If you’ve got an idea for a business, and you’re ready to put in the hard work, now is as good a time as any to make it happen. But before you quit your job to become your own boss, it’s important to have a clear idea of how much this venture is going to cost you upfront. In this article we’ll be breaking down some of the startup costs you’ll need to think about to get your business up and running. 

What Are Startup Costs?

Startup costs are the funds needed to get your business off the ground. Starting a business is not cheap so you need to be realistic about how much you’ll need to make it happen. We’ve split the startup costs that you need to calculate into two groups, one-time costs, and ongoing costs. 

Startup costs that will be covered in the post include: 

  • Equipment 
  • Registration and incorporation fees
  • Permits and licenses
  • Branding costs (logo and website design)
  • Starting assets
  • Business location 
  • Payroll
  • Rent and utilities
  • Loan and credit repayment
  • Insurance 
  • Marketing

Small Business Startup Costs: How Much Will You Need? 

Calculate your overall startup costs before you start investing in the business. You don’t want to get halfway through starting your business only to run out of funds. Figuring out how much money you need at the beginning will give you insight into whether you’ll need to raise funds with investors, take out loans and grants, or get a line of credit. 

When you’ve calculated your startup costs, open a business bank account to keep your small business’s funds separate from your personal finances. 

One of the best ways to calculate your estimated startup costs is by fleshing out a detailed business plan. The financial projection part of the plan will help give you a guideline for the expenses you’ll be needing for the next 3 to 5 years. 

There are external resources you can use to calculate your startup costs. Check out the Small Business Association (SBA) start-up costs worksheet. When you are calculating your startup costs estimate needing enough to cover the first 6 months of any expense. For example, calculate a full six months rent rather than just the first month. If you start making a profit from your business before six months, congratulations! But it’s better to be safe than sorry. 

Finding Funding for Your Business Costs

The startup costs for your business don’t necessarily have to come from your own back pocket. Lots of new business owners choose to find investors to give them financial support. These investors might be people from your inner circle who believe in your vision and want to help you bring it to life. You can also access small business loans through organizations such as the SBA. Platforms like Kickstarter make it easy for business owners to raise funds through crowdfunding.  

Startup Costs to Expect: One-Time Expenses

When you start a business there will be a number of initial investments that are necessary to kick things off. Here are some of the more common startup one time expenses. 

Equipment 

‘Equipment’ is a very broad term when we’re talking about a business. If you’re starting a restaurant, ‘equipment’ could mean an entire industrial kitchen. If you’re starting a web design business, it might just mean upgrading your computer. The cost of startup equipment will depend on what industry your small business is in. Typically the cost of equipment when starting your business could be anywhere between $10,000 to $125,000. Kabbage has put together an article outlining the average cost of start-up equipment based on industry. Here are some of their findings: 

  • $125,000 is the average cost for restaurants and hotels.
  • $75,000 is the average cost for real estate and property rentals.
  • $16,000 is the average cost for arts and entertainment.

Note that this is just an average and doesn’t necessarily reflect your business. It’s important you put in the time to properly calculate how much your equipment will cost. 

Registration and Incorporation Fees

Just like with equipment costs, registration fees are different from business to business. There are five main types of businesses in the US, these are; LLC, S Corp, C Corp, Corporation, and Sole Proprietorship. What legal structure you choose for your business will affect the cost of registration. These fees also vary depending on what state your business operates in. 

Sole proprietorship is the least expensive type of business structure. It will only cost on average $25 to file with the Secretary of State. 

Registering as an LLC, on the other hand, can cost as low as $50 (in Colorado) or as high as $630 (in Illinois). An Incorporated company cost also varies depending on the state but is similar to the range you’ll see with an LLC.

To form an S Corp, you’ll have to file form 2553 with the IRS after you’ve registered your business and paid the associated filing fee. 

Permits and Licenses

The last thing you need when launching a new business is a fine for not registering the right permits and licenses to operate. It’s up to you to do your due diligence and make sure you are operating legally. Here are some business startup licenses and permits you might need: 

Professional licenses:

A professional license shows you are qualified to do a certain job. There are a number of industries that require you to have a professional license to practice. This does vary from state to state however if you are practising any of the following professions, chances are you need a professional license:

  • Medicine
  • Nursing
  • Law
  • Dentistry
  • Accounting
  • Veterinary medicine
  • Pharmaceutical 
  • Psychology 
  • Engineering and architecture

The cost of these professional licenses depends on the field. Most of these will need to be renewed each year. 

Business startup permits: 

DBA stands for ‘doing business as’. If your business’ comercial name is different to it’s legal name, you’ll want to get a DBA permit. The average cost is $10-110 depending on where you are operating. 

  • Health permit

If you are running any kind of food or beverage business, you’ll likely need a health permit. This is for the safety of your customers. The average cost of a health permit is $25

  • Building permit

If you need to renovate a space for your business, you’ll need a building permit. The average cost of a building permit is $1,156. 

  • Fire inspection permit

For obvious reasons, if you’re operating out of a commercial space, you’ll need a fire inspection permit which usually costs around $100. 

  • ATF permit (alcohol, tobacco, or firearms)

You’ll only need these permits if it relates directly to your operations. 

  • Sales tax permit/Seller’s permit 

You need a sales tax permit for any state that you have a ‘nexus’. A nexus used to mean a physical presence but nowadays it can also include significant economic presence. If you reach a certain level of sales in a state you may have to pay sales tax and will have to get a permit.

People can also trigger a sales tax nexus, so if you have employees in another state, you may also have to get a sales tax permit for that state. Sales tax permits have different names depending on the state, they are sometimes called ‘sellers permits’ or just business permits. They range in cost but usually won’t cost more than $100 and are more often than not free. 

Branding Costs: Logo and Website Design

When you’re first starting out, you don’t need a top of the line, custom-designed website. You just need something that is very user friendly and professional looking. The most important thing is that it’s easy for your potential customers to use. 88% of consumers will not return to a website after a bad experience and 33% will stop engaging with a site if they think it’s unattractive. You can use Wix or Squarespace to easily make an attractive, user-friendly website that won’t chew up your startup budget. The average cost of a basic website template is about $50. Rather than blowing money on a custom website, we recommend you put funds towards developing a notable and thoughtful logo for your business.

Starting Assets

Starting assets are items you buy for your business that have long term value. You’ll pay a large sum upfront for these assets but they will last you a long time and add value to your business. 

Some examples of starting assets include: 

  • Computer and tech equipment
  • Office building and land (if purchased and you have obtained ownership)
  • Office furniture and equipment
  • Company vehicles

Many of these items will probably match up with other costs in your ‘one time expenses’ list. But, it’s important to identify assets from other expenses for tax reasons. Assets, unlike other expenses, are not tax-deductible. This is really important for sorting out your business taxes. 

Business Location 

Depending on what sort of business you want to build, you may have to consider the expense of a business location. Most businesses will start by renting out space. Here are some one-time costs associated with renting a space for your business:

  • Application fee 
  • Security deposit 
  • Rent up front (depending on the lease agreement this could be anything from 2 weeks to 1 month)
  • Moving costs 
  • Realtor fees
  • Any updates needed (Renovations, office furniture, etc) 

If you have the funds available you might choose to buy a location for your business. If you do decide to buy a location outright you’ll need to categorize this as an asset. 

Here are some one-time startup costs associated with buying a business location: 

  • Down-payment
  • Inspection fee
  • Appraisal fee
  • Closing costs
  • Moving costs
  • Realtor fees

If your new business space needs renovations, you’ll also need a proper permit to do this. Obviously, if you are renting you’ll also need the permission of your landlord before you start doing renovations. 

Startup Costs to Expect: Ongoing Expenses

Some business expenses are ongoing. This means you’ll have to continue to pay for them for the life of your business. Remember when calculating your startup costs, include at least 6 months of ongoing costs. 

Payroll

One of the most important startup costs is your payroll costs. You’ll have to start paying payroll costs right from the beginning, even when you’re not yet making a profit. This includes paying yourself. Payroll costs are not just salaries. They also include things like, benefits, overtime, and commission. Your payroll budget should also cover the cost of any second party payroll service you are using. If you’re a sole proprietor, you can probably get away with a pretty small payroll budget when you’re getting your business off the ground, however, for other business structures, we recommend putting away 25-50% of your total startup budget. 

Rent and Utilities

Along with rent payments, you’ll also have to calculate the cost of things like gas, water, internet and phone bills. These costs will vary from business to business. If you are operating out of a commercial business, a good ball park figure to consider is about $2 per square foot of the total office space that you’ve purchased or rented. 

The cost of a rental space is difficult to estimate due the many variables of small business. To save money on rental costs in the beginning, you may want to start by working out of your home, or look into coworking spaces. 

If you want to start a restaurant or retail business, the cost of renting a space will all depend on your choice of location. If you find a space in a busy location with plenty of foot traffic in a large metropolitan area, you’ll be looking at a vastly different cost to that of something off the beaten track in a less populated city, town or suburb. 

Loan and Credit Repayment

It’s fairly common to take out a small business loan or a line of credit when starting a small business. If this is the case for you, you’ll have to calculate how much of this outstanding debt you’ll realistically pay back over the course of your first 6 months in operation. 

Insurance 

Business insurance comes in many different forms. It’s a good idea to research all your options before landing on the insurance that will serve you and your business best. You’ll want to consider things like, industry standards, the size of your business, the number of employees you have and any other risks. 

It’s hard to calculate the average cost of business insurance due to so many variables but here are some ballpark numbers. A sole proprietor can expect to pay on average around $500. A small consulting firm is likely to pay on average upwards of $3000. These are not hard and fast rules. If you’re a sole proprietor, working from home and selling marketing services, the cost of your insurance will be much less than that of a sole proprietor working on a construction site simply because there is more risk involved. 

Here is a breakdown of some of the insurance options you might be looking into for your business:

  • General liability insurance (about $400-$800 per year)
  • Commercial property insurance ($300-$2,500 per year)
  • Worker’s compensation ($0.75-$2.74 per $100 spent on payroll)
  • Errors and omissions insurance ($2,000-$5,000 per year)]

Marketing

We recommend that if your small business is well under $5 million in revenue, only 7-8% of your revenue should be dedicated to marketing. This money can go towards costs such as updates to your website, social media, content marketing, and newsletter and email campaigns. Your marketing budget should be less than 10% of your original total calculated budget. This may not seem like much but in today’s world, there are actually plenty of creative ways to market your business of a shoestring budget. 

There is always risk involved in starting a business. Being realistic about your startup costs is one of the best ways to lower this risk. Don’t let startup costs deter you from making your dreams of starting a business a reality. Even the most successful business people in the world had to start somewhere. If it takes you a little longer to raise your startup money, that’s ok! Be patient and keep working hard. The only way you can fail is by giving up before you start.