If you’re starting a business, you likely already know that calculating startup costs is a crucial step in getting your company off the ground. Simply put, you need money to make money.
Depending on the type of business, you might need to create a website, rent equipment and an office space, obtain licenses and permits and hire a team of skilled workers—all of which add up in different bills to pay each month. To better understand your expenses and start a successful business venture, you’ll want the answer to this burning question: how much does it cost to start a business?
We’ve put together a guide on how to identify expenses, finding the best way to estimate costs and picking the right financing methods for your new business.
10 types of business startup costs
Before you start calculating the cost of starting a business, you need to understand how startup costs are categorized (and check out our business startup checklist). As you write out your business plan, keep in mind that are two main types of spending - expenses and expenditure.
Startup expenses can include initial legal and state incorporation fees, as well as deductibles like business travel and meals, according to the SBA guidebook.
Also known as capital expenses or assets, expenditures are one-time purchases such as equipment, property and a vehicle. These cannot be tax deductible.
Here are the main types of business startup costs you'll need to prepare for when starting your business:
01. Legal and administrative costs
Every business has legal and administrative costs to get it up and running. These can vary widely between states and industries so be sure to do your research for your precise costs.
Business registration fees: These are all the costs associated with registering your business, its name and with obtaining necessary permits and licenses. These vary according to the type of business you plan to start.
Legal fees: Includes expenses for consulting with attorneys to help set up your business structure, draft contracts and ensure compliance with laws and regulations. While a home-based business may have little startup legal fees, other types of businesses, such as LLC, corporation or partnership may incur heftier attorney expenses leading up to tens of thousands of dollars. For example, if you plan to start an LLC, you'll need to work with an authorized agent, such as Legal Zoom.
If you're planning to start an LLC in California, for example, registration fees will cost you:
Articles of Organization: $70
Statement of Information (every two years): $20
Annual LLC tax: $800 (minimum)
LLC fee (based on income): Varies based on total income from California sources ($900 - $11,790)
02. Office space costs (if relevant)
Not all businesses need an office so this startup cost is not always relevant. If you're starting a business from home, or online you can ignore this cost. However if you plan to scale your operations, they're worth factoring it for some time down the road. They include:
Rent: Monthly payments for leasing office or retail space. Some business owners consider buying office space an investment of its own but this is a large cost, depending on your budget and funds.
Utilities: Costs for electricity, water, internet and other utilities.
Office supplies and furniture: Initial setup costs for desks, chairs, computers, and other necessary office equipment.
Office rental costs vary widely between states and cities. In Florida for example,
Orlando: The average rent for office space is approximately $26.74 per square foot per year. Class A office spaces average around $28.65 per square foot, while Class B spaces are about $26.85 per square foot, and Class C spaces are around $20.77 per square foot.
Tampa: Office space rental rates can vary, but the average sale price per square foot was noted to be around $182.63 in 2023.
In New York renting an office is considerably more expensive. The average asking rent for office space in New York City is around $80 per square foot. Class A office spaces, which are the highest quality buildings with the best amenities and locations, tend to be slightly higher, averaging just under $90 per square foot.
03. Inventory costs (if relevant)
Factor in inventory costs only if relevant. For example, if you're starting a service business or a dropshipping business you won't need to. Inventory costs typically include:
Initial inventory: Purchasing stock or raw materials needed to start operations. If you're planning to start a craft business, for example, this would include your crafting materials and equipment.
Storage costs: Renting warehouse space or purchasing storage solutions for inventory. If you're starting small and testing the market with limited inventory, storage may be a relevant cost to factor in later.
Also consider manufacturing and stocking of products, packaging, labeling and dropshipping with Wix.
04. Marketing and advertising costs
No matter which business you plan, your business startup costs should include marketing and advertising costs. These are essential to getting your business in front of your intended audience and an absolute must. Budget for:
Branding: Expenses for designing a logo, business cards and other branding materials. These are what will set the style and tone of your business to make sure to choose high-quality options that reflect your brand properly. There’s also trademarking your business name or logo which represents additional costs to starting a business.
Advertising: Include costs for online ads, print media and other promotional activities to attract customers. Paid ads are a fast and efficient way to get your product or service in front of a lot of people.
Website development: Creating a website, including domain registration and web hosting fees. With Wix, you can create a site for free (or choose a paid plan), which includes reliable web hosting and advanced security features.
05. Equipment and technology costs
Every business needs equipment and technology to run. Depending on the type of business you start, you will need the right equipment to aid you in getting the job done. For example, if you’re starting a mobile business (like a food truck), you’ll need to finance a truck, cooking equipment and refrigeration equipment. Plus operating supplies, ranging from oil, petrol and water, to your POS system and marketing supplies, such as a menu board and online ads. These are examples of sunk costs, which means money spent that cannot be regained.
Most businesses will require computers and relevant software to run. Including scheduling software and business organizational tools, such as Monday.
06. Employee-related costs
If you plan to hire employees, either at the start or later down the road you'll need to factor in the following essential costs:
Salaries and wages: This will include wages, employee salaries, benefits and perks plus any relevant insurance and taxes.
Benefits: Costs for health insurance, retirement plans, and other employee benefits.
Training and development: Expenses for onboarding and training new staff, as well as helping existing staff to grow.
07. Operational costs
These are an essential part of your startup costs and should be included within the financial section of your business plan. Remember to include the cost of:
Insurance: You must purchase business insurance to protect against risks and liabilities. The type you need will depend on your state and type of business.
Accounting and bookkeeping: Hiring accountants or using accounting software to manage finances is a necessary business cost.
Professional services: Fees for consultants, IT support and other professional services need to be accounted for.
08. Licenses and permits
Another crucial business startup cost to remember is the cost of your licenses and permits. These vary widely between states and industries.
Business licenses: Essential costs include all of the fees necessary for obtaining local, state, and federal licenses required to operate. You'll likely need to research how to get a business license based on where you start and operate your business. Depending on the state where you’re conducting business, you will have to consider processing and recurring fees that range between $50 and a few hundred dollars per year. The US Small Business Administration’s (SBA) website also has information about federal business licenses.
Special permits: Costs for specific permits related to certain industries, such as health permits for food businesses must be researched and added to your financial planning.
09. Research and development costs
Research and development costs can vary widely between businesses. But if you plan to create a product or run a service you'll need to calculate:
Product development: Expenses for creating and testing new products or services. You'll also need to think about the cost to keep improving products and services on a regular basis so that you stay relevant in the market.
Market research: Costs for conducting surveys, focus groups, and other research to understand the market are essential for planning how you develop and improve on your product.
10. Working capital
Thinking beyond your startup costs, you'll need to think about the costs the day after you start your business. These include:
Operating expenses: The funds needed to cover day-to-day expenses until your business becomes profitable.
Emergency fund: A reserve of money set aside for unexpected expenses or financial downturns.
Each of these costs varies depending on the type of business, its size and its industry, but understanding and planning for these expenses is crucial for a successful startup.
How to calculate the cost of starting a business
There are various ways to estimate how much it will cost to start a new business. Once you differentiate between these types of costs, you’ll be able to better manage your business cash flow and assess your company’s overall profitability.
01. One-time vs. ongoing costs
A one-time expense can be anything from equipment purchases to paying for a special ‘one-off’ service, such as a business consultation or legal advice. When you make a one-time purchase, you may also find more money flowing out of your business than coming in as you go over your monthly bookkeeping. Generally speaking, you will need to make up for any monetary loss from such unusual or nonrecurring expenses in the next month—so plan your one-time costs accordingly.
In stark contrast, ongoing costs should not alter your monthly cash flow since they are included on a regular basis in your overall budget. Typically, ongoing costs are rent, utilities, insurance and employee salaries.
02. Essential vs. optional costs
Certain expenses cannot be avoided, including those for development and growth. Essential costs are taxes, employee salaries, human resources, debt repayment, business software, and more (like plumbing equipment for someone starting a plumbing business).
On the other hand, optional costs are made if the budget permits it. They can include upgrading the office coffee beans, snacks or any kind of small perks.
03. Fixed vs. variable costs
Similar to ongoing expenses, fixed costs are paid regardless of how much you sell. In other words, these costs do not change and should not affect your cash flow. Your weekly payroll, rent for office space, and even equipment depreciation are common examples of fixed costs in most businesses.
Variable costs are based on sales volume, thus as your profits increase so do variable costs, such as raw materials and production supplies. If you run a successful bakery, you will have higher variable costs of flour, sugar and butter.
How to fund your business costs
When it comes to financing your startup, there are multiple options available. Below are a few suitable business funding models that are low risk and effective.
01. Small business loans
The U.S. Small Business Administration (SBA) offers small businesses different types of loans, including 7 (a) loans, 504 loans and microloans. SBA-guaranteed loans have competitive rates and fees compared to non-SBA loans and provide unique benefits, such as flexible overhead requirements and no collateral.
02. Government grants
There are thousands of government grant opportunities for small businesses distributed on a federal, state and local level. Some examples include the National Institute of Health Grants, which reserves grants for small businesses specific to research on COVID-19; the Rural Innovation Stronger Economy (RISE) grants which support rural jobs and new businesses in the agricultural industry, providing funding between $500,000 and $2 million; and more.
03. Investors
A third way to raise money for your business is by reaching out to an angel investor. These are affluent individuals who can invest their own money in startups in exchange for ownership equity in the business. While there is no set amount for these types of investors, investment is known to range from a few thousand dollars to a few million dollars. What about crowdfunding? That is another option if investors are hard to come by.
