Startup costs are expenses for new businesses. Almost all new businesses will have at least a few expenses, such as legal entity registration (around $150), software, and marketing. Some businesses have costs that are not required but are helpful, such as business plan software ($20 per month), professional consultants, and a website ($20 monthly).
Tips to Estimate Your Startup Costs
When estimating the costs of starting a business, it’s important to do research to get accurate amounts. One strategy to get an accurate overall startup cost is to reach out to similar businesses that are not competitors and ask the owner a few questions about costs related to starting their business.
For example, if you’re interested in opening a boutique outdoor store, find a similar store in another state and reach out to the store’s owner on social media, like LinkedIn. Also, consider calling them or offer to visit their business. Doing this shows that you’re serious about opening your own business and will make it more likely that they will talk to you.
Another tip to consider when estimating your startup costs is to separate ongoing and one-time costs. You should document your ongoing costs within your business plan’s financial projections. For example, a point-of-sale (POS) software and hardware may cost $569 to set up, but the $69 monthly software fee needs to be budgeted for every month.
Here are 21 startup costs every business owner should know.
1. Legal Entity Registration Cost
All businesses need to register their business as a legal entity―also called business structure―with the state it’s operating in. Registering as a legal entity protects the business owner’s personal finances if a lawsuit ever occurs against the business. Additionally, making your business as a legal entity protects your personal finances if it goes bankrupt.
The limited liability company (LLC) is the most popular business entity. Around 80% of small businesses choose to register as an LLC. Costs to register an LLC vary depending on the state in which it’s registered. For example, in Kentucky, the cost to register an LLC is $40 whereas the cost to register an LLC in Massachusetts is $520. Typically, the average cost to register an LLC is around $125.
To register a business, visit your state’s official business registration website. Many business owners find their state’s website to be confusing and cumbersome. An alternative to the state website is an online legal service website. They assist owners in making business registration fast and accurate. IncFile is an online legal service company. They charge $49 plus state fees to register a business and submit paperwork on an owner’s behalf.
2. Business Tax Expenses
Taxes are easy for a new business owner to overlook. As a general rule, put aside 25% of profits for taxes. For instance, if you predict you’ll earn $60,000 in profit your first year in business, you’ll need to put aside $15,000 ($60,000 x 25%). If you’re an LLC, you may want to look at the tax advantages of electing an s-corp status. This is when an LLC chooses to be taxed like an s-corp, which can save a small business thousands of dollars in taxes owed.
Additionally, you’ll want to budget for an accountant or certified public accountant (CPA) to file your business taxes. You can save on this cost if you file your own taxes. However, most business owners choose to have a professional organize and file their taxes.
“Hiring an accounting firm to file your business taxes can be surprisingly expensive. Many small business owners just starting don’t plan for this well enough. It’s important to make sure that you have at least $2,000 in the bank when it comes time to pay for this service because the cost can vary wildly even for the same company at different times. Staying on top of your required filing deadlines can help you plan ahead and save the money necessary to pay for this service.”
― Calloway Cook, Founder, Illuminate Labs
3. Business Plan Software Costs
Business plan software is a tool to help create a strategic plan. It comes with step-by-step directions, educational materials, and financial projection tables. Business plan software costs from $19 per month to $49 per month. LivePlan is a business plan software that comes with a 60-day free trial. It provides more than 500 business plan examples from which to learn. There are several payment options, including a $140 yearly fee and a monthly fee of $19.95.
4. Market Research Expenses
If you’re creating a business plan, it’s important to show why you believe your business will succeed and support it with data. Use market research tools like ReferenceUSA to gather demographic data about your ideal customers. ReferenceUSA is free at most libraries around the United States. For industry research, use a paid tool like IBIS World, which costs around $1,095 per industry report.
Additionally, many businesses that are seeking funding from investors will purchase a feasibility study, which is an in-depth market research analysis about a business’s likelihood of success. You can purchase a feasibility study from an online source, like Wise Business Plans. Feasibility studies can cost from $5,000 to more than $30,000.
5. Accounting Costs
To manage and record income and expenses, small business owners either have to do it themselves with software like Intuit QuickBooks or hire a bookkeeper. QuickBooks is cloud-based has plenty of online resources to help you learn to use the software yourself. Hiring a bookkeeper may be more costly. However, it will lessen the small business owner’s duties.
“Tracking expenses will become a nightmare if you don’t get a handle on it in the beginning of your new business. An online platform like QuickBooks will run you $12 per month if you want to learn it. Otherwise, plan to spend $200 to $400 per month for a solid bookkeeper to keep tabs on all your expenditures.”
― Jeff Rose, Certified Financial Planner & CEO, Good Financial Cents
6. Payroll Expenses
If you plan on having several employees, payroll will be an additional cost. If you have an office manager, bookkeeper, or accountant on staff, they may handle the payroll for you. However, many small business owners manage payroll themselves and use software for assistance. Typical payroll software helps set up direct deposit for your employees and can help you pay your quarterly payroll taxes automatically.
Gusto is a payroll software that starts at $39 per month plus $6 per employee. For a business with five employees, that’s $69 per month. In addition to payroll, Gusto can also help set up employee benefits like medical, vision, and dental insurance.
7. Employee Wages Cost
In addition to payroll software, it’s wise to have enough cash to cover at least two months of employee wages before opening your business. This ensures you can cover payroll costs during any rough patches that may occur after you start your business.
For example, if you have three employees working at any given time, pay them on average $12 an hour, and are open 60 hours a week, that equates to approximately $20,000 ($12 x 3 x 60 x 9) you should have on hand. In addition to wages expense, a good rule of thumb for any small business is always to have at least two months of all regular expenses saved in the bank.
8. Office Utilities Expense
If you’re opening a brick-and-mortar location, office utilities can add up quickly. For the average business with a physical location, budget $300 to $500 a month for utilities; this may include internet, electricity, water, trash, phone, and cable if you plan on having televisions. Sewage may be an additional cost. However, it’s often included with the water bill.
Getting connected with the right provider for your cable, internet, and phone service can be complicated. Business Services Connect provides recommendations to available providers based on your business address. It works with all major cable companies, such as Comcast Business, Spectrum Business, and Cox Communications.
Visit Business Services Connect
“A cost that many small business owners overlook is their phone system. A VoIP [voice-over-internet-protocol] phone system can save a small business a considerable amount of money. Additionally, it provides flexibility, control, and is very easy to use. Although the amount of savings varies case by case, there are obvious direct costs that are reduced when a business decides to switch to VoIP.
“In general, the most expensive component of a phone bill is the minutes, especially for a PBX [private branch exchange] system, and especially if your calls are long distance. Because VoIP turns your voice into data transmitted over broadband, the cost is reduced significantly and long-distance calls are unlimited.”
― Tracey Montour, Director of Marketing, Arbeit
9. Traditional Marketing & Advertising Costs
Most businesses will have some advertising, whether it’s business cards, signage, flyers, or postcards. A business owner may choose to create promotional materials with its name on it like pens, notepads, and water bottles. Additionally, a business may advertise in the local print newspapers or trade publications for their industry. Costs for physical advertising vary depending on the quality and number of products ordered. Paper advertising varies depending on the reach of the publication and quality of the ad.
Typically, a new business will spend at least 5% of their budget on traditional marketing. As your business becomes more well-known, consider dropping that down to 1% or 2%. Many businesses channel all of their marketing budget to online advertising. Regardless, it’s always important to have updated business cards and brochures for face-to-face marketing.
10. Online Advertising Expenses
In addition to traditional advertising, many businesses will do online advertising, which includes Google Ads, Facebook Ads, and Instagram Ads. All of these online advertising platforms provide user-friendly options that business owners or employees can manage. The advertising cost for all of these platforms vary greatly based on your industry. A good budget for each platform is $500 each per month.
Instead of managing online ads yourself or having an employee do it, consider paying a professional to manage them. Typically, they charge an upfront setup fee and 10% of the monthly online advertising budget. The average online advertising specialist will want you to spend at least $1,000 per month on a single platform.
11. Office Supplies Costs
The typical office spends, on average, $200 to $1,000 a month on office supplies per employee. These costs go-to items that help employees do their jobs more effectively like paper, ink, writing instruments, and furniture. The office supplies cost will increase if you have a business like an attorney’s office that does a lot of printing. Additionally, your office supplies costs go up if you choose to provide additional perks like specialty coffee and snacks.
“In my opinion, the office supplies budget is one of the most underrated and hard to calculate start-up business expenses for many reasons. You can project about 10% to 15% of the budget will go to office expenses, but only when your business is finally up and running will you find out the real cost of maintaining an office.
“The fixed costs, such as utilities, rent, and office equipment, might be easy to anticipate, but the devil is in the variable costs. It’s hard to calculate in advance how much coffee or toilet paper your employees will consume. Not to mention complimentary supplies, such as sugar, milk, soap and laundry detergent. My advice is to always overshoot the office supplies budget when you start up a company because you will be surprised by how much coffee humans can consume on a daily basis, especially millennials.”
― Igor Mitic, Co-founder, Fortunly.com
12. Location Expenses
If you’re opening a location, it’s important to consider the build-out cost, which is the cost of updating the location to suit your business. A build-out includes both interior design and structural changes. If you sign a long-term lease―three to five years―the landlord may pay for a portion or all of your costs. Expenses can vary depending on the size of the interior space and type of business. A good rule of thumb is to expect to pay 25% more for the build-out than anticipated due to unknown costs and construction overages.
13. Equipment Costs
Your business’s equipment costs need to be factored into the total startup costs. If possible, consider purchasing quality used equipment, which can save you 40% to 60%. If your equipment needs to be maintained, factor that into the monthly or yearly ongoing equipment costs. If it’s a yearly cost, divide it by twelve, and factor it in as a monthly expense for the financial projections.
14. Insurance Expenses
Insurance protects a business owner against liability claims of a third party or employee. A common insurance expense for small businesses is general liability insurance, which protects businesses from injury claims issued by third parties, like customers.
General liability insurance typically costs between $400 and $600 per year. If you have employees, most states require workers’ compensation insurance, which covers a worker injury on the job. Workers’ comp varies by state and the type of work but, on average, it costs about $1.50 per every $100 in payroll.
“Business insurance was one expense that wasn’t on my radar when I launched my business full-time but should have been. Just as you have protection for your home and car, it’s critical to have insurance as a safeguard for your business. Policies are affordable and customized for your industry. Entrepreneurs work incredibly hard to build their companies. Protecting them should be treated with the same level of diligence and urgency.”
― Brandyn Campbell, Founder & CEO, Brandyn Campbell Communications
15. Borrowing & Interest Fees
If you’re taking out a loan, include the monthly principal and interest payment. Typically, an unsecured personal business loan may have an interest rate between 11% and 18%. The interest rate of a secured bank business loan that’s backed by the Small Business Administration (SBA) is between 7.25% and 9.75%. If you’re taking on an investor, they may want monthly payments as a portion of the profit. That needs to be factored in as an ongoing cost. Discuss the method of payment with an investor before agreeing to a deal.
16. Inventory Costs
Stocking your business with sufficient products before opening is important to meeting potential customer demand. To determine how much inventory to keep on hand, consider how much you will sell in a year, and keep 1/10 of that number in inventory. For example, if you expect to sell $35,000 worth of inventory during the year, keep $3,500 ($35,000 x 10%) of on hand. Additionally, if you have a dropshipping business, which involves selling products produced by a third party, you may not need any inventory or a limited amount.
Although it’s hard to know which items will be bestsellers before you open, it’s important to have good working relationships with vendors to ensure the timely delivery of fast-selling items. Inventory costs vary depending on the type and size of a business. Before opening, call around to get product price quotes from multiple vendors.
17. Professional Consulting Expenses
When setting up your business, you may need professional consultants to help you in areas where you are not an expert. For example, if you’re opening a business that will have several employees, maybe you will hire an HR Consultant to create an employee handbook.
If the overall look, feel, and design of your business’s marketing is important, you may hire a branding consultant. If online security is important to your business, consider hiring a cybersecurity expert. Consultant rates vary by industry and level of experience. Typically, expect to spend anywhere from $75 to $400 an hour for a professional consultant.
“One start-up cost that I invested in was a branding consultant because I felt like it was important to wrap up all the hard work that we put into designing the product into one package that would resonate with our customers.
“Very often, there are great marketing campaigns and bad products. Since the opposite was true for us, I didn’t want to miss an opportunity to have a strong brand impression. The branding consultant was $7,500―a little tough to swallow―but worth it because we found out brand name, secured out domain, other intellectual property, and much more.”
― Brianna Kilcullen, Founder, ANACT
18. Lifestyle Photo Expenses
Most businesses benefit from taking lifestyle photos of their products or services. Lifestyle photos are action shots of customers using products or using your services. It’s important to have these photos before opening a business so that they can be added to online directory pages, social media, website, and print media. For example, if you’re opening a clothing boutique, have photographs of customers or models showing off the clothing in your shop. If you have a service-based business, such as a legal service company, get photographs taken during a consultation or in court.
You can take free quality photographs on a smartphone. However, they still need to be high-resolution and well-lit. Generally, instead of taking the photos yourself, it’s a better decision to hire a photographer to come to your business and take photos. Remember, these photos will be seen thousands and possibly hundreds of thousands of times during the next few years on your website and online profiles. An amateur photographer may cost $300, and a mid-tier may cost more than $500 for a photoshoot in your business.
19. POS Software Expenses
Most retail businesses will need a point-of-sale (POS) software, which processes credit card payments from customers. Depending on your needs, a POS system can be free―typically with higher processing fees and fewer features―or up to $289 per month for a larger shop. Additionally, many POS software programs provide additional business management features like inventory management and sales analytics.
Vend is a POS software that costs $99 per month for a business with one location. Its software is easy to use and includes 24/7 phone support. You can try Vend for 14 days without entering any payment information.
20. Website Costs
Every small business needs a website. The cost varies depending on the business’s needs. You can try to design a website yourself with a website builder, which doesn’t require coding. DreamHost provides a WordPress website builder that starts at $19.95 per month.
If you don’t want to create the website yourself, you can hire a professional website developer, which can cost from $2,500 to $15,000. If you are going to hire a professional, you may want to purchase a domain name and secure it before someone else does. Additionally, web hosting―space on the web you’ll use to store your website’s information―is a common cost small business owners incur before hiring a professional designer.
“The cost of web hosting gets overlooked surprisingly often, especially by smaller businesses. It is important to have a web host that is different from your website designer or developer. You may have a need to change hosts down the road and will want to do so without alienating those working on your site. There are web hosting packages to suit a variety of different speed and bandwidth needs, but the cost of web hosting usually starts at $35 a month for a shared hosting account. However, soon-to-be business owners should look to spend slightly more so they aren’t limited to the bare minimum.”
― Katie Weedman, Content Strategist, THAT Agency
21. Travel Expenses
Before opening your business, budget for travel costs to attend places like trade shows and conferences as well as to visit suppliers and vendors. It’s important to have good working relationships with the people you’re getting products from or peers within your industry. When traveling to events, consider costs like registration fees, airline fare, rental car, hotel, and meals. When booking airlines, trade shows, and conferences, it’s best to book at least six months in advance to get a discount.
For example, many business owners getting supplies from China will visit the factory to create a better relationship with the factory owner and manager. It’s especially helpful to have good working relationships with vendors and suppliers if you have a situation where you run out of inventory and need the factory to rearrange priorities for your business. For a business trip to visit a Chinese factory, budget at least $4,500.
Bottom Line
Understanding startup costs before starting your business is important to know so that you don’t run out of capital. You don’t want to be in a situation where you’re going back to the bank or investors for additional funds before you have any customers. It’s helpful to document each startup cost in a business plan to show you’ve created a thorough plan to determine the funds needed to open your business.
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