Home Business Tips

The Costs of Incorporation

Many home business entrepreneurs opt to incorporate so that they can protect themselves from legal liabilities. When this step is taken, it involves several expenses that must be settled in a timely manner. A prudent entrepreneur must be aware of these expenses so that he can better manage his finances. Here are the major costs of incorporations

• Legal Fees – These would refer to fees paid to a lawyer when his services are used to incorporate the home business. Some entrepreneurs may forego the services of lawyer and proceed with the incorporation themselves. This will save expenses. But this is advisable only if the entrepreneur has a good grasp of the legalities of incorporation.

  Otherwise, a simple error, such as the absence of corporate minutes may dissolve the corporation’s legal identity.

  Most legal firms that handle business transactions have flat rates when they are hired to incorporate a business. The rate is approximately $500. The lawyer handling the incorporation will prepare the requisite paperwork as well as setting up the first meeting of the shareholder/s.

  The legal fees will shoot up when there is more than shareholder. That is, the legal firm will charge an additional $500 (estimate only) for every shareholder. This is because the lawyer will have to draw up the shareholders’ agreement.

  The entrepreneur may save some expenses if he does some of the paperwork, such as the certificates and the articles of incorporation. The local State office has forms for these legal papers.

• Filing Fees – The existence of the new corporation must be recognized. And this involves several filing fees. The major filing fees are:
  1. Fees paid to the office of the Secretary of State – which is about $200 in many States. Some States charge higher while others charge lower
  2. Fees paid to other government agencies – which is estimated to be around $200 too.
  3. The franchise tax payment for the first year of operation – which may range between $800 to $900, depending on which State the home business is being incorporated.
• Accounting Fees – When a home business entrepreneur hires a legal firm to process the incorporation of the business, the same legal firm can also manage the accounting and the taxes. The cost of accounting will depend on the following:
  1. Number of employees(if any)
  2. Corporate structure
  3. State tax issues, and
  4. Other factors.
• Taxes – For the first year of operation, the home business entrepreneur will need to pay these two major taxes.
  1. The general excise tax – a tax based on the earnings of the home business, and it is paid every quarter (four times a year)
  2. The corporate taxes – a tax which is paid annually to keep the existence of the corporation

Small/Home Business Tips, Finance 2006-05-03 Home Business Tips