Costs of Incorporating

Many small-business owners incorporate their businesses to protect themselves and their shareholders from liability. That way, their personal assets are safe from business creditors or lawsuits against their firms.

Before you incorporate, however, you should consider the costs of doing so. Here's a look at the major costs and how they can vary with circumstances.

Attorney fees. It's possible to incorporate without a lawyer — but it's not necessarily advisable. Without an experienced attorney, you might botch the process — and your corporation might not hold up under legal scrutiny.

Many business law firms offer a flat rate — typically $500 to $700 — for helping you incorporate your firm. They'll help you both fill out the required documents and set up the required first shareholder meeting.

You'll pay a higher attorney fee if your firm has more than one partner or shareholder. For example, add $500 or so if two partners wish to draw up documents governing what will happen to the business if one partner dies or wants to sell his or her shares. Tack on at least another $500 to $1,000 if you plan to sell shares to more than one shareholder. In that case, your lawyer will have to draw up a shareholder's agreement.

The more shareholders you designate, the more you'll pay in legal fees. If you plan to raise money by selling shares to a large number of people, attorney fees can exceed $10,000. The reason: your attorney will have to deal with complex securities law and draw proxy statements.

That said, you can save money by completing paperwork such as certificates of incorporation, charters, or articles of incorporation yourself. Your Secretary of State's office should have the forms. Once you've completed those forms, you can have a lawyer review them. That might cost about $500.

One potential hitch: you may have a hard time finding a lawyer willing to merely look over your shoulder. Many lawyers would rather draw the documents from scratch. For guidance on finding the right attorney for your job, read How Do I Find a Corporate Attorney?

Another option is to use an online incorporation service. Most of these sites can answer your business-formation questions to help you incorporate online. One such site is LegalZoom.com. Once you complete an online form, sites like LegalZoom take your information, put it in legal documents, and file those with your Secretary of State for you.

Filing fees. You must pay administrative and filing fees. Secretary of State offices charge fees ranging from $100 to $250, depending on the state in which you incorporate. You also may have to pay $50 to $200 in other government filing fees. For example, if you incorporate in New York, you must pay an organization tax of 50 cents per $1,000 of authorized par value stock.

First-year franchise tax payment. Every state imposes these taxes for the privilege of doing business in the state as a corporation. Expect to pay anywhere from $800 to $1,000.