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This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.
While you may have a winning business concept, if you’re like many aspiring business owners, there’s one thing holding you back — finances. When you start your own business there are financial unknowns. That comes with the territory, and it can be intimidating.
Business startup costs are the expenses accrued when first launching your business, and they can vary depending on your industry and scale of business.
While there’s no cut-and-dried formula for figuring out exactly how much it will cost, there are common startup costs and additional expenses that apply in most cases. If you add up those expenses, you can get a ballpark estimate of what you need to get started. And from there, you can start looking into financing options.
To help you estimate how much it will cost to start your business, we’ve outlined what you need to consider.
There are two main startup cost categories.
Before you start evaluating what you need, it’s important to know how business startup costs are categorized. They can be separated into two main categories: capital expenses and operating expenses. Here’s the difference between the two:
Capital expenses
Before you start evaluating what you need, it’s important to know how business startup costs are categorized. They can be separated into two main categories: capital expenses and operating expenses. Here’s the difference between the two:
- Business licensing based on federal and state business laws
- Business registration
- Property and rent expenses
- Equipment
- Security deposits
- Technology expenses
- Initial inventory and vendor expenses
Operating expenses
Operating expenses are recurring costs that may contribute to startup costs but continue throughout the life of the business, so you also need to allocate funds to cover these costs during the startup phase. Most likely you’ll need to factor in the following operating expenses:
- Rent
- Payroll and employee expenses
- Travel
- Utilities
- Marketing and advertising
- Website
- Office supplies
- Insurance
In addition to these costs, you need to account for initial organizational startup costs like legal, licensing, incorporation, and permitting fees.
Calculating startup costs.
Determine the must-have startup expenses.
As you’re looking over these common startup expenses, you may realize there are a couple of them that don’t apply. For example, if you’re a service-based business, you don’t need to consider costs for inventory and shipping. Or, if your business is online, you may not need to worry about travel expenses.
After you’ve looked over the list and have accounted for the line items that do apply, figure out which costs are absolutely necessary to streamline your budget. For example, if you want to save on rent as you’re building up your business, consider alternatives such as a home office or even a co-working space. Consider writing a business plan, as this can help you scope what type of business you want to operate and how it fits into the market. This document can come in handy in the future if you plan on applying for financing. A business plan can also help communicate your business to future investors. The Small Business Administration (SBA) offers a free Business Plan Tool to help facilitate planning.
Here are a few costs you might incur in the first year of starting a new business:
- Business licenses, permits, insurance, and fees
- Business plan costs
- Renting, leasing, or purchasing of physical space
- Utilities
- Office furniture and supplies
- Advertising and marketing costs
- Hiring staff
- Payroll costs
- Equipment (i.e., ovens, cooking utensils, styling chairs, scissors)
- Inventory
- Website hosting
- Taxes
Making a list of all your possible costs will help you better gauge and manage cash flow for your business.
Break out the numbers.
Once you’ve pulled together a list of all your costs, assign an estimated dollar amount for each item. These approximate costs vary depending on your specific business needs, so do your research.
Consult colleagues in your industry and look online to make educated guesses about what you need for each line item. By taking the extra time to estimate your startup costs early on, you can figure out a realistic financing plan and make a game plan to get started.
Conduct a break-even analysis.
Once you’ve crunched the numbers and feel confident about how much money it may take to get your business up and running, it’s time to conduct a break-even analysis.
Determining the BEP (break-even point) allows a business owner to understand the amount of revenue needed to cover business startup costs and ongoing operational expenses. With this in mind, you can come up with a plan to ensure the profitability and success of your business.
Paying for business costs when first starting out.
Now that you know how much it’s going to take to start your business, you need the money to back it up. There are a number of ways to finance your business, but you should always do your research and talk to your accountant or financial advisor for additional assistance. To get you started, here are a few methods of raising capital:
- Loans and grants: Whether from a family member, friend, organization, or business, there are many options to get started. (Here are some ideas if you are a minority or woman).
- Business credit cards or business lines of credit
- Investors and/or accelerators
- Crowdfunding
Pro tip: You should always separate your business and personal expenses, especially when you’re just starting out. Learn more about business banking and using business credit and debit cards.
How to deduct startup costs from business taxes.
However you decide to pay for your new venture, you should also be aware that you can deduct some startup expenses on your taxes as a business owner. If your total startup costs are $50,000 or below, you can deduct $5,000 in business startup costs and $5,000 in organizational costs. Startup costs are recoverable if your business paid or incurred those costs to operate an existing trade or business in the same field as the one the business entered into.
Chapters 7 and 8 of Publication 535 by the IRS provide in-depth information on what is considered an acceptable startup cost, but you should also discuss deductions with your tax advisor.
