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15 • 2016

How Much Does It Really Cost to Incorporate

So how much does it really cost to incorporate?

In our last article, we examined the primary benefits of forming a business entity, as well as some of the hidden costs associated with achieving those benefits. In this article, we’ll delve into the more obvious costs of forming a new business entity.

Those costs fall into two major baskets: (1) the initial cost of forming the entity, and (2) the annual cost of maintaining the entity.

Initial Formation Costs

To start a new corporation or LLC, you have to file Articles of Incorporation (for a corporation) or Organization (for a LLC) with the Secretary of State’s office. In California, the filing fee is $100 for a corporation or $70 for a LLC.[1] But before you even file the formation papers, you should reserve the name. That’s another $10.[2] Then, within 90 days after filing Articles (and annually after that), the corporation must also file a Statement of Information, setting forth certain specified information, including the corporation’s designated agent for service of process in the state.[3]  The filing fee for the Initial Statement of Information is $20.[4]

Of course, those are just the filing fees. We have written extensively about the desirability of assembling a team of attorneys, accountants and financial advisors when forming a company.  See, Why Every Entrepreneur Needs Both a Lawyer and a CPA to Form a Company.  Rather than just jump online, the right team will ensure that documents are customized and all ancillary documents (stock certificates, bylaws and organization minutes for a corporation or an operating agreement for a LLC, tax documents, etc.) are prepared.   For the most part, the legal and accounting fees will be around $1500-$2000.  Be wary of a la carte online services, as the total fees (for incomplete work) are typically not much less.

Other than legal and accounting fees, you could also face some unusual costs in some states, like the “publication requirement” if you want to form a LLC in New York, which can run to as much as $1,200.[5]  For more on the New York publication requirement, see  Everything You Need To Know About New York’s LLC Publication Requirement.

Ongoing Costs

On ongoing basis there are additional costs of maintaining the corporation (other tax return preparation, which is not included in this article).

For example, nearly all states have an annual reporting obligation.  In California, a Statement of Information must be filed annually (for a corporation), or bi-annually (for a LLC) with the Secretary of State if you are doing business in California.[6]

Just about everywhere, you will also have to pay an annual franchise tax. In California, for example, every corporation, with the exception of banks and financial corporations, must, after its first taxable year, pay an annual franchise tax computed at the rate of 7.6% of its net income for the preceding income year, or, if greater, the minimum franchise tax of $800.[7] Delaware has a similar rule, though the amount of the minimum franchise tax is lower ($175, plus the annual report filing fee of $50, for a $225 minimum).[8] Note that these are the minimums if you pay your taxes on time; if you pay late (or not at all), you can be liable for some substantial penalties, especially if you elect to do business as an S corporation.

In our next article, we will cover the hidden and unexpected costs of incorporating.

[1] See Cal. Gov’t Code §§ 12186(c) (corporation), 12190(b) (LLC)

[2] See id. §§ 12186(a) (corporation), 12190(a) (LLC).

[3] See Cal. Corp. Code § 1502. For more information on resident agents, see Why Every Business is Required to Have a Resident Agent.

[4] See Cal. Gov’t Code § 12186(g).

[5] See N.Y. Ltd. Liab. Co. Law § 206; Matthew J. Moisan, A Look at the Publication Requirement in New York Limited Liability Company Law, 31 Touro L. Rev. 465, 475-76 (2015), available at http://digitalcommons.tourolaw.edu/cgi/viewcontent.cgi?article=2660&context=lawreview.

[6] See Cal. Corp. Code § 1502.

[7] See Cal. Rev. & Tax. Code § 23151(a), 23151.1(e), 23153(a), (d)(1), (f).

[8] See Del. Code Ann. tit. 8, §§ 502, 503.