There are many advantages to forming a corporation. Since a corporation is considered a separate entity, its shareholders and owners are not liable for the corporation's debts. Protection from liability makes corporations attractive to investors, as does a corporation's stock structure.
Since a corporation is a separate legal entity, owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses and dividends. The corporation itself pays taxes, at the corporate rate, on any profits of the corporation. However, incorporation can be a complicated and costly process, and it is important a business owner understands the general costs of incorporating before beginning the incorporation process.
There are typically four types of fees to incorporating: a fee to file the articles of incorporation with the Secretary of State; a first year franchise tax prepayment; fees for various governmental filings; and attorney fees.
Filing Articles of Incorporation
Filing the Articles of Incorporation (or Certificate of Incorporation) with the Secretary of State is required for officially starting a corporation. The filing fee may be a set fee, may be based on the number of shares authorized, or may be a combination of both. Secretary of State Offices usually charge $100 to $250 for administrative and filing fees, depending on the state in which the business is incorporating.
You can obtain your specific state's filing and fee information by visiting your Secretary of State's Web site.
First Year Franchise Tax Prepayment
A franchise tax is a fee paid for the privilege of doing business as a corporation in that particular state. This fee usually ranges from $800 to $1,000. Not all states charge this tax, such as Nevada, making it attractive to business owners.
Fees for Various Governmental Filings
Corporations are required to pay between $50 and $200 in government filing fees. This is in addition to the filing fees paid to the Secretary of State. Government filings are based on the type of business being incorporated and the state in which the business is incorporating.
Though it is possible to incorporate without an attorney, especially with the multitude of on-line services available, it is usually more beneficial to hire an experienced attorney. Many times when business owners try to incorporate on their own, they make mistakes that sometimes would not hold up in a court of law if the business is put under legal inquiry. Many law firms will offer a flat rate for incorporating a firm, usually between $500 and $700, but some attorneys fees can accumulate to as much as $5,000. This includes helping complete the required documents and working with shareholders. The more shareholders you have may raise the price of attorney's fees.
There are many ways to go about finding a corporate attorney. Probably the easiest method is by contacting your local bar association or searching on-line.
How to Choose Your State
Because incorporation costs vary from state-to-state, it is important to investigate various states' incorporation costs before deciding where to incorporate. If you intend to do business in only one state, it is usually a wise decision to incorporate in that state. If, however, you decide to incorporate in a state other than the one in which you are based, you will want to consider the following cost issues:
- What is the tax rate in the state you are considering for incorporation?
- How do the costs for incorporation compare to the costs to incorporating in the state in which you are based?
You should also investigate the corporate laws in the state you are investigating as it relates to the rights and responsibilities of the shareholders, officers and directors, as well as the rights of creditors in that state.