What is the Cost of Setting up an S Corporation?
If you're thinking about setting up an S corporation, it's important to understand the costs involved. There are three types of costs: legal and financial costs, taxes, and ongoing fees for your S corp.
To offset these costs, most people choose to incorporate their business as a C corporation instead of an S corp. However, there may be some situations where you can still benefit from incorporating as an S corporation despite the higher cost associated with doing so.
Legal and Financial Costs
You don’t need to pay both an accountant and a lawyer. It’s possible to hire a lawyer who also performs accountancy services, or find a company that has both attorneys and CPAs on staff.
When you form your S corporation, there are various fees that you should be aware of:
- Incorporation fees
- Filing fees (these vary by state)
- Legal advice
The primary benefit of an S corporation is its lower tax burden. In addition to the lower corporate tax rate, there is no double taxation and no self-employment tax if you are a shareholder.
As a result of these benefits, S corporations are broadly attractive for businesses with less than 100 shareholders or employees. However, setting up an S corp does not come without costs—and those costs can quickly erase any savings from the lower tax rate.
Some expenses that can be deducted from your taxes include: business startup costs, wages paid to yourself (if you own more than 2% of the company), office rent or utilities if they're related to running your business (but not personal expenses), travel costs related directly to doing business (but not vacations), meals provided as part of doing business (but again only when directly related), etc.
Ongoing Fees for your S Corp
Now that you’ve explored the cost of setting up an S corporation, here are some ongoing fees:
- Accounting/bookkeeping fees – this would be for your C corporation. If you don’t know what these are, ask your accountant or bookkeeper.
- Tax preparation fees – same as above. Check with a tax preparer and ask what they charge to prepare and file your business taxes each year.
- Tax planning fees – if you want them to help with preparing your personal tax returns (rather than just business), they may charge extra for that additional service too.
- Filing fees in other states where you do business (if any). Your C corporation will likely have to pay state franchise taxes in addition to federal income taxes each year, so check with them about their rates.
The biggest benefit of an S corporation is that it doesn't pay corporate income tax. Instead, your personal income taxes are reduced because your company pays a lower rate than you would otherwise (this is called “pass through taxation”).
If you are considering setting up an S corporation, it is important to understand the costs and benefits of doing so. There are many legal and financial costs associated with starting this type of business structure, but they can be offset by the tax advantages offered by this corporate entity. The ongoing fees for maintaining your S corp must also be considered when planning how much money you need to invest in order to start up your own company.