How Much Does It Cost to Start a Business?

Figuring out how much it will cost to start a business can be a daunting task for entrepreneurs.

There’s a lot to take in when thinking about what you’ll need to buy, how much it all will cost, where your startup funds will come from, how much your business may be able to generate, ongoing costs of running it, and other considerations.

While calculating startup costs for your business can be difficult and time-consuming, I highly recommend that you do so before launching, as you’ll need that information if you plan to seek funding or attract investors. It also will help you estimate how long it will take until the business breaks even and begins to generate a profit, which also is information potential investors will want to see.

Whether you’re planning to launch a Sole Proprietorship, Partnership, Limited Liability Company (LLC), or C Corporation, having a handle on your start-up costs is essential. This article shares some considerations and insights to help you do that.

Understand the Different Types of Business Expenses

The cost of starting a business varies dramatically, depending on the size of the business, what type of facility you’ll have, the industry you’re planning to enter, the location of your business, the products or services you’ll offer, how many operating expenses you’ll encounter, and other factors.

When you’re just starting out and have no history of past income and expenses, budgeting for start-up costs is based on educated guesses about what you’ll need to get your business up and running. It’s important to understand how to budget for different types of expenses, such as those you’ll have to pay every month as opposed to one-time expenditures. Let’s look at the types of expenses you’ll need to plan for.

One-time Expenditures

Starting a business involves some one-time payments, including the following:

• If you register your business with the state, you’ll have a one-time filing fee to be paid when you submit Articles of Organization to start an LLC or Articles of Incorporation for a Corporation.
• You might encounter one-time costs for machinery, furniture, an alarm system, and other equipment necessary for starting a business.
• Hiring someone to help you write a business plan or design a company logo could add one-time expenses to your startup budget.

One-time expenses are normally deductible for tax purposes, so make sure you keep track of everything you spend and provide a record of expenditures for your accountant when it’s time to file taxes. You’ll read more about tax deductions later in this article.

Recurring Expenditures

Recurring expenditures are the payments you’ll need to make at regular intervals, such as bi-weekly, monthly, or annually. Recurring expenses can be broken down into three categories: fixed costs, variable costs, and semi-fixed costs.

These are expenses you can count on being the same at each interval you pay them. That makes them easy to budget for, as you know what to expect. Fixed costs, which are defined as “costs that remain constant regardless of activity level.”

Fixed costs might include:

• Rent or mortgage
• Utility costs that don’t fluctuate due to usage
• Property taxes
• Insurance
• Wages and salaries

Variable costs, defined as “costs that change directly with activity level” are harder to budget for because they change from pay interval to pay interval. If your bakery business sells 50 cakes in July and 80 cakes in August, for instance, you’ll incur higher expenses for materials, labor, and other costs in August than you did in July.

Some examples of variable costs are:

• Inventory
• Direct labor costs
• Packing, shipping, and delivery costs
• Raw materials used to make your products

These are costs you can anticipate paying with the understanding that the amount is likely to fluctuate. Semi-fixed costs, which are defined as “costs that have both fixed and variable components.”

Semi-fixed costs could include:

• Vehicle expenses that vary due to factors like fuel use and need for repairs
• Salaries that vary due to commissions or bonuses
• Utility expenses that vary due to use, such as add-on phone services for exceeding usage limits or electric bills that vary depending on usage

Once you understand the different types of expenses you’ll encounter, you can plan how much money you’ll need to pay them and when that money will need to be available. Your next step in figuring out startup costs is to estimate what specific expenses you’ll be looking at.

Estimate the Cost for Starting a Business

As I said, there’s no perfect formula for knowing how much money you’ll need to get a business up and running. You can, however, come up with a good estimate by researching costs, talking to other business owners, and doing some reading.

Here are some cost estimates gathered from various sources, but remember that these costs can vary significantly depending on the type of business you’re planning to start and other factors I’ve already mentioned.

Costs you may encounter when starting a business include the following items.

Filing Fees for an LLC or C Corporation

If you plan to operate as an LLC or a C Corporation, you’ll need to pay filing fees to the state in which you’re forming the business. Fees vary from state to state, normally ranging between about $50 and $500. You can check this state-by-state table of costs to find out how much the fees are in your state.

Rent

If you need to rent space to operate the business from, expect to pay between 2% and 20% of your anticipated revenue. If you’re purchasing property, you’ll need to figure out what your mortgage costs will be.

Professional Help

Most entrepreneurs require the services of an attorney, accountant, business formation company, or other professional to help them avoid costly mistakes while getting their businesses started. Costs for these services typically range from $75 to $400 an hour.

Business Licenses and Permits

Most businesses require some sort of federal, state, and/or local business licenses or permits, and you’ll need to pay a fee to get them and keep them current. You’ll probably need to budget between $50 and $400 for these fees.

Taxes

Tax obligations vary depending on your business structure, revenue, and expenses, but it’s advisable to set aside between 30% and 40% of earnings to cover federal and state taxes.

Insurance

Regardless of your type of business or where it’s located, you need insurance to protect the property, equipment, and vehicles, as well as professional liability insurance and workers’ compensation insurance. These coverages average about $250 a month for a small business.

Marketing and Advertising

Letting people know about your business is critical, meaning you’ll need to spend some money on marketing and advertising. The Small Business Administration (SBA) recommends that you spend no more than 8% of your revenue on marketing, which includes things such as website development, social media marketing, paid search, research and analytics, and content marketing.

Employees

Paying employees is a significant expense for business owners. Costs of employees can include, in addition to their salary or hourly pay, payroll taxes, bonuses, overtime pay, commissions, paid time off, health care, and other benefits. Count on the cost of each employee being 1.25 to 1.4 times the amount of their salary. If you have an employee who earns $50,000 a year, your cost for that person would be at least $62,500. Many owners of young businesses use contractors to avoid the expense of hiring employees.

Inventory

Purchasing inventory to get started can be a significant expense but is necessary if you plan to sell products to customers. Expect an initial expenditure of about 10%-50% of the amount of product you expect to sell in your first year of business. If you plan to sell $100,000 worth of clothing, for instance, budget $10,000-$50,000 for initial inventory costs.

Furnishings

The cost of filing cabinets, desks, chairs, display cases, shelving, and other furnishings can add up. Experts report it costs between $500 and $1,800 to furnish a basic private office and up to $6,750 for a premium private office.

Office Supplies

Printer ink, software, phones, paper, and other items are necessary to get a business started and keep it running, meaning you’ll incur a one-time expenditure to acquire what you need, and recurring expenses to restock and keep equipment in shape. Once you’ve purchased what you need, figure on about $80 per month per employee.

Equipment

Most businesses need to finance some equipment to get started. You might have to buy computers and printers, or specialized equipment for your business such as a truck, commercial ovens, or salon chairs. It varies depending on the industry, size of the business, and other factors, but the cost of equipment required to get up and running can range from $10,000 to $125,000.

Utilities

Utilities such as electricity, water, gas, internet, and phone normally cost about $1.50 per square foot of office space.

Security System

The cost of a security system depends on the type of system you choose, how much time it takes to install it, the monitoring method, the size and complexity of the system, and other factors. Figure on installation fees of about $600 for a small to medium space, with monthly costs of about $50 for monitoring.

Professional Associations

Many small business owners join professional organizations for networking, possible funding opportunities, conferences, and other benefits, but membership costs can be hefty, as dues can range from a few hundred to several thousand dollars a year.

After you’ve identified approximate expenses, separate them into one-time and recurring expenditures to determine how much you’ll need up front and what your monthly expenses will look like. The SBA offers a fillable PDF spreadsheet to help you calculate your business startup costs.

Take Advantage of Tax-Deductible Expenses

Starting and running a business can be expensive, but the good news is that some expenses can be either fully or partially deducted from your taxes, reducing what you must pay.

To begin, the IRS allows you to use some startup costs to reduce your taxes. Startup costs include organizational costs such as fees paid to the state to register your business, costs for creating legal documents, attorney fees, and other expenses associated with getting the business started. You also can deduct startup costs such as deposits on utilities, website development, and money spent on an initial advertising campaign. You normally can include costs incurred within one year before your business officially opened as startup costs.

Some startup costs can be deducted during your first year of business, but most will have to be spread out over several years in a process called amortization. You may be able to deduct up to $5,000 of organizational costs and $5,000 of startup costs in your first year of business, but the rules are complicated, and I strongly recommend that you find a tax professional to direct you on what expenses you may be able to deduct and when you can do so.

The IRS defines a tax deduction as “any ordinary and necessary expense” incurred to run your business. Once your business is operational, you can deduct eligible expenses from the business income reported on your tax return, lowering the amount of income you must pay taxes on.

Generally, expenses that are fully or partially deductible include the following:

• Rent or mortgage payments on business space
• Home office expenses
• Legal fees
• Insurance premiums
• Membership dues
• Software purchases and subscription fees
• Employee wages, salaries, and commissions
• Payments to independent contractors
• Marketing and advertising
• Office supplies and equipment
• Office furniture
• Inventory purchases
• Materials required to make products or provide services

Get a Handle on Business Expenses

Anticipating and predicting business expenses can be difficult but becomes easier once the business has been operational for a time and you understand what to expect. There are some steps you can take, however, to help you plan and manage those expenses.

Write a Business Plan

A business plan serves as a roadmap for all aspects of starting and operating a company and can help you better understand your industry, market, and competition. In addition, the plan can make it easier to identify the types of materials, vendors, suppliers, and other resources you’ll need to get the business started. Having a business plan in place can help you assess the viability of your idea and identify red flags before putting significant money, time, and energy into the endeavor. Learn more about creating a business plan for your startup.

Keep Fluctuations in Mind

We’ve recently experienced high inflation rates and supply chain interruptions, and wide-ranging tariffs called for in President Donald Trump’s second-term economic plan have the business community wondering how their costs may be affected.  While you’ll want to figure out your expenses as accurately as you can, be prepared to adjust if they change. It’s important to not underestimate costs or overestimate expected sales and revenue. Try to leave yourself a buffer when forecasting expenses in case prices change.

Seek Insight from Others

We’ve all heard the phrase, “You don’t know what you don’t know.” That’s true when starting a business and trying to get a grip on how much everything will cost. Look for online resources, talk with vendors and suppliers, and leverage business mentors (such as those at SCORE) and other business professionals who can offer insight based on experience and knowledge.

Plan Where the Money Will Come From

Some types of businesses need minimal capital while others require a lot of money in the early stages. Entrepreneurs typically rely on one or more funding options when starting their companies. Examples of funding include the business owner’s personal checking and savings accounts, money from friends and family, bank and credit union loans, grants and economic development programs, outside investors, and crowdfunding sites such as Kickstarter.

Pay Attention to Cash Flow

The flow of money in and out of a business can make or break its sustainability. If most expenses are due at the start of the month but the bulk of the income arrives mid-month, a business may not be able to pay its bills on time. That could lead to late fees, penalties, and a hit to the company’s credit score.

Remember to Factor in the Ongoing Cost of Business Compliance

Once your business is up and running, you’ll need to budget for costs associated with keeping it in compliance and maintaining good standing.

Doing so is extremely important, as remaining in compliance helps ensure that your business can operate smoothly. It’s necessary for maintaining your company’s limited liability protection, being able to expand into another state, transferring ownership of the business, buying business insurance, renewing licenses and permits, and conducting other activities.

A business that meets all compliance requirements is considered in good standing with the state, which issues a Certificate of Good Standing or similar document. A business that doesn’t maintain compliance will not be in good standing and could face serious consequences, including fines and penalties and, in some cases, administrative dissolution or termination of the business.

Understanding the costs associated with remaining in compliance can help make sure you have money available to cover them. These fees vary from state to state so you’ll need to check to see what applies to your business.

Annual reports filing fees. Most states require businesses that are registered with the state to file annual reports within a specified time frame and pay associated fees. A few states do not charge a fee to file an annual report, but in others it can cost hundreds of dollars.

Franchise Taxes

Some states levy franchise taxes, which are fees a business must pay for the privilege of operating there. Some states impose a flat fee, while others have a tiered structure based on annual income and other factors. Franchise taxes, where applicable, are paid in addition to state and federal income taxes. The amount needed for franchise taxes varies depending on how the state imposes the fees, business revenues, and other factors, but it can be substantial.

Registered Agent Fees

Corporations, LLCs, and some other business entities are required to have a registered agent in the state or states in which they operate. A registered agent is a person or business authorized to receive legal correspondence or other documents on behalf of a business and make sure the documents are forward to owners in a timely manner. You can appoint a non-commercial registered agent, which is often an owner or member of the company, or hire a commercial registered agent, which has filed a listing statement and is recognized by the state. There are some distinct advantages to hiring a commercial registered agent and I suggest that you consider doing so. If your business operates in more than one state, using a commercial agent will likely enable you to hire one agent to serve all locations. The cost of hiring a registered agent varies but normally ranges from $100 to $300 a year.

Business Licenses and Permits

Most businesses need some type of license or permit to operate legally. These normally must be renewed regularly, often with fees associated. Licenses and permits may be issued by federal, state, city, or county government, depending on the type of business you have and where it’s located. Failing to keep licenses and permits up to date can result in fines and other penalties.

Income Taxes

Businesses must file a federal income tax return each year. Filing requirements and how much tax is paid will vary depending on your business structure, income, and other factors. In addition to what you’ll need to pay in taxes, you should consider fees for an accountant or tax advisor, if applicable. Many states and local municipalities also impose income tax on businesses.

Employer Payroll Taxes

If your business has employees you’ll need to budget for payroll taxes, which are taxes that employees and employers pay on salaries, wages, and tips. Taxes paid by both employers and employees include the Social Security tax and Medicare tax, while employers are typically responsible for state and federal unemployment taxes. Local governments may impose a small payroll tax to fund services such as first responders and road maintenance. These taxes are deducted from employees’ paychecks. Learn more about registering for payroll taxes.

Putting It All Together

Thinking about the costs of starting a company and keeping it in compliance can seem intimidating, but don’t let it dissuade you from pursuing your dream of owning and operating your own business. Leave yourself time for researching and talking to entrepreneurs who have gone through the process of getting a business up and running and think carefully about what you’ll need.

Consider ways you might be able to reduce startup costs, such as operating from your home instead of renting space or buying refurbished office furniture instead of new. As your business grows, you might consider looking for outside investors to increase your capital.

Finally, don’t be afraid to ask for help when you need it and hire professionals to handle complicated matters that could result in problems if not handled properly. Remaining in compliance with applicable laws and regulations is vital, both when starting a business and as it continues operations.