The Hidden Costs of Business Formation
When budgeting for “forming a business,” most founders focus on only the filing step. Typical expectations include:
$50–$300 for state filing fees
Possibly $500 if using a formation service
In practice, these expenses represent only a small portion of what most businesses spend during their first year.
The formation filing fee is usually the smallest component of total startup costs. Actual expenses vary significantly based on jurisdiction, industry, and business complexity.
When Your Business Structure Changes
Your initial formation isn't necessarily permanent. Common scenarios where businesses change or update:
Conversion from LLC to C-Corp
- Often happens when raising venture capital
- Requires state filings
- Tax consequences possible—consult CPA
Adding or Removing Members
- Requires updating operating agreement
- Possible state filings depending on changes
- Tax implications for transfers
Changing Management Structure
- LLC: member-managed to manager-managed
- Usually requires amendment to Articles
Electing S-Corp Status
- Just a tax election, doesn't change entity structure
- File Form 2553 with IRS
- Strict eligibility requirements
Moving to a Different State
- Can domesticate (change state of formation)
- Can form new entity in new state and merge
- Complex tax and legal implications
The Life Cycle of Business Entities
Understanding where you are in the business lifecycle helps clarify what to focus on:
Stage 1: Formation (Month 1)
- File formation documents
- Get EIN
- Create operating agreement
- Open business bank account
Stage 2: Setup (Months 1-3)
- Obtain licenses and permits
- Get insurance
- Set up accounting systems
- Register for taxes
- Make tax elections
Stage 3: Operations (Ongoing)
- Maintain separate finances
- Document major decisions
- Track income and expenses
- Comply with licenses and permits
- File required reports
Stage 4: Annual Maintenance (Every Year)
- File annual reports
- Pay annual fees
- Review and update operating agreement
- Renew licenses and insurance
- File tax returns
- Distribute K-1s (if applicable)
Stage 5: Changes (As Needed)
- Add or remove owners
- Amend operating agreement
- Change address
- Elect different tax treatment
- Expand to new states
Stage 6: Dissolution (If Applicable)
- File dissolution documents
- Pay final taxes
- Distribute remaining assets
- Close bank accounts
- Cancel licenses and permits
Common Post-Formation Practices
The following checklist reflects common post-formation practices that many founders follow. Individual circumstances vary, and consultation with qualified professionals is advisable.
Immediate (Week 1):
✓ Receive approval/certificate from state
✓ Apply for EIN
✓ Draft or customize operating agreement
✓ Open business bank account
✓ Move any business funds from personal to business account
Within 30 Days:
✓ Identify required business licenses
✓ Apply for business licenses
✓ Register for state taxes (sales tax, employer taxes)
✓ Obtain business insurance quotes
✓ Purchase necessary insurance
✓ Set up accounting software
✓ Make any time-sensitive tax elections (83(b), S-Corp if applicable)
Within 90 Days:
✓ Hold organizational meeting (even if just you)
✓ Document initial capital contributions
✓ Adopt operating agreement formally
✓ Issue membership certificates or stock certificates
✓ Set up payroll system (if needed)
✓ Establish bookkeeping processes
✓ Create system for tracking expenses and receipts
✓ Determine foreign registration needs
Ongoing:
✓ Keep business and personal finances completely separate
✓ Document major business decisions
✓ Maintain meeting minutes
✓ Track all income and expenses
✓ Make quarterly estimated tax payments
✓ Keep business licenses current
✓ File annual reports on time
✓ Review and update operating agreement as business evolves
What Many Founders Wish They'd Known
After working with many businesses, here's what founders consistently wish they'd understood from day one:
"I wish I'd created a comprehensive operating agreement from the start."
Generic templates often don't address specific situations. When disputes arise, clear rules that everyone agreed to when times were good become invaluable.
"I wish I'd kept finances separate from day one."
Trying to untangle mixed expenses months or years later can be extremely challenging. Starting clean and staying clean is much easier.
"I wish I'd budgeted for the full first-year costs."
The filing fee is just the beginning. Budgeting for the full cost of operating a legitimate business entity is important.
"I wish I'd made tax elections on time."
Missing an S-Corp election deadline or 83(b) election can cost thousands. These deadlines are typically strict.
"I wish I'd maintained proper records from the beginning."
An LLC doesn't protect you if you're not maintaining it like a real separate entity. Documentation is crucial.
"I wish I'd gotten licensed before I started taking clients."
Operating without required licenses can result in fines, inability to enforce contracts, and losing revenue earned while unlicensed.
The Bottom Line
Congratulations on forming your business! But understand that formation is typically the starting line, not the finish line.
You now have:
- A legal entity separate from you
- A structure for ownership and governance
- A foundation for building a real business
Many businesses still benefit from:
✓ An operating agreement or bylaws that actually governs the business
✓ Proper tax setup and elections
✓ Required licenses and permits
✓ Separate business finances and accounting
✓ Insurance to supplement entity protection
✓ Systems to maintain compliance
✓ Understanding of ongoing requirements
The formation documents filed typically represent about 20% of what's needed to operate legally and maintain protection.
The next 30-90 days of setup are often just as important as the formation itself. Doing it properly, documenting correctly, and maintaining consistently are widely considered essential.
The time and money invested in proper setup and maintenance is often viewed as less expensive than fixing mistakes later - or worse, discovering your LLC wasn't actually protecting you when you need it most.
Learn more about Business Formation for startups.
To compare structural options before formation, read Should Your Startup Be an LLC or a Corporation? A Simple Decision Guide.
To learn from common early missteps, see 5 Business Structure Mistakes Founders Make (And How to Avoid Them).
For foundational governance insights, read Operating Agreements: Why Your LLC Needs More Than a Template.