Deciding to start your own business is exciting. But it can be a bit overwhelming for new entrepreneurs, especially if you’re unfamiliar with startup costs.
Running out of cash is one of the top reasons why startups fail. That’s why it’s so crucial to understand your startup costs from the beginning—allowing you to budget accordingly.
This guide will teach you everything you need to know about business startup costs.
What Are Business Startup Costs?
Business startup costs are the expenses incurred as you’re launching a new business. Everything from incorporation fees to computers, office chairs, insurance, and more all fall into this category.
Some business startup costs are one-time fees, while others are recurring charges that you need to budget for throughout the duration of your business.
The Basics of Business Startup Costs
Obviously, startup costs will vary based on business type and industry. But the following section will cover the most common types of business startup costs for the majority of businesses. Just be aware that not all of these will necessarily apply to you.
Business Formation Fees
If you’re forming a legal business entity, like an LLC or corporation, you need to pay various fees to officially form your startup.
The exact costs will vary based on your state of formation.
For LLCs, expect to pay an initial state filing fee between $50 and $300. Corporations can be a bit more expensive, as some states charge upwards of $700 for the initial fillings.
There’s lots of paperwork that must be filled out correctly and filed with the appropriate agencies to ensure the state recognizes your business. So most of you will benefit from using a business formation service.
These online services make it much easier to start a business, as they handle all of the paperwork and filings on your behalf. However, this convenience comes at an added cost, as you’ll need to pay a fee to the formation service as well.
Depending on your entity type, additional things you’ll need during the formation process include:
- EIN (employer identification number)
- Operating Agreement
- Articles of Organization
- Articles of Incorporation
- Meeting Minutes
- Corporate Bylaws
You can get an EIN for free directly from the IRS. But many startups choose to get this from the business formation service, which will incur an additional fee.
Unless you’re a sole proprietor operating without a formal business entity, all 50 states require businesses to appoint a registered agent. Technically, you could be your own registered agent, but we strongly advise against that.
A registered agent must be physically present during business hours at the listed address in order to receive service of process and important government correspondence.
For example, if you get sued, the paperwork will be delivered to your registered agent and accepted on your behalf.
If you’re the registered agent for your own business, then you’ll always need to be available during normal business hours—which isn’t realistic for everyone. Furthermore, it can be embarrassing to be served with a lawsuit or legal process in front of employees or customers. So many business owners prefer that it happens elsewhere.
Even if you don’t have an office, you can avoid someone knocking on your front door by using a registered agent service. On average, this will cost you about $100 or $150 per year.
Insurance, Licenses, and Business Permits
Launching a startup without insurance is scary. If something happens, you could be on the hook for a lot of money—so getting properly insured needs to be at the top of your priority list.
Common types of business insurance for startups include:
- General Liability Insurance
- Commercial Property Insurance
- Professional Liability Insurance
- Workers’ Compensation Insurance
- Commercial Auto Insurance
- Commercial Umbrella Insurance
- Product Liability Insurance
- Business Interruption Insurance
These costs will vary by business type and other factors. But you can usually save some money by bundling insurance coverages with the same provider.
Many of you will also need seller’s permits and licenses to operate. Things like health permits, zoning permits, liquor licenses, land-use permits, and reseller’s licenses all fall into this category. Most of these will require renewal fees on an annual basis.
Labor and Payroll Costs
Whether you’re hiring employees, working with contractors, or a combination of the two, labor must be taken into consideration when you’re budgeting startup expenses.
In addition to salaries and hourly wages paid to employees, you’ll also need to consider the costs associated with your employee benefits packages. I’m referring to things like health insurance, 401(k) plans, life insurance, and other potential perks that you might offer your employees.
You’ll also need to pay a fee to your payroll service provider. And don’t forget about payroll taxes.
Some of you can get away with running things on your own at the very beginning, which can help you save some money on labor and payroll. But most businesses require employees to scale.
Every business in today’s day and age needs to have a digital presence. This all starts with a website.
Common costs associated with starting and running a website include:
- Domain name registration
- Web hosting
- Design fees
- SSL certificate
- Content delivery network (CDN)
- Site security
You can save some money by using a website builder and bundle lots of these costs into a single plan. Most of you won’t need a web designer either, as you can just customize a professionally-made template.
It’s also cost-efficient to lock in long-term rates on web hosting. This is an ongoing fee that you’ll have to pay for the lifetime of your website. But lots of web hosting providers offer rock-bottom rates to new websites if multiple years of hosting are paid upfront.
Legal and Professional Services
Many startups require help from professional service providers. It really depends on your business type and expertise.
For example, investing in a lawyer or an online legal service can help you save money long-term on the potential costs associated with non-compliance. Accountants can help you evaluate your tax obligations and financial records.
Some of you may even decide to hire a third-party consultant to help you with things like online marketing or something along those lines.
Other Miscellaneous Startup Costs
Again, startup costs obviously vary based on the business type. Coffee shops and restaurants will incur different costs than dry cleaners or florists.
But here are some common costs that your startup might need to prepare for:
- Office and retail space
- Storage and warehouses
- Business cards
- Internet and phone service
- Computers, tablets, desk phones, cell phones, and other electronics
- Point of sale (POS) systems
- Credit card processing
- Office supplies (pens, paper, printers, etc.)
- Office furniture (desks, chairs, couches, etc.)
- Software (CRM software, cloud storage software, etc.)
The list goes on and on. Even if you don’t need all of these things on day one, you’ll likely need them eventually.
Some of the small stuff adds up quickly. Don’t forget about things like toilet paper, soap, mops, brooms, and other cleaning supplies. You might even need a refrigerator, microwave, and coffee maker for the employee break room.
3 Solutions to Help Manage Business Startup Costs
Getting a credit card for your business should be at the top of your to-do list. This will make it much easier for you to manage your startup costs.
#1 — Chase Ink Business Unlimited
The Chase Ink Business Unlimited credit card is an excellent option for startups. There’s no annual fee, and the card allows you to earn an unlimited 1.5% cash back on your purchases. If you spend $7,500 on qualified purchases within three months of opening your account, you’ll get a $750 cash back bonus.
Chase also offers new cardmembers 0% APR for the first 12 months of opening an account. So you can pay for startup costs on credit without incurring interest fees.
#2 — Capital One Spark Classic
Not every entrepreneur has a great personal credit score. If you fall into this category, you might have a hard time getting approved for a business credit card. The Capital One Spark Classic card is perfect for building credit, and it’s easy to get approved.
With no annual fee, you can still earn unlimited 1% cash back on your business purchases. You’ll also benefit from free employee cards, fraud coverage, alerts, payment flexibility, and other great perks from Capital One.
#3 — American Express Blue Business Cash
The American Express Blue Business Cash credit card lets you earn 2% cash back on purchases up to $50,000 per year, then 1% on all other purchases. Cash back rewards will automatically be credited on your statement, so there’s no need for you to manually redeem anything.
Amex offers 0% intro APR on purchases for the first 12 months of opening an account. Another cool part of this card is expanded buying power—giving you the freedom to spend beyond your credit limit. There’s no annual fee, and Amex offers a $500 statement credit after you spend $5,000 within the first six months of opening an account.
3 Tricks For Business Startup Costs
Apply these three quick tips and tricks to help keep your startup costs as low as possible:
Trick #1: Create a Budget
So many first-time entrepreneurs make the mistake of launching a business without a budget.
But this can be fatal if you’re not careful. As you can see from all of the different costs we covered already, startup costs can add up quickly. If you’re just swiping your credit card without sticking to a budget, you’ll run out of cash before you know it.
To be effective, the budget needs to cover a period of time beyond your official start date. You’ll want to have a three-month, six-month, and one-year budget as well.
A budget forces you to be a bit more decisive with how your money is spent. For example, you might ultimately decide to hold off on hiring a marketing consultant or buying the leather couch for your office. Things like liability insurance and website security are far more important.
Be aware that unexpected costs will come up during the startup process. So have some room in your budget for emergencies and unplanned expenses.
Trick #2: Secure Financing Before Expenses
Whether you’re raising money from outside investors, getting a loan, or opening a line of credit, it’s in your best interest to get your financing in order before the startup costs kick in.
In most circumstances, you’ll need the business entity formed before you can officially apply for a credit card or open a line of credit under the company’s name. So some of these startup costs must be paid upfront.
But having a full understanding of your financial situation from the beginning will make your life much easier as you’re navigating the waters of startup costs.
In some cases, you might be able to get interest-free financing for the first year of a new credit line. This is definitely something you’ll want to take advantage of before your business is cash-flow positive. Just make sure you account for the interest rates whenever you need to start making payments.
Trick #3: Look For The Fastest Path to Cash
Your startup won’t be perfect on day one. The sooner you accept this, the faster you’ll be able to generate some revenue.
For example, let’s say your startup is entirely web-based. You’re selling goods, services, ads, or something else from your website.
Spending six months trying to design the perfect website is a waste of time. There are tools out there that you can use to launch a website in less than an hour. If that site isn’t up and running, you’re just digging yourself into a hole of startup costs without generating cash to pay for it.
Regardless of your industry or business type, look for the fastest way to start making money. I’m not saying you should cut corners, do anything shady, or put out a sub-par product. But focusing on perfection instead of cash can cause your business to go bankrupt before it has a chance to take off.
What to Do Next
Now that you have a firm grasp on business startup costs and what they entail, it’s time for you to take control of your expenses.
Put your startup costs on a credit card. This makes it easier to manage your budget, and you can earn some great rewards for your spending as well. We have a complete guide on the best credit cards for startups that will help you find the best option for your business type.
In addition to using a credit card for everyday spending and ongoing business expenses, a loan or line of credit can help you with bigger purchases. Check out our guide on the best business loans for more information.