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Deciding to start a business is exciting, but can also be daunting if you're a new entrepreneur. Calculating business startup costs, worrying about long-term profitability, securing startup funding — it can all be pretty stressful.
The question of costs is critical because the initial investment can be significant. A Kauffman Foundations study shows the average cost to be around $30,000, and costs tend to increase each year.
Fortunately, certain types of businesses, such as micro-businesses and home-based companies, have lower financial entry barriers. Here, we’ve put together a list of 14 different types of business startup costs you’ll need to consider when launching your company.
How to calculate the cost of starting a business
Drafting a business plan is the best way to estimate your business startup costs. Within your plan, the financial projections section should estimate your revenue, profit, and expenses for the next three to five years.
There are other resources to estimate your finances as well, such as the SBA’s startup costs worksheet. Templates will help you estimate your initial investment costs, so you know how much capital you should request when you seek startup funding.
Keep in mind that many of the business startup costs we list below are recurring. You'll need to cover these costs over a monthly, quarterly, or annual basis — think rent, office supplies, and payroll. Other expenses, like the incorporation fee or office furniture, are one-time costs.
When calculating your business startup costs, a good rule of thumb is to be able to cover six months’ worth of expenses upfront. So don’t count on your business’s revenue to start easing your costs until at least after that early period is over. You’ll want a cushion while you get your feet under you and work on attracting business.
14 business startup costs to plan for
Although this is a typical list of business startup costs, your actual startup expenses depend entirely upon your specific business and industry.
Here are some typical business startup costs to plan for:
1. Equipment: $10,000 to $125,000
Almost every business will need to finance equipment immediately. Equipment costs for startups can range anywhere from $10,000 to $125,000, depending on the industry and size of the company.
For example, if you’re starting your own moving or shipping company, you’ll need to finance a truck. If you’re opening a restaurant, you’ll need commercial-grade ovens, stoves, dishware, and cooking utensils. If you own a hair salon, you’ll need styling chairs. And nearly any business will require computers.
Of course, these costs range according to your industry and the size of your business. Hiring employees will incur additional costs, as you may need to secure individual equipment, as well.
2. Incorporation fees: Under $300
One of your first to-dos when setting up a business is to choose a business entity, which has tax, legal, and financial implications.
If you decide to incorporate your business or form a limited liability company, you’ll need to file articles of incorporation or articles of organization, respectively, with your state. The filing fee can range from $50 to as high as $725 depending on the state. However, the fee is under $300 in the majority of states.
Even if you’re not incorporating, you’ll probably need to apply for federal or state licensing or permits. The types of documentation you'll need will vary based on your industry and location. For example, businesses within the agriculture or aviation sectors require federal licensing. Service-based sectors may need to have trade-specific licenses. And retail companies will likely need sales tax licenses or permits.
3. Office space: $100 to $1,000 per employee per month
Renting an office or retail space will be a sizeable portion of your fixed costs, whether you rent or buy. You might spend between $100 per employee per month up to $1,000 per employee per month — again, it will depend on the type of space you're using.
You can mitigate these costs if you work from home in the beginning, or look into coworking spaces — both ideal for smaller businesses. And if you own a service-based business, you can travel directly to clients to further decrease overhead costs.
4. Inventory: 17% to 25% of your total budget
If you’re in the retail, wholesale, manufacturing, or distribution sector, you'll likely need to secure inventory to sell, as soon as you possibly can.
Knowing how much inventory to carry can be tricky: If you have too much inventory, you risk spoilage or damage. If you have too little, you risk losing customers who won't wait for items on backorder. This is especially true for seasonal businesses where inventory can vary drastically year-round.
You should allocate between 17% to 25% of your budget to inventory, depending on your industry. When you’re first starting out, consider securing more inventory. You'll want to attract customers and generate as much revenue as you can in your company's early stages.
5. Marketing: Below 10% of your total budget (even 0%)
Marketing materials might include physical materials, like signs, banners, and business cards. You might also consider paid ads, as well as more creative options, like videos and giveaways, that might require you to hire a consultant or a video producer.
Courtney Barbee, COO at The Bookkeeper, recommends keeping overall marketing costs to a minimum. Specifically, strive to keep your ad materials under 10% of your budget.
The good news? You can do the bulk of your small business marketing, for free. Thanks to social media and other online marketing strategies, advertising costs are often much lower for small businesses just starting now than they would have been 20 years ago.
6. Website: Around $40 per month
When building your business website, you'll want it to look professional, be easy to navigate, and display information about your services, products, hours, and contact information.
Fortunately, services like Wix, Squarespace, and Weebly, make creating a website easy and cost-effective. These content management systems are sometimes free, but premium plans will come at a monthly or yearly subscription cost:
Wix: $13 to $39 per month for a premium plan.
Squarespace: $12 to $18 per month billed annually, or $26 billed month to month.
Weebly: $5 to $25 per month.
Wix and Weebly also offer basic, free website builders. If you’re relatively tech-savvy, it’s easy to build a website through one of these services, no coding background required. But if you’re not very familiar with computers, you may want to hire someone to build the website — which, of course, is an additional cost (although it might become a worthwhile investment).
7. Office furniture and supplies: 10% of your total budget
Office furniture and supplies add up fast. If you’re operating in a traditional nine-to-five office environment, then every employee will need a desk, a chair, a computer, and a phone. Add in break room appliances, small office supplies, and computer programs, like your accounting software, and you’ll reach a hefty sum.
Again, that sum varies depending on the tools your business needs to operate, and the number of employees you need to outfit. Nate Masterson, the marketing manager at Maple Holistics, estimates that the total cost for office furniture and supplies would be around $5,000. In all, though, Masterson recommends keeping your furniture and supply costs to approximately 10% of your budget.
8. Utilities: Around $2 per square foot of office space
In addition to the fixed costs of rent and a down payment, you’ll be responsible for paying the electric, gas, water, internet, and phone bills for your office space. According to Iota Communications, the average cost of utilities for commercial buildings is $2.10 per square foot.
If you intend to install HVAC units, that will incur an additional cost — usually a couple of thousand dollars, not including installation fees and upkeep.
9. Payroll: 25% to 50% of your total budget
You need to pay your employees, even in the early stages, where you’re not bringing in much revenue. Remember, payroll includes all of the following:
Paid time off.
Of course, payroll costs will vary across startups. Typically, an employee will cost 1.25x to 1.4x their salary. For example, an employee on a $40,000 salary will actually cost you around $54,000 after factoring in various payroll tax costs and insurance.
A conservative payroll budget could work if you’re a sole proprietor, or if you’re running a small enterprise and use mostly 1099 contractors — and either is a pretty likely scenario for most startups.
10. Professional consultants: Between $1,000 and $5,000 per year
It’s tempting to take a DIY approach for all your business operations. After all, who knows your business best? But working with experts and professionals can be worth the investment.
For example, certified public accountants can explain the different legal structures, help you choose an employee benefit program, and ensure you're fulfilling your responsibilities as an employer. When tax season rolls around, they’ll prepare your tax returns and help you save on your taxes.
You don't need to hire a full-time accountant either. But it’s often a good idea to consult with your accountant on a monthly, quarterly, or annual basis to review your financial statements, and for general financial guidance and advice. Consulting with an attorney regularly can also save you from major legal mistakes like failing to trademark your logo or developing relationships with vendors without a contract in place.
Every CPA and lawyer charges different hourly rates. Rates and additional fees vary depending on the number and level of difficulty involved in the tasks you need outsourced, the time it takes to complete your projects, and your consultant’s tenure. However, you can mitigate these costs by taking on some basic tasks yourself, only outsourcing the most complicated projects. There are even some options to get free business legal advice.
And with the help of good business accounting software, you can handle basic bookkeeping, like processing and managing payroll, creating and tracking invoices, and managing your business bank account.
According to SCORE, all told, the majority of small business owners spend between $1,000 and $5,000 per year on administration tasks, including accounting and legal fees. But as a startup — and by taking advantage of those cost-cutting tactics we mentioned — you’ll probably err on the lower end of that spectrum.
11. Insurance: Average of $1,200 per year
Your business needs the same protections you provide to your health, home, and car. There are many different kinds of business insurance, including protection from customers that file a lawsuit against you and disaster insurance for potential fires that can shut down your restaurant for weeks.
The type of insurance your startup needs is entirely dependent on your business, industry, number of employees, and other risk factors. For instance, a sole proprietor running an online business has far fewer insurance requirements than a construction company with several employees.
Here are a few essential forms of insurance you should look into to protect yourself, and policy costs vary according to several different factors:
General liability insurance: About $400 to $800 per year. Your industry’s risk will be the most significant factor influencing the cost of your policy.
Commercial property insurance: Anywhere from $300 to $2,500+, depending on the value of the property and its assets, and a risk factor dependent upon the nature of the business and the location of the property.
Workers compensation insurance: Approximately $0.75 to $2.74 per $100 of payroll, depending on the business’s size, location, payroll, and risk.
Errors and omissions insurance: Approximately $2,000 to $5,000 per year, depending on your business’s size, industry, location, revenue, legal history, and the quality of your contracts and employee training procedures.
12. Taxes: Variable, but 21% corporate tax rate
When planning your budget, determining the exact amount to allocate toward business taxes can be confusing. It depends on your revenue (which is difficult to predict), your deductible expenses, and your business entity.
Under current federal law, corporations pay a flat 21% corporate income tax. For pass-through entities, business income and losses pass through to the owners' personal tax returns. Pass-through entities can claim a 20% deduction on income before paying their business taxes.
But know that you can often save money and time by working with a CPA. A skilled CPA will determine what you can deduct so that you pay as little as possible.
13. Travel: Variable
Not every new entrepreneur needs to factor travel into their business startup costs. But if you have a consulting business or you visit your customers directly, you will be traveling a lot. You'll need to factor in the price of transportation, food, and lodging — multiply these costs if you have multiple employees traveling. Be mindful of how quickly those costs add up.
Try to keep total travel costs to an absolute minimum so that you can allocate your revenue toward bigger expenses, like payroll and rent. And to make some returns on all that time on the road or in the air, consider using a travel business credit card, which can earn you points and miles for every dollar you spend. If you do have to travel frequently, keep the nonessentials like business class tickets to a minimum.
14. Shipping: Variable
Service-based businesses can probably stop reading here. But if you’re in retail, you might be shipping products to customers. If so, you’ll need to factor shipping into your startup costs, including packing materials and postage. Depending on what you’re sending, these costs can reach into the thousands of dollars.
Services like Stamps.com can ease the burden of shipping costs on small business owners. With this service, you can print postage without having to buy a costly postage meter. If possible, you can secure free or low-cost shipping boxes from your shipping service of choice.
How to save on startup costs
The costs of starting a business can certainly add up, with many expenses being non-negotiable. Do your research before you splurge on high-ticket purchases, and recognize that there are ways to take care of some of these startup costs on the cheap.
For example, using software like QuickBooks can save on the costs of hiring a professional bookkeeper. Working from home or using a coworking space is a cost-effective alternative to leasing office space. And leveraging social media can mitigate your marketing costs.
Some costs are worth the investment. Don’t buy poor-quality equipment just because it’s cheaper — you’ll lose time and money making repairs and eventually need to purchase new equipment. Hire a legal or accounting expert if you’re confused. And make sure your website and advertising campaigns are professional-looking and effective.
If you've calculated your business startup costs and now feel overwhelmed, know that there are plenty of resources to help you find startup financing.
Your initial funding will likely come from a combination of debt and equity financing. But keep in mind that debt financing options — small-business loans — are relatively limited for brand-new businesses. Most lenders only feel comfortable offering loans to established companies with hard evidence of profitability, as well as healthy credit, which most startups simply don’t have yet.
Some lenders work with startup business owners, so don’t completely rule it out if you think it’s your best option. Check out more information on how to get a loan to start a business if you think debt financing is the right move for you.
Get a business credit card
Once you’ve established a legal entity for your business, we recommend applying for a business credit card.
The application is simple, and a business credit card is usually easier to qualify for than a traditional business loan. Also, you typically gain access to a higher credit limit than your personal card. More importantly, a business credit of card keeps your personal and business finances separate — essential if you wish to maintain your personal liability protections after forming an LLC or corporation.
Just make sure you’re not maxing out your credit card or charging more than you can repay. Both can harm your credit score, which might hurt your chances of securing a small business loan down the line.
Frequently asked questions
1. What is the average cost to start a small business?
The cost of starting a small business depends on the type and size of the business you’re opening and your industry. For example, opening a McDonald’s franchise can cost you $1 million, while starting a social media consulting company may cost less than $10,000. The average cost will vary on a case-by-case basis.
2. How do you calculate startup costs?
The most straightforward method for calculating your startup costs is to use a budget template. Your budget will break down your startup costs and recurring expenses — rent, office supplies, payroll, and more.
It’s prudent to cover six months’ worth of expenses minimum upfront; this financial cushion will support you in your business’s early stages when your profit margins might be slim.
3. Are business startup costs tax-deductible?
While the IRS does not recognize startup costs as capital expenditures, they do state that you can deduct $5,000 of business startup and $5,000 of organizational costs paid or incurred after October 22, 2004, but only if your total startup costs are $50,000 or less.
You can review IRS Publication 535 or consult a business accountant for additional information.
4. What is considered a startup cost?
A startup cost is any expense incurred when starting a new business. Startup costs will include equipment, incorporation fees, insurance, taxes, and payroll.
Although startup costs will vary by your business type and industry — an expense for one company may not apply to another. For example, a brick-and-mortar business will need to pay to rent a separate business location, unlike a home-based online consulting company.
The bottom line
Planning your business budget is one of the most stressful parts of entrepreneurship. But being realistic about estimating your business startup costs — and how much money you may need to borrow right away — will go a long way toward getting your company up and running.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.