Types of Business Startup Costs

Types of Business Startup Costs

Explaining the Many Costs to Start Your Business

Have you ever heard the saying “money doesn’t buy happiness?” Although it may be uplifting to hear from a personal standpoint, money does matter when building your business, especially in the startup phase. Having available funds for growing a business is a necessity, not a luxury.

A huge inhibitor to startup success is lack of awareness of crucial business startup costs. But you can alleviate this problem by knowing the main business startup costs you will face, so it becomes easy to estimate the costs involved with building your business to ensure its viability and to attract appropriate means of funding.

Continue reading for the types of business startup costs you need to know.

Key Takeaways

  • Before beginning a venture, it is imperative that you fully understand startup costs and are prepared to find funding through loans, bootstrapping, or other avenues.
  • A traditional or lean business plan is the first step in highlighting what costs will be crucial for your early growth and development.
  • There are many types of startup costs and tax-deductible costs, and working with an accountant will help you stay on top of spending.

Start With a Business Plan

An essential part of handling startup costs is simple: Be prepared. Entrepreneurs quickly get swept away by the excitement of starting businesses, yet don’t spend adequate time preparing. The easiest way to begin determining startup costs is by developing a business plan.

Your company may not need a fully detailed, lengthy business plan. Many in the startup or early-stage development phase prefer a lean business plan that highlights a company’s value proposition and finances. This type of plan allows for malleability as you develop more areas of the company.

A business plan creates the structure to help you grow and manage a startup. Even a simple, lean business plan makes you focus on aspects of your business such as:

  • Customer segments
  • Revenue streams
  • Key activities
  • Product line

These four items and more each require some form of cost. Writing this plan, even a simplified version, creates a roadmap for success that you can easily overlay with key actions and expenses.

Growth takes money, and a business plan is the first step to educating yourself on what it takes to build your business. But creating a plan also shows areas where you can cut costs or lower expenses. Be honest with yourself when creating goals, timelines, and products, and the financial costs will be reflected accurately as you start.

Types of Business Startup Costs

Registration Costs

E-commerce platform Shopify found that 23% of businesses were surprised by the legal costs associated with starting a business.2 This includes activities such as registering and incorporating at the state and federal levels.

Registration costs are an easy line item to make sure you’ve covered in your financial estimates, not something to be blindsided by.

Registration costs vary across state and county, though you also may be required to file at the federal level, further increasing costs.

 

Insurance and Permits

Starting a business means preparing for anything, including being ready for worst-case scenarios with adequate insurance and permits.

Insurance is a critical business startup cost to protect yourself, your team, and your business assets. Although this can be a surprising cost for many early-stage business owners, insurance is manageable in your budget. Even a low-cost insurance plan can protect you in case of liability or accidents.

Federal agencies, rather than local entities, regulate various industries, including agriculture, wildlife, aviation, and broadcasting. If you’re in one of the specified industries, your permitting begins at a federal level. State permits also become necessary when involved in certain activities. Some requirements you may come in contact with include:

  • Health permit
  • Sales-tax permit

Your local secretary of state will be an invaluable resource in understanding local and federal regulations and what’s necessary for your business’s legal standing. Permits can range anywhere from less than $100 to several hundred dollars, so do specific research to identify permit costs.

Securing a Space

Starting a business means having a functional space to get your venture off the ground. Even with home businesses seeing a rise in popularity, many startups find that an office, warehouse, or kitchen is necessary for success.

Startup costs related to space would include items such as: 

  • Down payment
  • Security deposit
  • Internet connectivity
  • Utilities
  • Remodeling, if needed

You can still keep this cost relatively low, particularly in being honest about your needs. A coworking desk is the beginner space level, averaging around $150 per month, and quickly escalates from there.

Ask yourself this: Do I need an entire office space, or can I manage with a hot desk? Is there a rental kitchen that can help start a cooking business? Examine all options when it comes to spaces, and allow room for growth as your revenue increases.

Equipment and Supplies

Equipment and supplies quickly become one of the most critical aspects of startup business costs. Without these items, you will lack the resources needed to provide products or services to customers.

Depending on your needs, supplies could run anywhere from a few hundred dollars for a simple office setup (such as for home-based businesses) to several thousand for more equipment-heavy companies such as catering or other service providers. Michigan’s Small Business Development Center shares a starting list of equipment items to keep in mind, including:4

  • Furniture
  • Office supplies
  • Point-of-sale systems (POS)
  • Vehicles
  • Shipping needs

The options are truly endless for this startup cost, and you should aim for leanness as you start.

Inventory

Inventory is a tricky part of startup business costs to pinpoint. The more product you have, the more you can sell, and the more revenue you can bring in. Income can then be reinvested into the business to cover more inventory or other costs.

As researched by Shopify, almost 32% of business costs came from the product category, including inventory needs. Yet a surprising twist to this line item is the cost that surplus inventory can incur.

You will want to find your sweet spot of inventory based on the number of product lines, the manufacturer’s suggested retail price (MSRP) of each, and the markup. Working with direct sales numbers makes understanding your inventory needs easier.

Marketing

Businesses are often under customers’ radars in the early stages, so marketing becomes a powerful tool in getting the word out to your audience. Marketing usually is a cost-effective startup expense due to its ability to boost brand awareness without big spending.

You can start with a relatively small marketing budget in the beginning phases of growth. Put together the necessities such as:

  • A simple branding kit (logo, fonts/colors, social header)
  • Website
  • Business social accounts
  • Word of mouth (begin with friends and family in the early phases)

Doing it yourself will help in retaining a small marketing budget. Canva, Visme, Design Wizard, Easil, Snappa, Crello, Stencil, PicMonkey, and similar tools have free and premium plans of around $100/year for all branding and marketing assets.5 Squarespace, Google Workspace, WordPress, Wix, Duda, Elementor, Carrd, and other similar options can be as low as $140/year for all website needs.6 Social media is a free asset to begin your business with, then switch to premium accounts when the budget allows.

Payroll

Payroll is a significant startup cost to cover, yet also highly dependent on the needs of your business. Your team at the start could look like a) just you, b) you and a few employees, or c) you and freelancers.

Don’t lock yourself into employee obligations if you can run an efficient ship as a solopreneur.

Setting aside enough for payroll could look like covering your living expenses for a three- to six-month runway period. Or it could mean minimum wage for an employee, dependent on city and state rules, or a freelance budget set aside for one-off projects.

Professional Assistance

The SBA considers a lawyer and an accountant two standard startup costs for starting a business, and you should not discount their importance just to cut costs.

You may be unfamiliar with the legal or financial landscape. This makes hiring an attorney and accountant a critical move for success, as they will help navigate these unknown waters. You may end up saving money by not making costly errors. Hourly rates for both of these professional services vary dramatically, though finding options at $100 per hour is possible, to keep the rate smaller as you start.

Don’t be discouraged from starting by this list of costs. There are many avenues toward funding a venture, including grants, investment, loans, and bootstrapping. Knowing the types of startup costs will help you understand your financial outlook and find necessary funding.

 

Deducting Startup Costs

Remember how we mentioned an accountant as a crucial startup cost? There are many reasons why, yet the simplest is that good, accurate financial accounts can save you money in the long run.

The IRS has a plethora of common, deductible business expenses that save you from a heavy tax burden. A deductible business expense must be “ordinary” (accepted in your industry) and “necessary” (helpful for your business), as defined by the IRS.7 This definition leaves a lot of ambiguity, but an accountant can help you distinguish what expenses are tax-deductible.

You should aim to track all business expenses with detailed recordkeeping. Even a simple spreadsheet saved on your laptop reflecting various costs and their descriptions will make deducting startup costs easier at tax time.