What Are the General Costs of Incorporating?
The term corporation stems from the Latin word “corpus,” which translates to “body.” And a corporation quite literally is a body. It’s a legal individual in the eyes of all laws. In and of itself, it can buy or sell property, get taxed, commit crimes, bring lawsuits or enter into contracts. Most notably, setting up a corporation will protect owners from corporate debts and personal liabilities, within certain limits.
A corporation is a legal entity that’s apart from the people who created it and operate it. You only need a single incorporator to form a corporation, and the process can be started by simply filing for an application for a charter within a respective state.
By filing said application, an incorporator will put certain facts on record. Some of these include:
- Incorporator’s names and addresses
- The corporations intended purpose
- The types and amounts of capital stock authorized for use within the corporation
- Stock holder’s privileges and rights for each stock class
There are others, depending on the state in which you’re incorporating.
Why Decide to Incorporate?
You may have heard that there are certain drawbacks to operating a corporation. This is true in some regard.
As an example, the business owner is now responsible for keeping additional administrative details and records. Running a corporation can also increase your tax burden. This is worrisome to many business owners, especially those that are just starting out.
However, the most common reason a business owner decides to take on the cost of setting up their business as a corporation is that, as a shareholder rather than an owner, they’re not legally liable for the corporation’s actions. This is due to the fact that the corporation exists on its own, completely separate from the people who run it.
Let’s take a look at three other key reasons why setting up your business as a corporation is an attractive option.
1. Unlimited Life
Unlike partnerships or sole proprietorships, the corporation’s life does not depend on the life of the person or people who run it. The business can carry on indefinitely until it merges, completes its objective, or goes bankrupt.
2. Shares Are Transferable
The ownership interest of a corporation can easily be transferred, sold, or given away to a family member. When it comes to proprietorships and partnerships, the process can be costly and cumbersome.
In cases of proprietorships and partnerships, all property needs to be retitled, new deeds have to be drawn, and other detailed administrative steps need to be taken for even the slightest ownership change. With a corporation, all owners’ privileges and rights are represented only by the stock shares the individual holds.
Ownership transfers within a corporation are simple. On the back of a stock certificate, an owner can sign and endorse the sign-over of the shares they are selling or disposing of.
3. Raising Investment Capital
In a corporation, it’s typically much simpler to bring new investors into the entity because of the limited liability and ease of share transferability. A set amount of shares can be transferred to new investors without hassle.
When larger public offerings are involved, stock exchanges and brokerage firms can be used for stock transfers to these investors.
First, we’ll look at some advantages of incorporating:
- Individual owners are fully protected from any personal liability
- There’s a reliable amount of legal precedent to guide managers and owners
- A corporation is the best way for companies to go public
- Easier to raise capital
- Ease of ownership transfer
- Corporations have an unlimited life
- Corporations create certain tax benefits that proprietorships and partnerships don’t
These make a strong argument for incorporating.
Now, we’ll take a look at some of the disadvantages:
- They require meetings every year and require directors and owners to observe formalities
- Corporations are more expensive to create than proprietorships and partnerships
- You’ll be required to make periodic filings with your state and pay annual fees
As you can see, the advantages seem to outweigh the disadvantages of incorporating.
What Are the Costs of Incorporating?
Now that you understand the advantages and disadvantages of incorporating, we’ll take a look at how much it’s going to cost to set up your corporation.
1. Filing the Articles
Before you get started on incorporating, you need to file Articles of Incorporation, also known as Certificate of Incorporation, with the Secretary of State. The fee you pay for filing can be a set fee or could be based on the total number of shares that are authorized. The fee could be a combination of both factors.
Expect the Secretary of State Offices to charge between $100-250 for filing fees and administrative fees. This, of course, depends on the state you’re incorporating within. You can easily find out your state’s filing requirements and fees by visiting your Secretary of State’s official website. Click here for more information on setting up your IRS EIN.
2. 1st Year Franchise Tax Prepayment
You’ll need to pay a franchise tax for the privilege of doing business as a corporation in your state. The fee typically ranges from around $800 to-1,000.
Some states, including Nevada, don’t charge corporations this tax. This makes setting up a corporation in these states more attractive.
3. Various Government Filing Fees
As a corporation, expect to pay between $50-200 in filing fees to the government. These are added on top of the fees you pay directly to the Secretary of State.
The specific government filing fees are based on the state in which you’re incorporating, and the type of business you run.
4. Fees for Attorneys
You can certainly incorporate without retaining an attorney, especially with the many online services currently available. However, it’s advantageous to hire an attorney with experience in incorporating businesses.
Often, when a business owner attempts the process without an attorney’s help, they make minor mistakes that may not hold up in court if the corporation is ever put under the inquiry of law.
Most lawyers offer flat-rate incorporation fees, typically between $500-700. However, some more experienced attorneys may demand up to $5,000. This fee would include assisting with the completion of all needed documents and working with the shareholders.
Typically, the more shareholders your corporation has, the higher the cost of the attorney you choose to hire.
Starting the Process
To being incorporating, get in touch with the Secretary of State or the state office that’s responsible for the registering of state corporations. Request all forms, fee schedules, and instructions. If you’re not hiring an attorney, get your hands on some corporation books and useful software tools that can help guild you through the process.
In this case, your total cost for incorporating will only be how much these resources cost you, the total filing fees, and additional costs associated with your state’s laws.
Unfortunately, incorporating on your own may take significantly more time than hiring a lawyer. There will be an obvious learning curve. But, you’ll save the cost of the attorney and can re-invest that money into the corporation.
One of your very first steps in the process is preparing your official Certificate or Articles of Incorporation. There are several states that will provide a pre-printed form for this step. Either you or your attorney will be able to complete this.
The form will request certain detailed information such as:
- Proposed corporation name
- Corporation’s purpose of existence
- Names and addresses of all parties involved in the corporation
- Location and home office
You’ll also need to write a set of corporate bylaws that describe in full detail how you plan on running the corporation. This includes the assigned responsibilities of all officers, directors, and shareholders. In your bylaws, you’ll also need to inform the state when your stockholder meetings will be held, as well as other pertinent details about how you plan to run the company.
Once your articles are accepted, you’ll receive an official Certificate of Incorporation from the Secretary of State’s office.
Where Should You Incorporate?
This is a major decision that nearly every business owner asks when they decide to incorporate. Understand that you are not required to incorporate your business within the state where you plan to operate it. You can incorporate it in any of the 50 states, or in the District of Columbia.
Your corporation will be referred to as a foreign corporation in every state, with the exception of the state in which you chose to incorporate. If you’re conducting business in any state where you’re not incorporated, you could be required to register for a Certificate of Authority in order to transact business. This is sometimes referred to as a Foreign Qualification.
If your corporation conducts business while failing to register with that state as a foreign corporation, you may lose access to the court systems within that state and face penalties and fines.
If you’re a foreign corporation that’s registering for a Certificate of Authority within a different state, expect to pay filing fees to get the qualification. Typically, these fees cost more than the filing cost of the domestic corporation.
Corporations that are foreign-qualified are also subject to annual report fees and taxes from both the incorporation state as well as the qualifying state. It seems obvious, therefore, that the advantage of incorporating within a state with low filing fees and minimal corporate income taxes is not as advantageous as it may have once appeared. Your corporation will still need to qualify to conduct operations in the state in which it exists.
The legal definition of the term “transacting business” will depend on the situation and state. To get concrete answers, talk to an attorney. They’ll help you determine how the corporation’s laws apply to your specific situation.
Generally speaking, some of the factors that a state will consider include:
- Is there a physical presence within the state?
- Are there employees working in the state?
- Are orders accepted in the state?
- Is there a business bank account in the state?
These are general guidelines.
Is Incorporating the Right Move for Your Business?
Now that you have a better idea of the costs and details of creating a corporation, it’s time to ask yourself if this is the right move for your business. If so, you now have some powerful tools and tips to get you started. Check out our next guide if you are looking to set up an LLC.