Many small-business owners incorporate their businesses to protect themselves and their shareholders from personal liability. That is, they desire to protect their personal assets from potential business obligations, creditors, and/or lawsuits. However, before you decide to incorporate, you should first consider the costs. The actual cost of incorporating is usually rather minimal and generally includes: (1) filing fees, (2) annual disclosure fees, (3) annual franchise tax fees, and (4) attorney's fees.
Beware of Paralegal Services and Online Incorporation Services.
For those of you considering the use of a paralegal or online incorporation service beware. These services often advise you, in the smallest of print, to seek the advice of local counsel and for good reason. Paralegals and online incorporation services are NOT permitted to provide legal advice and often do not file all of the required forms, or prepare all of the documents necessary to protect the limited liability protection you are seeking by incorporating.
Filing fees, including administration fees, corporate kits, and local business licenses.
The filing fees vary from state to state but will usually fall anywhere from $50 to $350 (In California, the filing fee is $115.00). Some states, like California, also require every business to obtain a business license, and file additional documents with the Secretary of State and other governmental agencies which are typically accompanied by a nominal filing fee.
Annual Disclosure Fees.
The annual disclosure fee (sometimes called the Information Statement of Officers and Directors) generally runs between $25 and $200, depending on the state. In California, the filing fee for the annual Information Statement of Officers and Directors is $25. Arizona, Georgia, Nebraska and Pennsylvania also require a new corporation to pay a publication fee, which ranges from $150 to $300.
Annual Franchise Tax.
A major cost in the incorporation process is the payment of the first year's annual franchise tax which averages $800 to $1000. In California, corporations are now exempt from paying the first year's $800 franchise tax, although they are still required to pay any taxes due on income.
Ever heard the saying, "Do it right or don't do it at all." Nothing could be truer when it comes to incorporation. While it is possible to incorporate without a lawyer, it is not advisable. Although attorneys will generally charge between $1,500 and $5,000 to assist you with the incorporation process, their time and experience is well worth their fee. Without an experienced attorney, you might botch the process, be subject to multiple fines, and lose the limited personal liability protection you sought by incorporating. Not only will local counsel ensure you have filed all of the required paperwork to fully establish your corporation, but they can also explain your options, the process, and future requirements to remain in good standing. Local counsel may also advise and assist in the preparation of buy-sell agreements and shareholder agreements, the acquisition of local business licenses, and the transfer of personal assets to the corporation such as intellectual property rights (trademarks, copyrights, etc…).
You should expect, when all is said and done, your total incorporation costs to be in the vicinity of $2,000 to $5,000 dollars depending on the number of shareholders. Despite the cost, it is well worth the expense if you plan to have a profitable business. If you can't afford it, don't incorporate right away. Consider operating as a sole proprietor, and if partners are involved, consider having an attorney prepare a simple partnership agreement with a clause requiring incorporation if the business meets certain goals. A properly prepared partnership agreement should cost less than $1,500.