14 startup costs business owners should know - NerdWallet (2023)

The decision to start a business is exciting, but it can also be daunting if you are a new entrepreneur. Calculating start-up costs, worrying about long-term profitability, securing start-up financing – it can all be quite stressful.

The issue of cost is critical since the initial investment can be significant. A Kauffman Foundation study shows that the average cost is around $30,000 and the cost tends to increase every year.

Fortunately, certain types of businesses, such as micro-businesses and home-based businesses, have lower financial barriers to entry. Here we have compiled a list of 14 different types of business start-up costs to consider when starting your business.

How to Calculate the Cost of Starting a Business

Creating a business plan is the best way to estimate startup costs. In your plan, the Financial Projections section should estimate your income, profit, and expenses for the next three to five years.

There are also other resources for estimating your finances such asSBA Start Up Cost Worksheet. The templates help you estimate your initial investment costs so you know how much capital to request when seeking seed financing.

Please note that many of the business start-up costs listed below are recurring. You'll need to cover these costs on a monthly, quarterly, or yearly basis—think rent, office supplies, and payroll. Other expenses, such as the incorporation fee or office furniture, are one-time expenses.

When calculating start-up costs for your business, a good rule of thumb is that you can cover six months of expenses up front. So don't count on your company's revenues starting to drive down your costs until at least this initial stage is over. You will need a mattress while you stand up and work to attract business.

14 startup costs you should budget for

While this is a typical list of business startup costs, your actual startup costs will depend entirely on 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 thisfinance teamimmediately. Equipment costs for startups can range from $10,000 to $125,000 depending on the industry and size of the business.

For example, if you start your own moving or trucking company, you need to finance a truck. When you open a restaurant, you will need commercial ovens, stoves, dishes, and cookware. If you have a barbershop, you need barber chairs. And almost all companies need computers.

Of course, these costs depend on your industry and the size of your company. Hiring staff will incur additional costs, as you may also need to back up individual devices.

2. Training Fees: Less than $300

One of your first tasks when starting a business is choosing a business entity, which has tax, legal, and financial implications.

If you decide to incorporate your corporation or incorporate a limited liability company, you must file a statute or articles of incorporation in your state. The filing fee can range from $50 to $725 depending on the state. However, in most states, the fee is less than $300.

Even if you don't incorporate, you may still need to apply for a federal or state license or permit. The type of documentation you need depends on your industry and location. For example, agriculture or aviation companies need a federal license. Service sectors may require industry-specific licences. And retail businesses will likely need sales tax permits or licenses.

3. Office space: $100 to $1,000 per employee per month

Paying for office or retail space represents a significant portion of your fixed costs, whether you rent or buy. You can spend anywhere from $100 per employee per month up to $1,000 per employee per month; again, this depends on the type of space you are using.

You can mitigate these costs by initially working from home or looking for coworking spaces, both of which are ideal for smaller businesses. And if you own a service-oriented business, you can travel directly to customers to further reduce overhead.

4. Inventory: 17% to 25% of your total budget

If you are in the retail, wholesale, manufacturing or distribution sector, you probably need to secure stock for sale as soon as possible.

Knowing how much inventory to carry can be tricky – if you carry too much inventory, you risk spoiling or damage. If you run out of stock, you risk losing customers who won't wait for backordered items. This is especially true for seasonal stores where inventory can fluctuate dramatically throughout the year.

Depending on your industry, you should allocate between 17% and 25% of your budget to inventory. When you start, consider securing more inventory. In the early stages of your business, you need to attract customers and generate as much revenue as possible.

5. Marketing: Less than 10% of your total budget (even 0%)

Marketing materials may include physical materials such as signs, banners, and business cards. You can also consider paid ads, as well as more creative options like videos and giveaways, for which you may need to hire a video consultant or producer.

Courtney Barbee, COO of The Bookkeeper, recommends keeping overall marketing costs to a minimum. In particular, strive to keep your promotional materials under 10% of your budget.

The good news? You can do most of your small business marketing for free. Thanks to social media and other online marketing strategies, advertising costs for small businesses just starting out are often much lower than they were 20 years ago.

6. Website – around $40 per month

When creating your business website, you want it to look professional, be easy to navigate, and display information about your services, products, hours of operation, and contact information.

Fortunately, services like Wix, Squarespace, and Weebly make building a website easy and inexpensive. These content management systems are sometimes free, but the premium plans have a monthly or annual subscription cost:

Wix and Weebly also offer basic free website builders. If you're relatively tech-savvy, it's easy to create a website through one of these services, with no coding knowledge required. But if you're not very experienced with computers, you might want to hire someone to build the website, which of course will cost extra (although it could be a worthwhile investment).

7. Office furniture and supplies: 10% of your total budget

Office furniture and supplies add up quickly. When you work in a traditional nine to five office environment, each employee needs a desk, chair, computer, and phone. Add in break room equipment, small office supplies, and computer programs like your accounting software, and you end up with a hefty sum.

Again, that total varies depending on the tools your business needs to operate and the number of employees you need to equip. Nate Masterson, marketing manager for Maple Holistics, estimates the total cost of office furniture and supplies to be around $5,000. In general, though, Masterson recommends keeping furniture and utility costs to about 10% of your budget.

8. Utilities: Approximately $2 per square foot of office space

In addition to the fixed costs for rent and a deposit, you are responsible for paying the electricity, gas, water, internet and telephone bills for your office space. According to Iota Communications, the average utility cost for commercial buildings is $2.10 per square foot.

If you intend to install HVAC units, there are additional costs involved, typically a few thousand dollars, not including installation and maintenance fees.

9. Payroll: 25% to 50% of your total budget

You also need to pay your employees in the early stages when you are not making much of an income. Remember that the payroll includes:

Naturally,Non-wage labor costs varythrough new companies. Normally, an employee costs between 1.25 and 1.4 times her salary. For example, an employee with a salary of $40,000 will actually cost you about $54,000 after factoring in various costs for payroll taxes and insurance.

A conservative salary budget might work if you are a sole proprietor or have a small business and primarily employ 1099 contractors, both of which are fairly likely scenarios for most new businesses.

10. Professional Advisors: Between $1,000 and $5,000 per year

It's tempting to take a do-it-yourself approach to all of your business operations. After all, who knows your company best? But working with experts and professionals can be worth it.

For example, accountants can explain the different legal forms, help you choose an employee benefit program, and make sure you follow your responsibilities as an employer. When tax season begins, they prepare your tax returns and help you save on taxes.

You also don't have to hire a full-time accountant. However, it's often a good idea to check with your accountant monthly, quarterly, or annually to review your financial statements and get general financial advice and advice. Regular consultation with a lawyer can also save you from serious legal errors, e.g. B. Do not place your logo or establish relationships with suppliers without a valid contract.

Each CPA and attorney charges different hourly rates. Prices and additional fees vary depending on the number and difficulty of the tasks you need to outsource, the time it takes to complete your projects, and the seniority of your consultant. However, you can mitigate these costs by taking on some basic tasks yourself and only outsourcing the more complicated projects. There are even a few ways to get free legal advice for businesses.

And with the help of good accounting software, you can perform basic bookkeeping tasks like processing and managing payroll, creating and tracking invoices, and managing your business bank account.

AfterSCOREIn total, most small business owners spend between $1,000 and $5,000 a year on administrative tasks, including accounting and legal fees. But as a start-up, and using the aforementioned cost-cutting tactics, you're probably wrong on the lower end of that spectrum.

11. Insurance: Average $1,200 per year

Your business needs the same protection you provide for your health, home, and car. There are many different types ofbusiness insurance, including protection against customers filing a lawsuit against you and disaster insurance for potential fires that could shut down your restaurant for weeks.

The type of insurance your startup needs depends entirely on your company, industry, number of employees, and other risk factors. For example, a sole proprietor operating an online business will have far fewer insurance needs than a construction company with multiple employees.

Here are some essential forms of insurance to consider to protect yourself, and the costs of the policy will vary based on a number of different factors:

12. Taxes: variable corporate tax rate but 21%

When planning your budget, it can be confusing to determine the exact amount of corporate tax. This depends on your income (which is hard to predict), your deductible expenses, and your business entity.

Under current federal law, corporations pay a flat rate of 21% corporate income tax. In the case of holding companies, business profits and losses are included in the personal returns of the owners. Transfer companies can claim a deduction of 20% of the income before paying their business tax.

But know that you can often save money and time by working with a CPA. An experienced CPA will determine what you can deduct so you pay as little as possible.

13. The trip: Variable

Not all business founders have to include travel in their startup costs. But if you have a consulting business or visit your clients directly, you will travel a lot. You need to factor in the cost of transportation, meals, and lodging—multiply these costs if multiple employees are traveling. Remember how quickly these costs add up.

Try to keep travel overhead to an absolute minimum so that you can use your earnings for bigger expenses like payroll and rent. And to make your time on the road or in the air worthwhile, consider using a credit card from a travel company, which earns you points and miles for every dollar spent. If you must travel often, keep unnecessary things like business class tickets to a minimum.

14. Shipping: Variable

Service companies can probably stop reading here. But if you're in retail, you can ship products to customers. If so, you'll need to include shipping in your initial costs, including packing materials and postage. Depending on what you send, these costs can be in the thousands of dollars.

Services like Stamps.com can save shipping costs for small business owners. This service allows you to print postage without having to purchase an expensive postage meter. If possible, get free or cheap shipping boxes from the shipping service provider of your choice.

This saves you start-up costs

The costs of starting a business can certainly add up, and many expenses are non-negotiable. Do your research before jumping into any big-ticket purchase, and keep in mind that there are ways to cover some of those up-front costs on the cheap.

For example, using software like QuickBooks can save you the cost of hiring a professional accountant. Working from home or using a coworking space is a cost-effective alternative to renting office space. And using social media can lower your marketing costs.

Some costs are worth the investment. Don't buy inferior equipment just because it's cheaper - you'll waste time and money on repairs and eventually have to buy new equipment. Hire a legal or accounting professional if you are confused. And make sure your website and ad campaigns look professional and are effective.

secure financing

If you've calculated the start-up costs of your business and now feel overwhelmed, know that there are many resources to help you find start-up financing.

Your seed funding will likely come from a mix of debt and equity financing. But remember that debt financing options:Small Business Loans— are relatively limited for start-ups. Most lenders are only comfortable offering loans to well-established businesses with solid proof of profitability, as well as healthy loans that most startups simply don't have yet.

Some lenders work with new business owners, so don't rule it out entirely if you think this is your best option. Learn more about getting a business start-up loan if you think debt financing is the right move for you.

Get a business credit card

Once you have formed a legal entity for your business, we recommend that you apply for a business credit card.

The application is simple and abusiness credit cardoften easier to qualify for than a traditional business loan. You also often have access to a higher credit limit than with your personal card. More importantly, a business credit card keeps your personal and business finances separate, which is essential if you want to maintain your personal liability protection after forming an LLC or corporation.

Just make sure you don't max out your credit card or charge more than you can afford. Both can hurt your credit score, which could hurt your chances of getting a small business loan.

frequent questions

1. What is the average cost of starting a small business?

The cost of starting a small business depends on the type and size of the business you are starting and your industry. For example, starting a McDonald's franchise can cost $1 million, while starting a social media consulting company can cost less than $10,000. The average cost varies from case to case.

2. How are start-up costs calculated?

The easiest way to calculate 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 is advisable to cover the expenses at least six months in advance; This financial cushion will support you in the early stages of your business, when your profit margins may be tight.

3. Are start-up costs tax deductible?

Although the IRS does not recognize charter expenses as a capital expense, it does state that you can deduct $5,000 for charter and $5,000 for organization expenses paid or incurred after October 22, 2004, but only if your total charter expenses are of $50,000 or less.

You can checkIRS Publication 535or contact an accountant for more information.

4. What counts as start-up costs?

Start-up costs are all the costs involved in starting a new business. Incorporation costs include equipment, incorporation fees, insurance, taxes, and payroll.

Although start-up costs vary by business type and industry, expenses from one business may not apply to another. For example, a physical business has to pay to rent a separate business location, unlike an online consulting business that works from home.

The final result

Planning your business budget is one of the most stressful parts of entrepreneurship. But a realistic estimate of your start-up costs, and how much money you might need to borrow right away, will go a long way in getting your business off the ground.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.