Paying State Fees

Each state charges a fee for the formation of a limited liability company (LLC) or corporation in the state. Each state also charges a fee, which may be the same or higher than the formation fee, when a foreign entity registers to do business in the state (see our discussion about choosing a state).

Each state has a minimum fee that it will charge for the formation of a corporation. In a few states the fee is based on the number of shares the corporation is authorized to issue. In those states, a business owner who wants to pay the minimum fee to form a corporation should also select the corresponding number of authorized shares.

In Delaware, the formation fee for a corporation is $0.01 for the first 20,000 shares of no par stock that is authorized, with a minimum fee of $89. Of that fee, $65 is charged by the state and $24 is charged by the county. For corporations, but not LLCs, the county fee varies with the length of the formation document. Thus, the fee is $24 for a one-page document plus $9 for each additional page. LLCs do not get recorded with the county.

With an LLC, the state formation fees are not based on the number of ownership interests. Instead, states usually charge a flat fee. This flat fee typically is lower than the minimum fee that states charge to form a corporation.

Warning LLCs. A few states (New York, Nebraska and Arizona) require that the articles of organization (or a foreign registration) for an LLC be published in a newspaper. New York, for example, requires that the articles, or foreign registration, be filed each week, for six weeks, in two different newspapers. Fees for publication can be extreme. In some cases, publication fees can amount to $1,000-$2,000. If you will be forming an entity in one of these states, or registering to do business there, first obtain an estimate on the cost of publication, and consider using a statutory close corporation in lieu of an LLC. Corporations. Four states, Arizona, Georgia, Nebraska and Pennsylvania have publication requirements for corporations. Thus, in Arizona and Nebraska, articles of incorporation must be published regardless of whether the entity is an LLC or a corporation.

A corporation does not have to issue all of its authorized shares, but you should carefully consider how many to authorize, because any changes require that an amended articles of organization--and a fee--must be submitted to the state. Follow these guidelines, in deciding how many shares to issue:

• Don't issue too few shares (e.g., one share) because this could make the subsequent raising of capital problematic. For example, in a one-owner corporation, one share or 1,000 shares would both represent 100 percent ownership. However, if only one share were issued, and the original owner subsequently sought to raise additional capital from others, he would be forced to purchase some of the additional shares, or perhaps lose control of his corporation.
• On the other hand, don't issue all of the authorized shares. Otherwise, if the original owner subsequently sought to raise additional capital from others, he would be forced to draft and file an amendment to the articles of organization with the state of formation, along with a required fee.

Thus, for example, in Delaware, if 5,000 shares were authorized, in a one-owner corporation, an issuance of 1,000 shares to the owner would represent a sound choice. (Note that 1,000 shares may be represented by a single stock certificate).

In the LLC, while the concept of authorized shares does not exist, a similar strategy can be employed. It is advisable to divide LLC ownership interests into "shares." The original owner could receive, say, 1,000 shares for his investment. Subsequently, to raise capital from others, he could issue additional ownership shares, without significantly diluting his ownership interest.

Work Smart If you are forming the business entity on your own, contact the state's department of corporations before sending the articles and the formation fee. States charge various other fees, for things such as recording the articles in the county recording office. In addition, the business owner may want certified copies of the articles or expedited service. States charge additional fees for these services. Our Table of Formation Fees can be used to locate each state's department of corporations, which usually is a division of the secretary of state's office.

Finally, a resident agent for service of process will be necessary when a business entity is formed. This involves an ongoing annual fee that averages about $75.