or corporation provides tax advantages and personal liability protection to a company’s owners. Switching a sole proprietorship to a corporation, for example, may qualify a business for a Small Business Tax Deduction with an annual tax credit of 16 percent on the first $200,000 of taxable income; can result in self-employment tax savings; and may provide a number of other income and tax advantages.

“When converting a sole proprietorship to a corporation  or LLC, timing is a consideration,” said  Karen Kobelski, General Manager for BizFilings. “If you change your entity at the very end or very beginning of a new year, you can simplify reporting by putting all or most of the income and expenses on one return for the entity in existence for most of the year.”

Otherwise, when you set up a new entity, she said you need multiple returns in the same calendar year–one for the sole proprietorship and a second one for the new entity.

For example, a business owner operating a sole proprietorship in 2008 that chooses to convert his or her business to a corporation during the last week of the year does not receive any income or pay any expenses for the corporation in that final week. All of the income and expenses of the sole proprietorship are reported on the owner’s Schedule C for 2008; the corporation’s return for its short tax year (of one week) has no entries.

A popular reason for forming new entities after Jan. 1 of a new year is to avoid state reporting or franchise fees for the current year, especially when the new entity is inactive. There are usually no tax consequences upon transforming a business from a sole proprietorship to an LLC or corporation. The changeover is essentially a tax-free reorganization. You contribute assets of the sole proprietorship to the new entity in exchange for an ownership interest in the LLC or corporation. Tax attributes of those assets also carryover.

October through January are THE busiest months of the year for state filing offices. That is why individuals forming a corporation or LLC during this time often experience excessive delays.

To help business owners minimize delays and reorganize their business structure for the upcoming year, business incorporation services leader BizFilings offers a “delayed filing” service to customers placing an order by phone at (800) 981-7183. Under this option, BizFilings processes the order in 2008 and puts it in a queue for filing with the state on or after Jan. 1, 2009.