Previously, I discussed the tax implications of choosing an S Corporation over an LLC. Today, I will compare the registration costs between an S Corp and an LLC. Registering a business begins at the state level. Since I live in California, I can only tell you what I have learned about registering in California. Fortunately, registration at the federal level is quick, painless and free. More about this later.
An S Corporation is very similar to a C Corporation when it comes to registration. When registering a corporation, you start by filing a document called “Articles of Incorporation” (also known as “Certificate of Incorporation” in other states) at the Secretary of State. The Articles of Incorporation are legal mumbo-jumbo that describe the name, purpose, agent of service, initial directors and liability limitations pertaining to your corporation. There is no form. It is a bullet list that you have to prepare and sign that will be reviewed and approved by the Secretary of State. However, there are some minimum and specific verbiage that must be included word-for-word.
The Articles of Incorporation will cost you $100 and a $15 special handling fee. If your Articles of Incorporation are rejected, the $100 check is returned to you along with instructions about what you need to change, but the $15 processing fee is forfeited. When you resubmit, you will have to pay another $15.
Within 90 days from when your Articles of Incorporation are approved, you will need to file a Statement of Information (Form SI-200 C) that provides biographical information about your corporation, its officers and agent of service. This will cost another $25. Thereafter, you have to file a Statement of Information annually at $25/year.
Limited Liability Company (LLC)
Registering an LLC is somewhat simpler because there is actually a form (LLC-1) for you to fill out. That takes away a lot of the guess work. The LLC-1, better known as Articles of Organization, will cost you $70. There is a similar $15 special handling fee. You will also need to file a Statement of Information (Form LLC-12) and pay $20 within 90 days from when your Articles of Organization are approved. Thereafter, the Statement of Information must be filed biennially at $20/year.
In addition to the costs above that differ between LLC and S Corp, there are common costs that are inevitable for both ownership structures. Bear in mind that I am only keeping tab of registration and maintenance costs here, exclusive of other startup costs. Taxes are already discussed in my previous article.
Both LLC and S Corp in California are required to appoint a registered agent of service. The agent of service can be a company or an individual, but your corporation cannot be its own agent of service. Some prefer to just list one of the owners as the agent of service, some list their attorneys or whoever filing the incorporation documents. What you need to realize is the agent of service is required to be available at all time during regular business hours. That means if you list yourself as the agent, you cannot take vacations, you cannot go for a coffee break, nor can you take a piss. It is unlikely though possible that while you are busy reading the Playboy magazine in the restroom, somebody tried to deliver a service of process (notification of litigation). If you missed the documents, it could lead to a default judgment. In this case, I decided to bite the bullet and went for one of the big three registered agent of service providers – National Registered Agents, Inc. (NRAI). NRAI costs me $120/year. The other two are The Company Trust Company (CT) and Corporation Service Company (CSC). Both charge upwards of $250/year. Reputation is important here. Most companies that offer online filing kits also bundle six-month or one-year service of registered agent. How reliable their registered agents are I don’t know. They typically charge $100/year. The Fortune 500 and legal community would not even go near anyone other than the big three when it comes to registered agents. Draw your own conclusions.
If you are registering an LLC or a corporation, you are probably using a fictitious name. That is, a name you made up or the name of your imaginary friend from third grade. It’s possible that a name like “Baba The Bird” is already used by some other business in your state. If this is the case, you will have to pick another. The California Secretary of State website allows you to check if your name is available. If your name is available, you can pay $10 to reserve your name for 60 days while getting your Articles of Incorporation ready. But make sure you register under the same applicant who reserved the name lest you run into what I call a self-imposed deadlock (i.e. you are holding the name you reserved but you need it released so you can incorporate).
Federal Registration (Employer ID Request)
At the federal level, you will need to request a Federal Employer ID Number (FEIN). This is the equivalent of your SSN that identifies your company at the federal level. In the stone ages, companies used to file a Form SS-4> to get an FEIN. Nowadays, you can get an FEIN immediately online. There is no fee associated with this filing.
Federal Tax Entity Election
At the federal level, if you want to go with the S Corporation you will need to make the election by filling out Form 2553. A multi-member LLC will be taxed as a partnership for tax purposes unless you fill out the Form 8832 to elect to be treated as a corporation. There is no fee associated with this filing. But you must make the election within 2 months and 15 days of the beginning of the tax year (or the date you are incorporated, whichever is later) you wish the election to take effect. Timing is crucial here. If you miss the deadline, your company will be treated as a C corporation until the S election takes effect next year.
State Employer ID Request
You will need your Federal Employer ID Number (FEIN) before you can get a State Employer ID Number (SEIN). You can get an SEIN the stone-age way via Form DE-1 or immediately online for free.
Some occupations like contractors are required to have licenses to operate in California and most likely other states. Fortunately, in the business I’m engaged in, no business license is required. So I have no idea how much a business license gonna cost ya.
Most cities would require you to register your business. You will most likely have to pay an annual fee to maintain your business registration with the city. Check with your city officials regarding the form and fees you need to pay.
Below is a table that summarizes the different costs for LLC and S Corps discussed, exclusive of common costs.
Cost Comparison Between LLC and S Corp
Item LLC S Corporation
Articles of Organization / Incorporation $70 $100
Processing Fee 15 15
Statement of Information 20 initial, 25 initial,
20 biennially 25 annually
Total First Five Years 145 240
So there are some savings to be had by registering an LLC when compared to an S Corporation. But the savings will neither make nor break your business. The almost $100 savings in five years with an LLC does not outweigh the tax benefits and tax code stability offered by an S Corporation in my opinion.
Source by Ye Cheng Yuan