Five Ways to Save when Incorporating a Business

Incorporating a small business can get expensive if you're not careful. Fortunately, many small businesses can use several tricks to reduce the cost substantially.

Consider Do-it-yourself Kits

A first easy tip that will work for some business owners: Consider preparing the incorporation paperwork yourself. In many states, you only need to file the articles of incorporation to form the actual corporation. As a practical matter, the only additional documents you need are corporate by-laws (which you can order from any number of online sources) and your Internal Revenue Service Employer Identification Number application. That's really it.

Accordingly, if you've owned or operated a corporation before or if you're someone who's comfortable reading and reviewing business and legal documents, absolutely, consider the do-it-yourself incorporation route. Do-it-yourself incorporation can save you substantially in terms of formation costs.

Don't Automatically Sign Up for Registered Agent Services

Many paralegal services encourage you to sign up for their registered agency services. And that sounds like a great notion. A registered agent is the human being you designate as being the "go to" person if someone (like a state government agency) has questions for your corporation.

The problem here is that often you're paying an awfully lot of money--regularly $100 to $200 a year--just for someone to agree to forward any mail.

If you want people to be able to contact you--like customers, employees and prospective customers and employees-- you might as well think about being your own registered agent.

Note: If your corporation registers in states where you don't have employees able to act as a registered agent, you may be required to get registered agents in those states.

Don't Unthinkingly Obligate Yourself to Foreign Registration Requirements

The basic rule about registering a corporation is that you need to register in the state that creates (gives life to) the corporation... and you need to register in any other states where you own property, employ people or operate the business.

Now, there may be good solid business reasons to register in several states. But be careful you don't unknowingly obligate yourself to register in a bunch of different states. For example, don't rush to incorporate in some state like Nevada to save taxes or in Delaware to get access to their more sophisticated corporation legal system.

By increasing the number of states you register your corporation in, you jack up the number of states you pay initial and annual licensing fees to. You also increase the number of state corporate income tax returns you or your accountant need to prepare.

Note: States usually charge around $100 annually for registration, but some (like California) charge quite a bit more. Furthermore, your accountant probably increases the fee he or she charges for your annual tax return by a set amount (easily $100 to $200 and sometimes much more) for each state corporate tax return you need.

Consider the Limited Liability Company Option

You can get good liability protection for your business both by using a traditional corporation and also by using a limited liability company. But for small businesses, the LLC option provides one very significant advantage. An LLC can often have its income and deductions reported on its owners tax return. That means the LLC doesn't need its own (probably costly) federal and state corporate income tax return.

For example, an LLC owned by a single individual and an LLC owned by husband-and-wife partnerships in community property states can often add the LLC income and deductions to the 1040 tax return. Similarly, an LLC owned by another corporation can have its income and deductions reported on that "owner" corporation's tax return.

Note: An LLC owned by two or more people needs to report its income and deductions on a partnership return, but partnership returns can also be simpler and less expensive to prepare than a regular corporation or S corporation tax return.

Skip Incorporating All Together

A final, perhaps odd idea... You may want to consider other cheaper options for protecting yourself and your business. Yes, incorporating delivers big benefits in terms of liability protection (when you start being profitable) and in terms of tax planning possibilities. But incorporation isn't the only way to protect yourself. You can stay away from risky situations, for example. You can buy liability insurance. And you implement some basic asset protection strategies (such as storing wealth in locations like retirement plans where creditors can't get at the wealth).