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Knowing how much it will cost to start your business is a crucial step to getting it off the ground. You can operate a website for less than $100 a month, while operating a restaurant is more likely to cost at least $10,000 a month. We've written out the complete guide on the major costs that a startup will face. We've structured a framework that any startup can use to note their biggest startup costs no matter what type of business they're launching.
The Biggest Expenses Your Startup Will First Run Into
While we may not be able to fully predict the exact startup costs your business will run into, we can break down the typical major costs that a business will face when starting up. Whether you'd like to open a bakery or start an e-commerce from the comfort of your home, all of the following are important to plan for.
Unless you're operating out of your home, the biggest initial expense is typically office space. The cost for your office space is also the most variable, as there is a wide range of prices depending on the size of the office or space you're looking for. Before diving into the details of the cost per square foot, be aware that there are multiple costs associated with leasing a commercial space. Unless you opt for a coworking space, most commercial real estate also requires you to sign a five- to 10-year lease. Below are some of the major costs that come with traditional leasing:
- Utilities and maintenance
- Significant upfront down payments
- Building maintenance
- Furniture, equipment and renovations
Because of the high fees and costs associated with leasing a space, many startups consider coworking spaces instead. Coworking allows for different companies and startups to work in the same space. In return, you'll usually pay a membership fee of around $190 per person per month, and different tiers of memberships grant different benefits. A lot of startups are immediately attracted to coworking spaces since they provide much cheaper alternatives for the simple trade-off of sharing a space with other businesses. However, coworking spaces tend to make less financial sense as a business grows, more employees are hired and membership costs skyrocket. After a certain point, leasing an office will make more sense. That breakeven point will vary largely depending on your location, the number of employees you have and the cost of your membership fees compared to an office lease.
On average, it costs roughly $34 per square foot to rent an office space in the U.S. That number greatly increases in hot cities for startups. In the most major cities, costs can greatly fluctuate between submarkets.
Registering an Official Business
When starting a business, you'll need to obtain all of the necessary licenses and permits. This can range from a generic business operating license to an industry-specific license, depending on what your business actually is. You'll need to research the requirements of your own business but you can usually, to pay $100 in total license and permit fees if you don't hire a lawyer.
On top of industry-specific registrations and permits, you'll also need to submit filings depending on the type of business you'd like to operate. Your business can operate as a sole proprietorship, general partnership, LLC and more, but there are registration details to pay attention to for each option. For instance, if you'd like to operate as a sole proprietorship or general partnership, you'll need to conduct business only using your personal legal name. If you'd like to use any other name for your business, you'll either need to file a DBA or register as a different business like an LLC. Be sure to follow local regulations at either the county or state level, as rules can differ.
When you first consider bringing on an employee, keep in mind that there's a lot more to paying an employee their salary. You'll also have to account for their benefits, employment taxes, applicable recruiting expenses and more. The Bureau of Labor Statistics estimates that benefits alone make up 31.8% of the cost of an employee on average.
We can't tell you exactly how much you should be paying your employees because that will depend on the location, market and the employee's skill level. But here's a list of average weekly salaries across each state in the U.S. that should help give you an idea as to how expensive an employee truly is week over week.
Average weekly wage as of Q1 2019
|District of Columbia||$1,917|
Inventory and Supplies
If you're planning on selling goods with your startup, you'll have to also estimate the costs required to first invest in your inventory. While we don't have an exact number for you to aim for, we recommend you work backward here. What's the target revenue goal you'd like to hit within the first few weeks or months of opening? From there, carefully consider pricing, the kind of product you'd like to sell and how many of each product you think you can sell given your specific sales strategy. All of this should be documented in your business plan.
Since the majority of small businesses are either sole proprietorships or general partnerships, most small businesses don't pay actual business taxes. Instead, the owners pay taxes on their businesses through their personal taxes. In other words, the revenue of the small business looks like personal income to the IRS and is taxed at the personal income rate.
If your business is indeed a corporation, your business will be taxed at both the federal and state level. The average corporate income tax rate is roughly 25.7%.
We don't recommend calculating taxes on your own, as business taxes can get quite complex. Work with a reputable CPA to make sure you comply with all necessary tax rules.
Insureon, an insurance provider, analyzed data from more than 18,000 policies and found that the average cost of small-business insurance was roughly $1,281 per year.
The specific type of insurance you buy will depend on the specific industry you're operating in, the type of business you're running and what you'd like to insure. However, there are a few insurance policies that almost every business will want, including the following.
- General liability insurance
- Property insurance
- Commercial auto insurance
- Workers' compensation insurance
- Cybersecurity insurance
- Commercial umbrella insurance
Rates will vary depending on your location, carrier and risk profile. You'll need to contact different insurers for specific quotes, but insurance shouldn't be anything close to a cost that is going to make or break your business.
Depending on the exact services you'd like, you can expect to pay anywhere from $4.50 to $38 a month to operate a website.
Operating without some sort of online presence is a risky move for businesses these days. It's arguably even more important for startups, as the web is one of the most effective ways to spread brand awareness. Most businesses choose to build their own websites, and there are plenty of cost-efficient ways to do this.
We'd recommend a general purpose website builder like Squarespace, Wix or Wordpress. They offer a ton of templates and make designing easy. If all you're looking to do is put words online, they also offer free options.
Getting Help Estimating Business Costs
Assessing the effort required to start a business isn't easy, but luckily there are plenty of free resources that can help.
- Minority Business Development Agency (MBDA): This is the only federal agency tasked with improving the competitiveness of minority-owned businesses.
- SCORE: SCORE is a nonprofit association dedicated to helping small businesses grow through education and mentorship.
- Small Business Development Centers (SBDC): SBDCs are located throughout the U.S. and its territories, and they provide assistance to small businesses.
As shown above, there are many costs that go into starting a business. These can be tough to meet alone or with bootstrapped funding. Most startups and small businesses explore external financing in the form of either debt or equity financing. Both options have their pros and cons, but the decision comes down to whether you'd like to pay interest on your loans or give up ownership of your company. There are plenty of options for both startup-specific financing or general small-business financing.