How Much Does It Cost To Start an S Corp
How much does it cost to start an S corporation? There are a variety of fees that will need to be paid in order to incorporate a business.3 min read
2. How to Choose Your State of Incorporation
3. C Corp and S Corp
4. Costs and Drawbacks of an S Corporation
Updated June 25, 2020:
How much does it cost to start an S corporation? There are a variety of fees that will need to be paid in order to incorporate a business. When a business is incorporated, it business evolves from a general partnership or sole proprietorship into a legally identified entity, separate from the owners who initially founded it.
What Are the General Costs of Incorporating?
There are normally four different fees that will need to be paid in order to incorporate. They include:
- Filing the articles of incorporation: The articles of incorporation will need to be filed with the Secretary of State (SOS). The filing fee will vary by state, may be a set fee, and may be calculated based on the authorized number of shares. The SOS will typically charge between $100 and $250 for filing and administrative fees. The exact fee can be obtained by visiting your specific state's SOS website.
- Franchise tax prepayment: States charge corporations a franchise tax for doing business in their state. The fee typically charged will vary by state between $800 and $1,000. Some states, like Nevada, don't charge a franchise tax fee, making them an alluring place to do business.
- Miscellaneous government filing fees: Government filing fees may vary from $50 to $200 depending on the state and the type of business.
- Lawyer fees: It is possible to incorporate a business without an attorney, but it's not recommended, as it can be an extremely complex endeavor. Many business owners attempt to incorporate on their own, but end up making errors in judgment causing them great legal pain. Law firms typically offer flat fees between $500 and $700, yet some may charge more than $5,000 depending on the complexity.
How to Choose Your State of Incorporation
Incorporation costs and benefits will vary by state. It's important to research the most beneficial environment for your business to thrive before deciding on where to incorporate. If you're intending to do business only in one state, then it's usually smart to incorporate in that specific state. If you decide to incorporate in a state outside your home state, it's important to consider the following subjects:
- State income tax rate
- Corporate laws
- Responsibilities and rights of the stockholders and creditors
- Deciding on whether to be a C corporation or an S corporation
C Corp and S Corp
S corporations have limitations on the kind and number of shareholders that the corporation may have. The only significant difference between a C corporation and an S corporation is that an S corporation is viewed as a sole proprietorship or partnership for taxation purposes.
Costs and Drawbacks of an S Corporation
One of the main advantages to incorporating as an S corporation is that it's treated as a pass-through entity for federal income tax purposes. Income, as well as tax credits, deductions, and losses, are passed through to the individuals, rather than at the corporate level.
Incorporating as an S corporation may burden some small businesses with extra costs and other drawbacks. Establishing your business as an S corporation should be thoroughly researched before implementing, as it does have a substantial number of drawbacks and costs. The three main drawbacks to forming an S corporation are:
- S corporation excise taxes and state fees: The costs to maintain and form the S corporation will need to be paid. This includes an annual filing fee, possible excise taxes, and/or franchise taxes.
- Additional tax return preparation costs: A tax accountant will need to be hired in order to file the state and federal tax returns. A modern computer accounting system will most likely need to be purchased in order to generate the data that is needed to file the income tax returns. Also, an employee payroll department will need to be created to track and issue paychecks.
- New miscellaneous operating costs: Unanticipated new costs relating to insurance and accounting tasks may arise. Forming an LLC or corporation may trigger additional insurance costs to be passed on to your business. Also, some states may force you to have a CPA audit or review your financial statement.
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