An active US-Corporation has a number of associated costs you might or might not be familiar with. Whether you are a US company or a foreign startup looking to incorporate in the US for billing/investment purposes, you should be prepared for these corporation costs that are going to take a hit in your company.
In Slidebean we originally opened a US Corporation as part of our time in the DreamIt Ventures accelerator, but we also needed it for billing purposes (looking at you, Stripe).
Anyway, let’s get started.
Incorporation: $500, One Time
Incorporating is a no-brainer deal that can be done in the course of 1-2 days by any decent lawyer or by a web service like LegalZoom. Creating your company in Delaware is a standard and unless you have a VERY good reason you shouldn’t attempt to do this in any other state.
I wrote an article not long ago with a number of documents that you should also create along with your incorporation, especially the Bylaws and the Stock Purchase Agreements for the founders.
Related Read: 5 Legal Docs your startup needs to sign before anything
EIN Number: $0-$200, One Time
Your Employer ID Number is a unique identifier for your company that is used for tax purposes, to open bank accounts and any other official ordeal. However, the EIN is not included with your incorporation, and you need to file some separate papers to get it.
If you are a US Citizen, this is a no brainer; there’s a quick online application that you can fill. For foreigners, you’ll probably need to go through your lawyer to do it, since some manual filing is required.
State Fees: $500-$800+ per year
There’s a minimum cost of operating any business. Delaware has a yearly tax of $400 and you’ll need to pay it every year regardless of your revenue/profit. Furthermore, you need to pay taxes for every state where you did any business.
So for example, if you have a team that’s separated in different states, you’ll need to file and pay state taxes for each state where your team operated. As you can imagine, this can quickly increase your costs if you have a team all over the US.
I (clearly) don’t know the exact tax amounts for each state but I do know that, for example, California charges a minimum of $800 in yearly taxes that you have to pay even if you were not profitable. You'll also need to file a tax return in each one of those states.
Accounting and Tax Filing: $1000 - $5,000+ per year
Now this is where shit gets scary. The fines for not filing your taxes correctly are HIGH, usually starting at $10,000. Considering how empty our bank accounts were during the early stages of Slidebean, a $10K fine would have killed us, or cut our runway really bad.
I am not a US Citizen and therefore I'm especially unfamiliar with common IRS tax requirements. This is why we decided to go with a pro service like inDinero. While they have a premium ($450/mo) price that may sound steep, we figured it was a good way to make sure that we didn’t screw up.
InDinero does your monthly bookkeeping, payroll calculation, tax withholding and tax filing at the end of the year; as long as you keep your monthly subscription going.
If you want to save some cash, you can have someone on your team keep your books or hire a cheaper bookkeeping service (web services ranging from $20 to $200/mo). You’ll still need to find someone to file your taxes at the end of the year, which could cost around $750-$1000.
Startup Insurance: $1500 and up per year
It’s recommended that any corporation should have an insurance policy. I wasn’t familiar with this until I read a recent article by Josh Pigford from Baremetrics, but he absolutely convinced me of the need.
The most basic insurance policies that you’ll need are the General Liability, the Errors and Omissions and the Cyber Security plan. Do refer to the Baremetrics blog for more details.
Foreign Companies or Founders
Foreign Founders: Form 5472 - $400 per founder per year
Any foreign founders on the team with +25% ownership?
Bingo, you’ll need to file form 5472. We gotta thank InDinero for letting us know about this, otherwise we would have missed it completely. You guessed it, $10,000 fine!! The tax team charged us an additional $400 for filing this form for each foreign founder; 3 in our case. Yeah, ouch!
Foreign Subsidiaries: Form 8865 - $1,200 per year
Does your US Company have a stake in any foreign company? Well, if that’s the case you’ll need to file Form 8865 every year. This is quite a long document that is estimated to take 50+ hours of a tax expert to complete, which means that the pricing will be steep.
InDinero gave us a quote for $1,200 to fill it for our upcoming tax return, but you might be able to find someone who can do it for less. Again, the catch here is knowing what you need to file and making sure that you don’t miss anything. Same as before, the fine here will set you back at least $10,000.
Closing the company: $1,000-$2,000
Don’t forget to plan for the worst case scenario. If your company fails, make sure that you still have enough money in the bank to close your Corporation as soon as this happens, otherwise you’ll be left with an extra year of expenses and headaches related to your unused C-Corp.
Summarising, this is the money that you’ll need to operate every year. Minimum costs accounts for the bare minimum expenses, no insurance, manual bookkeeping and minimum team members. The ‘Regular’ cost does assume an insurance for the company and a tax/bookeping system like the one we’re using.
As you can see, if you don’t have at least $2K in the bank to pay for the tax filing fees, you’re going to end up with fines that could really be trouble. Do aim for the ‘Regular Cost’ estimation, and be prepared to pay.
I hope you find this useful. Do let me know in the comments if you found any cheaper alternatives.