Cost to Start a Corporation: Key Expenses Explained

Key Takeaways

• The cost to start a corporation includes both organizational costs (incorporation fees, legal filings) and startup costs (market research, advertising, hiring).
• State filing fees typically range from $50 to $500, depending on where you incorporate.
• Additional expenses often include legal and accounting services, licenses and permits, franchise taxes, and compliance costs.
• Federal tax law allows up to $5,000 in startup cost deductions, with the remainder amortized over 60 months.
• Ongoing corporate costs—such as annual reports, registered agent services, and shareholder meeting requirements—should be budgeted in addition to startup costs.
• Carefully planning for these costs ensures smoother cash flow and avoids unexpected financial strain in the early stages of business.

A corporation startup cost is applicable for amortization over a certain number of years. Startup costs can include things such as:

• Market research
• Analysis
• Consulting fees

Basics of Corporation Startup Costs

The startup and organizational costs of new businesses in the United States are considered capital costs and can be amortized over a certain amount of time.

It is important for the following groups of people to understand the difference between startup costs and other business costs:

• Investors
• New business owners
• Project managers

This distinction is important for the following reasons:

• Startup costs and organizational costs are budgeted for differently than capital and operating expenses.
• Startup costs and organizational costs might be applicable for different tax treatment than other costs.

While startup costs tend be costly and use up much of a business's financial support from investments, most of the costs can be applied as a federal tax deduction for the business.

Common Incorporation Fees

The most direct expense when calculating the cost to start a corporation is the incorporation filing fee. Each state sets its own rates, typically between $50 and $500. Delaware, Nevada, and California are among the higher-cost states, while smaller states may charge closer to the minimum. In addition to the articles of incorporation filing, many states also require:

• Name reservation fees to secure your corporate name before filing.
• Initial report fees due shortly after incorporation.
• Franchise taxes or business privilege taxes, which can be a flat fee or based on authorized shares and business income.

Factoring in these variations ensures you don’t underestimate your startup expenses.

Defining Organization Costs

Costs that are directly connected to the startup of a new business are considered organizational costs. Some examples include:

• Legal fees for establishing documents such as the articles of incorporation, bylaws, and stock certificate terms
• Short-term directors' salaries
• State incorporation costs
• Accounting services
• Costs for meetings

Some examples of costs that are not considered organizational costs include:

• Brokers' stock sales commissions
• Stock certificates printing fees
• Asset transfer fees

Typically, the organization costs of a startup business are considered capital investments because the costs are due to asset purchases rather than everyday business costs.

Usually, capital investments are not tax deductible until the corporation is disestablished. However, startup businesses can choose to amortize, or gradually deduct, its organization costs over a time frame of 60 months. This time frame starts when the the startup begins conducting business.

To amortize, you must inform the IRS of your desire to do so and complete the following steps:

1. File a form with the IRS.
2. Provide a statement listing the costs, the business start date, and the amortization period being used.
3. Attach the statement to the business's federal income tax return.

The business's start date is not automatically its date of incorporation. This date must be clearly signified with evidence that the business is running or ready to run. For instance, the purchase of production machines would show that the company is in business.

Professional and Compliance Costs

Beyond state fees, many corporations incur professional expenses to ensure proper compliance. These costs may include:

• Legal services: drafting bylaws, shareholder agreements, and stock certificates.
• Accounting services: establishing bookkeeping systems and structuring tax elections.
• Registered agent fees: usually $100–$300 annually if you appoint a third-party agent.
• Compliance tools or software: to track deadlines for reports and maintain corporate records.

Corporations must also plan for recurring compliance requirements, such as annual report filings and shareholder meeting notices, which vary by state.

Defining Startup Costs

Startup costs should meet the following standards:

• If made by a current business, they would be instantly deductible.
• They were used to create a business or for looking into establishing or buying a business.
• The costs were paid prior to the company's first day of doing business.

Startup costs could include expenses such as:

• Market research
• Market analysis
• Labor supply, location suitability, and transportation research and analysis
• Costs for obtaining suppliers or distributors
• Consulting fees prior to opening
• Executive salaries prior to opening
• Advertising costs to promote the opening of the business
• Training and employee expenses prior to opening
• Costs for obtaining customers

The following costs are not included in startup costs:

• Loan interest
• Property taxes
• Research and development costs

Costs that would normally be capitalized, for example, the development of a capital asset, are not considered startup costs.

According to Section 195, a corporation can deduct up to $5,000 of startup costs. This deduction must be decreased by the increasing total of startup costs that surpasses $50,000.

As stated previously, startup costs may not be deducted right away, but they can be amortized over a period of 60 months with the first day being the company's first day of business.

When it comes to planning, startup costs can include both capital costs and operating expenses provided they meet the following requirements:

• The costs occur prior to earning income or reaping any benefits from the business.
• They are only paid if the startup successfully begins.

There are many types of costs that meet these requirements, including:

• IT system acquisition costs
• Lab equipment costs
• Prior advertising
• Building construction and remodeling
• Legal services
• Permit and license fees
• Feasibility research
• Recruiting staff
• Development costs
• Deployment expenses
• Establishment costs
• Training expenses

When it comes to taxes, costs might need to be divided into more detailed categories such as:

• Startup costs for book purposes
• Startup costs for tax purposes
• Section 195 startup costs
• Section 197 startup costs

Budgeting for Ongoing Corporate Expenses

While incorporation costs are one-time, ongoing corporate expenses are just as important to account for. These can include:

• Annual franchise taxes
• State annual reports and renewal fees
• Corporate minute book upkeep
• Ongoing legal and tax consultations

For C corporations especially, the cost of running the business structure can include double taxation planning, quarterly tax filings, and payroll administration. Startups should budget not only for their launch but also for these recurring costs to maintain corporate good standing.

Licensing, Permits, and Operational Costs

Corporations often need to secure additional licenses and permits to legally operate. Examples include:

• Local business licenses and zoning permits.
• Industry-specific licenses, such as health permits for food businesses or professional licenses for financial services.
• Employer Identification Number (EIN) registration, which is free through the IRS but sometimes processed for a fee if using a third-party service.

Operational costs at launch may also include office space, insurance premiums, IT setup, and initial marketing campaigns. These are often underestimated but form a critical part of the budget for any new corporation.

Frequently Asked Questions

1. What is the average cost to start a corporation?
   Most corporations spend between $500 and $2,000 upfront, depending on state filing fees, legal help, and licenses required.
2. Are incorporation costs tax deductible?
   Yes. Federal tax law allows up to $5,000 of startup cost deductions, with the remainder amortized over 60 months.
3. Do all states charge the same incorporation fee?
   No. State fees vary widely, from around $50 to $500, and some states also charge annual franchise taxes.
4. What ongoing costs should corporations expect?
   Ongoing costs include annual reports, franchise taxes, registered agent fees, and compliance filings.
5. Do I need a lawyer to incorporate a business?
   Not legally, but many corporations hire an attorney for bylaws, shareholder agreements, and compliance guidance to avoid costly mistakes.

If you need help with a corporation startup cost, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top five 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.