When you start a business or form a company, you probably consider all the costs associated with that decision.
One cost that businesses often ignore is the cost associated with incorporating and forming your company.
This can range from $100 to $10,000 for each type of entity depending on your needs as a company and which state you choose to incorporate in as well as other factors such as sales volume, number of employees, and so on.
How Much Does It Cost to Incorporate Your Business?
Most entities that can be used to form a business generally fall into three categories:
- C-corporation (or C corporation) – This entity type is the most complex and offers shareholders certain tax benefits. Generally, this type of entity would only make sense for larger businesses that are raising capital from investors or already have significant assets.
- S corporation — This entity is the best option for startups that want a flexible way to raise capital from investors and to structure ownership. The S corporation does not pay federal income tax; instead, it “passes through” corporate income and losses onto shareholders’ personal tax returns.
- Corporate Limited Liability Company (or CLLC) — This format is beneficial for smaller businesses. It offers the limited liability protection of a corporation, but with fewer taxes and paperwork than other entity types. The benefit of an LLC is that it can maintain a “pass-through” where income, deductions, gains, and losses are passed through to the company’s owners or shareholders.
Exact entity options depend on your goals and what state you decide to incorporate in, but there are other factors that affect the cost as well.
- The number of shareholders — The more shareholders the more complex it is for a company to maintain control over the business, thus leading to higher costs.
- The number of employees — The more employees you hire, the greater chance of legal action from an employee or shareholder which can lead to a higher cost. On top of this, larger businesses must also contend with certain state and federal regulations.
- Distribution of dividends — While taxation is based on ownership in a corporation, distributing dividends is a separate tax flow that must be considered when determining costs.
- Type of entity — The type of entity you choose will also dictate surrounding legal and accounting issues which can influence the cost.
There are many other factors that affect the cost, but for businesses setting up in most states an LLC will typically require less paperwork than a corporation, thus lowering the initial cost.
Formation Filing Fees
One expense you’ll have regardless of an entity type is the filing fee for bringing your business into existence.
This cost generally ranges from $50 to $800 depending on the state where you choose to incorporate and other factors.
The legal fees associated with incorporating a business are another cost that starts as soon as you decide to set up your business.
These fees are determined by the laws of the state in which you incorporate, but attorneys can help guide you through each step and also help minimize these incorporation costs.
Legal fees generally cost between $500 to $1500 for most new businesses, although this cost can vary significantly depending on entity type as well as other factors such as the business structure of your company and how many shareholders you have.
Small business owners may also need to make sure that the financial side of your business is set up properly and accounting fees for this could be a cost that you incur during formation.
The amount spent will depend on the size and complexity of your company, but it’s generally between $500 to $1000.
Accounting fees can be part of the legal bills you’ll incur during incorporation or can be a separate expense if you decide to use a company like Bench Accounting.
They will, however, be an ongoing cost that will continue over time as your business grows.
Filing Articles of Incorporation
In order to incorporate your business, you’ll first need to file articles of incorporation with the Secretary of State.
The fees associated with this filing will vary depending on the state where you choose to incorporate it.
These costs can range from $150 for Delaware and Nevada all the way up to $800 in other states like Connecticut and Washington.
Cost to Create Bylaws
Bylaws refer to the rules by which your company must operate and are created at the time of incorporation.
While some states already have a set of bylaws in place, creating them on your own can help you save legal fees as well as make sure that you have an appropriate setup for your business.
Bylaws cost between $50 and $200, depending on the amount of time an attorney spends on them.
Registered Agent Service
Registered Agent service is a separate business that maintains addresses and files for businesses. This is especially important if you plan on operating under an assumed name or want to make sure your physical address isn’t disclosed.
The cost can range wildly depending on the registry you choose, the number of shares you own in the company, as well as the state in which your company is incorporated, but you can expect to pay between $60 to $80 a year for a basic registered agent service.
Business Licenses and Permits
The types of permits and licenses required by your business will vary from state to state, so it’s best to check with the local town or county offices to find out exactly what you need.
However, here’s a list of common permits and incorporation fees for a variety of businesses:
- Foodservice — Permit fee and a yearly fee ranging $25 to $700
- Liquor — Licensing fee depending on the amount of alcohol and licensing authority, with annual renewal ranging from $150 to $400
Once your business is incorporated, you’ll pay taxes just like any other company. These will generally be in the form of sales tax and payroll tax for employees, but there may be additional state or local government fees that apply depending on the nature of your business.
In most states, you’ll also need to pay franchise tax ranging between $500 and $2,000 annually in the state where your business is incorporated.
This fee will vary depending on the amount of work involved with filing paperwork and how much exposure your company has in your local economy.
Annual Report Fees
Annual reports are official formation documents that you must file each year which will have information about your business’ finances.
State fees for this can vary according to the state where your company is incorporated. For example in Alabama, filers are charged $50 while in Rhode Island incorporation filing fees are $150.
Since annual report fees vary by state, you’ll need to check with your local jurisdiction to find out the exact cost.
Securities Exemption Filing Fee
If you plan to offer shares of stock as part of your business, then you’ll need to fill out a Form 8A-3 which registers the securities. The state fee for this is $10 and can be done in most states without an attorney’s help.
In order to make sure that you are not breaking any laws while offering your shares to the public, you’ll need to get help from an accredited securities attorney.
Your company’s formation will generally end up costing between $1,500 and $5,000 depending on your state of incorporation and which incorporation services you’re willing to invest in.
In addition to the cost of state filing fees, you’ll need to pay an attorney to draft your bylaws and file everything correctly. Attorney’s fees vary widely from state to state and must be considered when opening a company.
In California, it is estimated that there will be $1,500 in legal costs while in Delaware this fee can be as low as $200. This does not include any additional costs that may arise as the business grows in size, so you’ll need to consider whether or not an attorney will be involved with your company on a long-term basis.
While there are certainly costs involved with setting up a corporation or LLC, the benefits far outweigh the initial investment. Being self-employed comes with a significant financial burden and exposure.
Incorporation can help protect your personal finances from lawsuits as well as provide security when dealing with other businesses. It may be stressful to set up your own company, but the payoff can last well into the future.
The choice is yours: you can spend a lot of time and money trying to protect yourself from lawsuits while running your business as an individual, or you can set up a simple corporation or LLC which will provide extra protection without breaking any of your business bank accounts.