Business Startup Costs: What to Know and How to Calculate
Before you launch your business venture, consider and plan for the many costs, both one-time and ongoing, involved in starting a business.
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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 is critical because the initial investment can be significant. But with proper planning and realistic expectations — and by making use of funding options such as startup business loans and business credit cards — you can confidently get your small business up and running.
16 business startup costs to plan for
Many of the startup costs listed below are recurring — such as rent, office supplies, and payroll — which you'll need to cover monthly, quarterly or annually. Others, like incorporation fees or office furniture, are typically one-time expenses.
Your actual startup expenses will vary based on your business type, industry and location, which is why you’ll see some fairly wide ranges listed below.
1. Equipment: $2,000 to $100,000
Almost every business will need to finance equipment immediately. Equipment costs for startups can range from a couple thousand dollars for a home-based office setup to $100,000 or more to start a restaurant or construction business.
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 and other hardware, like a point-of-sale system or credit card reader.
2. Incorporation fees: $150 to $450
One of the first steps in setting up a business is choosing a business entity structure, which has tax, legal and financial implications.
If you decide to incorporate your business or form a limited liability company (LLC), you’ll need to file articles of incorporation or articles of organization, respectively, with your state. The fee is paid to the secretary of state and typically falls between $100 and $250. Additionally, you’ll be responsible for paying government filing fees, which range from $50 to $200.
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: $200 to $5,000 per employee per month
Paying for an office or retail space will be a sizeable portion of your fixed costs, whether you rent or buy. You might spend between $200 to $5,000 per employee per month, depending on the type of space you're using.
You can lower these costs if you work from home in the beginning, and if you own a service-based business, you can travel directly to clients to further decrease overhead costs.
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4. Inventory: $2,000 to $20,000
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, 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.
5. Marketing: $500 to $3,000
Marketing materials start with your logo and branding, which could run you anywhere from around $500 to a few thousand dollars. From there, you may look into creating physical materials, like signs, banners and business cards. You may also consider paid ads or videos, which could require you to hire a consultant or a video producer.
When you’re first starting out, though, you can do the bulk of your small-business marketing for free thanks to social media.
6. Website: $12 to $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. Some of these content management systems offer free templates and trials, but launching a site with your own domain name and enabling your site to do things like accept payments or schedule appointments will come with a monthly or yearly subscription cost.
If you feel overwhelmed by the thought of building your website yourself, even with the help of a template, you could instead hire someone to build your site for you. Many freelance web developers offer their services on sites like Upwork. You’ll pay hourly, anywhere between $50 and $125, for them to handle the design and build. And then you’ll still be looking at the monthly or yearly fee paid to whatever platform on which the site is built.
7. Furniture: $1,500 to $2,000 per employee
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 and small office supplies, 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. Average office furniture cost per employee, assuming mid-level quality, tends to hover around $1,500 to $2,000. That budgets for a desk, ergonomic chair and movable cabinet for storage.
8. Supplies: $60 to $125 per month per employee
When it comes to office supplies, it can also be useful to budget per employee. The fewer employees you have, the higher your cost as you won’t be able to take advantage of bulk pricing.
A truly small startup of one to four employees should budget anywhere from $104 to $125 per employee per month, while a startup with around 40 employees should budget from $61 to $72 monthly per head, based on a 2014 study published by OPI.net and adjusted for inflation.
9. Software: $20 to $150 per month
Business software subscriptions can add up quickly if you’re using programs to manage tasks like accounting, process payments, send and track invoices, run payroll and more. When you’re just starting out, be selective about the software you truly need; you can always add as your business evolves.
Also do your research and look for software providers that offer both free plans for basic software functionality as well as paid plans that you can grow into. Choosing software that performs multiple functions within one program and package can help keep your software costs manageable.
A retail point-of-sale (POS) software package that includes payment processing can run you around $0 to $109 per month (exclusive of processing fees). Restaurant POS software is typically pricier. Starter-level accounting software that includes additional functions like invoicing and inventory management can cost anywhere from $0 to $38 per month.
10. Utilities: $430 to $750 per month
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. Here are average cost estimates for common business utilities, taking into account costs from various cities across the U.S.:
Electricity: $180 to $300 per month.
Gas: $90 to $150 per month.
Water: $100 to $200 per month.
Internet and phone: $60 to $100 per month.
11. Payroll: 1.25x to 1.4x the salary of each employee
You need to pay your employees, even in the early stages, where you’re not bringing in much revenue. Payroll includes not only net pay but may also include costs such as insurance, retirement, bonuses, commissions, overtime and paid time off.
Typically, an employee will cost 1.25x to 1.4x their salary. For example, you can estimate that an employee on a $40,000 salary will actually cost you between $50,000 and $56,000 after factoring in payroll taxes, insurance and any additional payroll expenses related to that employee.
12. Professional consultants: $150 to $500 per hour
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, a certified public accountant (CPA) 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, especially since good business accounting software can capably handle the day-to-day tasks for you. But it’s often a good idea to consult with one on a monthly, quarterly or annual basis to review your financial statements, and for general financial guidance and advice. Many CPAs charge by the hour, and hourly rates can vary widely, between $150 and $500.
Consider also consulting with an attorney regularly, which can save you from major legal mistakes like failing to trademark your logo or developing relationships with vendors without a contract in place. Legal consulting fees are generally charged either at an hourly rate or as a retainer. You can expect hourly rates to be somewhere in the range of $150 to $325, while retainers may range from $2,000 to $5,000.
13. Insurance: Average of $1,750 to $2,575 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.
Here are a few essential forms of insurance you should look into to protect yourself:
Business owner’s policy (BOP): Anywhere from $515 to $685 per year.
General liability insurance: About $350 to $500 per year.
Workers compensation insurance: Approximately $155 to $540 per year.
Errors and omissions insurance: Approximately $730 to $850 per year.
14. 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 up to 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.
15. 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.
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.
16. Shipping: Variable
If you’re starting a retail business, you may 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 calculate your startup costs
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.
When planning for your startup, you need to only consider items that are essential in the beginning, rather than optional items you can invest in later when your business revenue can help offset the cost.
Follow these six steps to calculate the startup costs for your small business.
1. Make a list of all your purchases
Using the list of startup costs above, and taking into account any additional costs you’re aware of, make a list of all the purchases you’ll need to make to start operating your small business.
2. Categorize your list of expenses
Categorize your list into expenses that are one-time purchases and those that will be ongoing payments, since both will factor into your calculations.
Here are some of the most common expenses in both categories:
One-time expenses | Ongoing expenses |
|---|---|
Down payment for your office or store | Accounting services |
Equipment, including cash registers, machinery, vehicles, computer technology and hardware | Business insurance |
Incorporation fees | Business taxes |
Initial business cards | Legal services |
Initial inventory | Loan or credit payments |
Initial office supplies | Marketing materials |
Office or business furniture | Ongoing inventory |
Permits and licenses, such as city, county, and state licensing, or those related to your specific industry | Ongoing office supplies |
Signage | Operating expenses |
Payroll and employee benefits (including your own) | |
Rent or mortgage payment | |
Software subscriptions | |
Travel if your business will require it, including gas | |
Utilities like electric, gas, water, phone, and internet | |
Website hosting and maintenance |
Next, you’ll need to determine which of your ongoing expenses are fixed costs, and which are variable costs. Fixed expenses you can plan for exactly, but for variable expenses, your costs will change each time.
Here are some common expenses in each category:
Fixed expenses | Variable expenses |
|---|---|
Administrative costs | Inventory |
Insurance | Packaging |
Lease or mortgage | Payroll |
Utilities | Shipping |
3. Research
After you’ve made a list of your expenses, it’s time to research each item on your list to arrive at an accurate cost estimate.
When researching, don’t forget to do some bargain hunting. You’ll want to minimize expenses as much as possible without sacrificing quality for big-ticket items. This means your research should include equipment capabilities, reviews, maintenance costs and warranties.
Your one-time expenses and fixed ongoing expenses should have specific costs you can estimate fairly accurately. For variable ongoing expenses, you may have to make some broad guesses based on your research.
4. Total your expenses
First, total your one-time expenses, so that you know exactly what just opening the business will cost. Then, factor in several months’ worth of ongoing expenses.
While your business will be able to cover ongoing expenses once it’s operational, it may take time before the business can generate enough sales to cover these costs.
5. Factor in a safety cushion
Generally speaking, it’s a best practice for small businesses to budget 10% to 20% of their total estimated startup costs as a financial safety net for unforeseen situations and expenses. You can think of this like the equivalent of your personal emergency fund.
6. Total your startup costs
Once you have all these figures, total your expenses to estimate your startup costs.
Yes, it’s probably a large number. Don’t be alarmed or dismayed. Many funding options are available for new business owners, including business grants and small-business loans.
Next Steps
Explore your top options for startup business loans.
Apply for a startup business credit card.
Consider buying an existing business rather than starting one yourself.
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