What Are Incorporation Costs: Everything You Need to Know
Incorporation costs are the costs a company incurs before it begins active business.3 min read
2. Organization Expenditures
3. Offshore Costs
4. Financial Accounting vs. Tax Purposes
Incorporation costs are the costs a company incurs before it begins active business. All companies require money to form — even LLC and LLP business forms have fees — but the types of fees can vary per company.
Startup costs are incurred before the business even begins its operations, so they are important to factor in when budgeting for your new business. With a little research, you should be able to put together an estimate of what they will be.
- Secretary of state website: Each state's secretary of state website should have a list of forms necessary to start your business, along with the filing fees for those forms. Compare the filing fees of different states. Nevada and Delaware are common choices for incorporation because of the cheaper fees.
- Attorney consultation: Search for attorneys that offer consultations for incorporating businesses, and ask them which legal forms you'll need to have drafted and what they will cost. Try to visit a few different attorneys to compare prices or to decide if you can handle incorporating by yourself.
- Accountant: Speak to your accountant about your business's taxes and the impact they might have on your personal finances. It's especially important to break down the costs for a tax perspective, which is much more detailed than financial accounting.
- Internal Revenue Service: Fees vary depending on the type of corporation (S vs. C), so it's necessary to account for any fees specific to your type of corporation. The IRS and your state's tax board websites will be able to isolate those fees.
- Process research: Startup costs are not only incurred when a business is newly created. Introducing a new process in an old facility, opening a new facility, or beginning business with a new type of customer can also be classified as startup costs.
For a corporation, organization expenditures can be deducted over a period of 60 months. If you choose to do this, expenditures incurred before the end of the first tax year can be taken as equal installment deductions over the time elected. If you don't choose this election, expenditures will be capitalized, making them unrecoverable until liquidation.
Three conditions must be met for expenditures to qualify for deduction:
- Directly related to a corporation's creation
- Chargeable to a capital account
- Benefit the corporation throughout its life if it was made in relation to the corporation's limited life
Expenditure examples include:
- Fees surrounding the corporate charter, such as legal and accounting
- Incorporation fees paid to the state
- Temporary directors' expenses
You will not be able to deduct professional fees or printing fees.
Offshore costs are more extensive than domestic costs. If you're thinking about incorporating offshore, plan to include package fees in your budget. Package fees are the costs to incorporate in another country and are calculated based on the government and legal filing fees of those countries. The prices will vary depending on the country chosen for the incorporation service. For example, at $1,585, Nevis is often chosen due to its simplicity in incorporating and its cost-effective package fee.
Financial Accounting vs. Tax Purposes
Financial accounting lumps all startup costs into one category, but accounting for tax purposes is much more complex. Sometimes, the taxpayer can choose the categories specific expenses fall under, but other times, they can't. That's why it is important to find the most beneficial ways expenses can be categorized.
When considering your startup costs, remember that tax purposes may require you to break things down into smaller divisions that will be handled differently. For example, intangible costs are calculated for tax purposes. These can include but aren't limited to goodwill, copyrights, trademarks, patents, and franchises.
New regulations are introduced periodically for tax purposes. Repair regulations have recently undergone a change in classification. Some repair costs that were once deductible might have to be capitalized going forward. Those repairs can no longer be considered a startup cost, even if they were in the past. This change has the potential to be beneficial or detrimental to the company, depending on the depreciable life of the asset.
If you need help with incorporation costs, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.