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 such as incorporation. Every expense counts 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 separate from the business owners. Here are the steps to incorporate your business:

• Create a business name: Ensure 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 your home state or another state with favorable business laws.

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

• File the necessary paperwork: This typically involves filing articles of incorporation or organization 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 necessary licenses and permits: Depending on your industry and location, you might need specific licenses and permits to legally operate.

• 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 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:

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

• Corporation name reservation fee: If you wish to reserve your corporation name prior to filing, you’ll likely 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 prepayment of franchise taxes upon incorporation.

• Attorney costs: Hiring an attorney to assist with the incorporation process can provide valuable legal guidance, but it will substantially increase the overall cost. Individual law firms determine their attorney fees.

• Registered agent fees: Some incorporated businesses require a registered agent, which is an individual or a service with a physical address capable of receiving business documents during business 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 favorable 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 that can guide you through the incorporation process and provide templates for necessary documents. Some might even have discounts and promotions for new customers. This can be less expensive than hiring an attorney.

• Negotiate professional fees: If you need to hire an attorney 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 to factor in ongoing expenses such as annual report fees, franchise taxes, and registered agent fees.

Angel investors vs. other types of investors

Before pursuing funding from angel investors, familiarize yourself with other types of startup investors. Here’s an overview of investment options:

• Venture capitalists: Venture capitalists (VCs) are firms or individuals that invest in startups showing strong potential for growth, usually in exchange for equity. Unlike angel investors, they typically invest during the later stages of a startup’s development, after the business has shown some market traction. VCs invest larger sums of money than angel investors and are usually more involved in the direction of the company. They seek substantial returns and typically have a more aggressive view toward scaling the business and achieving an exit within a specific timeframe.

• Seed funds: Seed funds are specialized VC funds that focus on early-stage investments, often before angel investment and larger VC rounds. They invest in startups that have moved past the conceptual stage and have a minimum viable product (MVP) or some initial traction.

• Incubators and accelerators: These programs support early-stage companies through education, mentorship, and financing. Incubators focus most often on the initial development phase, helping entrepreneurs turn ideas into a viable business. Accelerators, on the other hand, look to scale up the growth of existing companies over a short period of time.

• Corporate investors: Some corporations invest in startups to access innovative technologies, enter new markets, or nurture strategic partnerships. These investors can offer ample resources, but they might seek more than just financial returns, such as an ownership stake in the technology or control over the company’s direction.

• Crowdfunding: This involves raising small amounts of money from a large number of people, typically through online platforms. Crowdfunding can be a good option for startups that want to validate their product with a broad audience, interact with potential customers, and raise funds without giving up equity or incurring debt.

• Government grants and subsidies: In some sectors—particularly those involving scientific research, clean technology, or social impact—government grants and subsidies can provide funding without diluting equity.

• Peer-to-peer lending and debt financing: Debt financing includes loans from financial institutions or peer-to-peer lending platforms. This type of financing is typically more challenging for early-stage startups to secure and it obligates a startup to repay the loan, with interest, but it doesn’t dilute ownership.

• Family offices: High net-worth families often have private wealth management advisory firms, known as family offices, that directly invest in startups. These investors can provide substantial funding and might be interested in longer-term investments compared to traditional VCs.

• Angel groups and syndicates: Unlike individual angel investors, angel groups or syndicates pool resources to invest in startups. These groups can provide larger sums of capital and combine the expertise and networks of multiple investors.

Each type of investor offers different advantages, expectations, and levels of involvement. Startups should carefully consider their stage of development, industry, funding needs, and the kind of strategic relationships they want to grow before deciding which type of investor to work with.