One of the first major decisions you'll face as an entrepreneur is whether you should incorporate your business. While incorporation has several advantages – for example, personal liability protection and potential tax benefits – it isn't free. In fact, small businesses in the US spend an average of 11% of their budget on operating costs, with incorporation being one of them. Every expense matters in the early days of a business, so it's important to consider the costs of incorporation before determining what's best for your business.

This guide will cover the expenses associated with incorporating a business and the best ways to save on costs when incorporating. Here's what you need to know.

What's in this article?

• How to incorporate a business
  
• How much does it cost to incorporate?
  
• How to save money when incorporating a business
  

How to incorporate a business

Incorporating a business is the process of forming a legal entity that is separate from the business owners. Here are the steps you need to take to incorporate your business in the US:

• Create a business name: Ensure that the name is available and complies with local regulations.

• Choose where to incorporate: Determine where you want to incorporate. For US companies, this could be their home state or another state with favourable business laws.

• Select a corporate structure: The most common business types are C corporations, S corporations, B corporations and limited liability companies (LLCs). Each type has different legal and tax implications.

• File the necessary paperwork: This typically involves filing articles of incorporation or organisation with the appropriate government agency.

• Establish corporate bylaws: Corporate bylaws are internal rules and procedures for governing your corporation, but they are not required for LLCs.

• Appoint directors (for corporations) or managers (for LLCs): These individuals will be responsible for overseeing your business.

• Obtain the necessary licences and permits: Depending on your industry and location, you may need specific licences and permits to operate legally.

• Open a business bank account: Keep your business finances separate from your personal finances with a business bank account.

How much does it cost to incorporate?

The cost of incorporating a business varies depending on a number of factors, including where you incorporate, the complexity of your business structure and which services you use during the process. Here are the typical costs associated with the incorporation process in the US:

• Filing fees: Most places have a basic filing fee for the articles of incorporation, which can range from US$50 to US$300.

• Corporation name reservation fee: If you wish to reserve your corporation name prior to filing, it is likely that you'll have to pay an additional fee.

• Annual filing fee: Incorporated businesses typically have annual filing requirements with associated costs set by the local government.

• Franchise taxes: Some places require the pre-payment of franchise taxes upon incorporation.

• Legal costs: Hiring a lawyer to assist with the incorporation process can provide valuable legal guidance, but it will increase the overall cost substantially. Fees are determined by individual law firms.

• Registered agent fees: Some incorporated businesses require a registered agent, which is an individual or a service with a physical address that is able to receive business documents during working hours. Different agents and agent services charge different fees.

How to save money when incorporating a business

While some incorporation fees are unavoidable, it's possible to lower your business's costs by handling as much as possible in-house and seeking professional help when necessary. Here are a few key strategies for saving money:

• DIY incorporation: If your business structure is straightforward and you're comfortable with paperwork, filing the incorporation documents yourself can save you hundreds or even thousands of dollars in legal fees. Online resources and guides are available to help you through the process.

• Compare registered agent services: Registered agent fees vary between providers. Compare prices and services from different companies to find the best deal for your needs.

• Consider forming an LLC: Limited liability companies (LLCs) are often simpler and less expensive to form than corporations, making them a cost-effective option for small businesses.

• Choose the right location: Some locations have lower filing fees and franchise taxes than others. Research different places to see which ones have the most favourable business environment for your industry and budget. Delaware is a popular choice in the US for its business-friendly laws and low fees, for example.

• Take advantage of online legal services: Online legal services offer affordable packages which can guide you through the incorporation process and provide templates for the documents required. Some may even have discounts and promotions for new customers. This can be less expensive than hiring a lawyer.

• Negotiate professional fees: If you need to hire a lawyer or accountant, don't be afraid to negotiate their fees. Some professionals might offer discounts for startups or small businesses.

• Plan for ongoing costs: While saving on initial incorporation costs is important, make sure that you factor in ongoing expenses, such as annual report fees, franchise taxes and registered agent fees.

17. Consider business loans

Using business loans as a part of your financial strategy can be a powerful step to expedite your business growth. Here's how to approach this step:

• Determine your need for a loan: Before jumping into the loan application process, assess whether you have a genuine need for a loan. Maybe you need funds for expanding your operations, buying equipment, increasing inventory, hiring staff or smoothing out cash flow. Getting clear about your business's financial needs can help you make a more informed decision about applying for a loan.

• Research different types of loans: There are different types of loans available for businesses, from traditional bank loans and Small Business Administration (SBA) loans to alternative online loans and lines of credit. Each type comes with its own terms, interest rates and requirements. The right choice for you will depend on your specific needs, financial situation and the stage of your business.

• Consider eligibility requirements: Lenders have varying criteria for approving loans. These can include factors such as your credit score, business revenue, the profitability of your business and how long you've been in operation. Before applying for a loan, carefully check these criteria to see if you qualify.

• Prepare your loan application: Once you've chosen a type of loan and confirmed that you meet the lender's criteria, the next step is to prepare your loan application. This involves compiling financial documents such as your business plan, financial statements, tax returns and details of your collateral. You may also need to present a plan outlining how you intend to use the loan and how you will repay it.

• Compare loan offers: If your loan application is approved, you may receive offers from different lenders. Consider each offer's terms carefully, including the interest rate, loan amount, loan term and any additional fees. Be sure you understand the total cost of the loan and how the repayment terms align with your business's financial projections.

Taking on debt is a serious commitment that demands careful planning and consideration. For additional guidance throughout the process, consult with a financial advisor or mentor.

There's no easy shortcut to starting a business. Cutting corners or skipping steps in the early days can create unnecessary friction, confusion or even legal liability down the road. But while much of the work that goes into starting a new business might seem tedious, it's not overly complicated. If you take a thoughtful and methodical approach to this process, and address each step in the correct order, you'll build a foundation that can support all the goals and dreams you have for your business – exactly what motivated you to begin this journey in the first place.