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How Much Does It Cost to Incorporate a Business?

How much does it cost to incorporate a business?

Of all the different business formats, the corporation is the most expensive to set up and maintain. So how much does it cost to incorporate a business? The answer depends on how many owners you have.

For corporations with just one shareholder, the cost to incorporate can be as little as $35 to as high as $300. This is basically the state’s filing fee. You’ll have to do everything else yourself. You can, of course, spend more for more help. The bare minimum help starts at around $50.

For corporations with two or more shareholders, the cost can theoretically stay the same. But we recommend you spend at least a couple of thousand dollars to hire and work with a lawyer. The lawyer can help you customize various documents and agreements to all the shareholders’ satisfaction.

We’ll break the costs down below.

To Incorporate, You Must Pay a Filing Fee

Each state charges a filing fee for you to file the paperwork to form your corporation. A quick internet search reveals the lowest filing fee is $35 (Florida) and the highest filing fee is $300 (Texas, note Texas uses the term Certificate of Formation, which means the same as Articles of Incorporation).

Since you can theoretically fill out and file all the paperwork yourself, this is the minimum cost of incorporating a business.

You Can Use an Incorporation Service to Help with the Paperwork

You can also use an incorporation service to help you file your paperwork. One or two of these services advertise a $0 filing fee. Other lower cost services start at around $50 for a bare minimum package that usually includes at least generic bylaws.  

If you’re the only owner of your business, we highly recommend that you use one of these services. They’ll have software to guide you to enter the information you need to fill out the forms. Usually, they will also double check for obvious mistakes before they file the paperwork for you. The $50 cost to incorporate your business is well worth it.

If you have co-owners of your business, you can still use one of these services to help you incorporate. However, we urge you to work with a lawyer to draft your bylaws and maybe a shareholders’ agreement. Because there are multiple owners, a lawyer can better address everyone’s concerns and find a happy compromise for all.

You Can Also Hire a Lawyer to Incorporate Your Business

Using a lawyer to incorporate a business typically costs more than doing it yourself or using a business formation service.

If you’re the sole owner of your business but have never owned a business before, it’s understandable if you feel a little lost or intimidated by the incorporation process. In this case, for your own peace of mind, you might want to use a lawyer to incorporate.

If there are multiple owners to your business, then we definitely recommend you hire a lawyer to incorporate the business. Lawyers typically include at least drafting of the bylaws in their service package.

Be sure to verify that the lawyer will at least spend some time advising you and your co-owners/investors on how the bylaws will work. It might be a good idea to hire the lawyer to draft a shareholders’ agreement as well, so all the co-owners’ rights are agreed upon.

A lawyer’s cost to incorporate a business can vary widely. We’ve seen some packages in the $700 range and others close to $2,000. It seems reasonable to expect that, for a corporation with just one shareholder, your charges would be in the lower range. For a corporation with multiple shareholders, your charges would be in the higher range.

And, if the package doesn’t mention drafting a shareholders’ agreement, expect to pay at least a few hundred dollars more for that agreement.

You Might Wish to Appoint a Professional Agent for Service of Process

As a part of incorporating your business, you have to name an agent for service of process. The agent for service of process is responsible for accepting important notices and documents sent to your company. For example, tax notices from the state or notices about lawsuits filed against your company all go to the agent for service of process.

This agent’s name and address are listed in your Articles of Incorporation and can be looked up by anyone. The address has to be a physical address and can’t be a PO Box. You can be your own agent if you have a physical location for your business. But if you run a home-based business, you’d have to disclose your home address to the public.

This is why you might want to hire a professional agent for service of process. This way, you retain your privacy.

An agent for service of process usually costs around $100-120 per year. If you use a business formation service to incorporate, sometimes they provide this service too. Some of them even will provide the service for free for your first year.

You’ll Have to Buy Stock, so This Works as a Part of the Cost of Incorporating a Business

A corporation is owned by its stockholders. So, even though you put up the money to form the corporation, you don’t technically own it until you buy the corporation’s stock.

Usually, the first batch of stock is issued at a face value of something very low, like $0.01 or even $0.001 per share. So, if you issue 1,000,000 initial shares at $0.001 per share, you’ll have to spend $1,000 to buy your shares.

In accounting, this is called initial capital contribution. However much your contribution might be, you’ll have to set the money aside as a part of the money used to start your corporation.

Fortunately, your initial capital contribution doesn’t have to be in actual cash. You can also contribute physical assets like a laptop and a printer to buy your shares. Just make sure they’re valuated fairly, in case questions arise in the future.

Still, no matter if you contribute cash or physical assets, they count as a part of the cost to incorporate your business.

(What if you need more money to run your business? You can make a personal loan to your business. Here’s how you can lend your business money the right way.)

You’ll Have Additional Costs in the Future Maintaining Your Corporation

Compared with other business formats, corporations cost more to maintain. So, before you set up your corporation, think things through carefully and make sure this is truly the best format for your business’ near and mid-term needs. You can upgrade your business to a corporation at any time, so there’s no hurry.

Yearly State and Federal Filings

A corporation is considered a separate person under the law, so this “person” will have to pay income taxes. If you’re a small business and if you qualify, you could elect to be treated as an S corporation and file the corporation’s taxes with your personal income tax return.

You could hire an accountant to file the taxes for you or you can use software such as Turbo Tax Business. Costs, of course, vary.

In addition to federal income taxes, you’ll have to file and pay taxes and fees with the state of your incorporation.

Some states require you to file an annual report and pay a fee. With other states, you’ll only have to file the report and pay the fee every other year. Yet other states require you to pay a franchise tax, with or without the annual report fee. The franchise tax amount usually, but not always, depends on your revenue.  

Check your state to make sure, if you want to find out the fees and amounts before you incorporate. Otherwise, once your incorporation paperwork comes down, your state will notify you of the time and amount of each required filing.

Other Costs to Maintain Your Corporation

In addition to the yearly filings and state and federal taxes, you’ll have to keep up with various corporate formalities. Ironically, this will become easier the bigger your business grows. By then, you’ll have hired people who will follow these operational guidelines as a part of their jobs.

For example, one important corporate formality is to separate corporate money from your personal money. As you grow bigger, you’ll likely to hire a finance/accounting person or work with an outside accountant to keep your books. You’ll then naturally keep your personal finances separate from corporate finances.

So, these other costs become mixed with your actual operating costs. It would be a bit difficult to argue that they’re a part of the cost to incorporate your business.

The Cost to Incorporate Your Business May not be High, but the Corporate Format Might Still be Wrong for a Starter Business

If you’ve read the first and the second articles in our series on corporations, you’ll know that the corporation is a complicated business format. The fact that the cost of incorporating a business can be as little as $35 is pretty amazing.

However, just because it doesn’t cost that much to start a corporation doesn’t mean that it’s the best format for a small startup business. Corporations are very structured entities. And, because of this structure, you’ll have to follow a set of corporate formalities to run the business.

While having a structure can be great for an established business, a startup typically has to move fast and be able to change easily. Being overly structured can hinder the startup’s nimbleness. So, a small, new business is usually better off going with a less structured format like a sole proprietorship or an LLC.

Once your business has ramped up and you’ve hired a few employees to help you with all the work, then you might want to think about incorporating. By then, it’ll be much easier for you to maintain the corporate formalities.

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

DISCLAIMER: This article does not constitute legal advice. Instead, it contains general information. The information gives you the background you’ll need to hit the ground running when you do go get advice from a lawyer. Only lawyers properly licensed in your state/country are qualified to give you legal advice.

Questions? Comments?