Organization Costs of Company Formation

The formation of a company is a much more costly step than the organization of a partnership. First of all, you should register a business name for your company so you can do it yourself or do it by registrar of companies. how ever to a company formation has very costs but it is important to know all rules of government and tax.

Very Important: Before selecting your company type, please have some meeting with attorneys to ask about your tax and limitation of that company that. some of company types has big tax charges and legal limitation and also ask about bank loan rules of company types

Costs of Company Formation

  • Incorporation fee to the state
  • Payments of Fees to attorneys- for their services in drawing up the articles of incorporation
  • Payments to promoters
  • Rent of company location as showroom or office
  • Charges of employees
  • Expenses of office accessories and showroom decoration

These costs are charged to an asset account called Organization Costs. In the balance sheet, organization costs appear under the ‘other assets’ caption.

 

Organization costs

Organization costs

The incurring of these organization costs leads to the existence of the corporate entity; consequently, the benefits derived from these costs may be regarded as extending over the entire life of the corporation. Since the life of a corporation may continue indefinitely, one might argue that organization costs are an asset with an unlimited life. However, income tax rules have permitted organization costs to be written off over a period of five years or more; consequently, most companies have elected to write off organization costs over a five-year period. Accountants have been willing to accept this practice, because organization costs are not material ‘in dollar amount.

 

 

The accounting principle of materiality permits: departure from theoretical concepts on the grounds of convenience if the practice in, question will not cause any material distortion of net income or financial position.