Launching a new business can be an exciting endeavor, but many budding entrepreneurs ask: How much does it cost to start a small business? Although startup costs vary by industry, you should plan accordingly to ensure you have enough capital to get your idea off the ground.
Stay on track by preparing for these 15 common small business startup costs.
Cost of starting a business
It’s important to go slow when opening a new business to avoid drowning in too much debt. Here are 15 startup cost examples to help plan for what’s to come.
Average cost: $132
One of your first tasks is to choose a business entity for your company, such as a sole proprietorship, limited liability company (LLC) or incorporation. Doing so will determine your business’s legal liabilities and how you’ll pay taxes.
Each entity comes with different costs. For example, you’ll need to file specific paperwork with your city or secretary of state when forming an LLC or incorporation, along with a one-time or annual fee. LLC filing costs vary by state and range from $40 to $500, with an average of $132. Incorporation fees are similarly priced, though some states might charge more or less.
Sole proprietors are not required to register if conducting business under their legal names. Otherwise, you must file a “doing business as” or DBA with your local government. You can typically expect to pay between $10 to $100 to register your DBA.
Average costs: Varies by industry
Small businesses often need federal, state or local licenses and permits. You can usually apply for such licenses online.
Research your specific state’s legal requirements to ensure you’re checking all the boxes. Here are some industries that typically require state-level licensing and permits:
- Construction and zoning
- Food service
- Liquor service
- Health care
- Legal services
- Real estate
Average cost for workers’ compensation: $1,332 per year
The federal government requires any business with employees to have workers’ compensation, unemployment and disability insurance. In addition, your state may also require additional types of small business insurance.
The costs of business insurance premiums vary based on multiple factors, such as your industry, the type of insurance policy, number of employees and the business’s location.
It’s worth considering the following insurance policies for extra peace of mind, even if they aren’t legally required:
- General liability insurance
- Commercial property insurance
- Professional liability insurance
- Product liability insurance
- Home-based insurance
Average cost to building a website: $200 plus $50 a month
A professional-looking website can help drive customers to your business and strengthen your online presence. Although you can create a basic website for free, it’s worth investing in an easy-to-navigate and user-friendly site that showcases your services, products and hours of operation.
You can hire a professional to build and maintain the site, but know this will increase the cost to approximately $6,000, plus $1,000 in maintenance per year. Alternatively, try using an easy website platform like Squarespace or Wix — but pay to remove ads and access better templates.
Average cost of office space: $38 per square foot, but varies by metro area
Whether you rent or buy, paying for a brick-and-mortar space will take a chunk of your revenue. You’ll also have to budget for utilities, like electricity, water, internet and phone.
Consider getting a commercial real estate loan if you need a long-term physical space for a restaurant or retail business. You can also explore specific restaurant loans, which often help finance franchises. For smaller businesses needing office space, you can start working from home or rent a coworking space to reduce expenses.
If you’re starting an event venue business, the physical location is one of the most important decisions you’ll make when getting up and running. For example, if you’re planning to host weddings, parties or even conferences, you’ll want to consider if there’s ample parking, updated kitchen space and adequate indoor and outdoor spaces.
Make a list of equipment and office furniture you need for your business. Consider whether it makes sense to lease big-ticket items instead of taking out an equipment loan. Even though a lease’s lifetime cost is often higher, it allows you to experiment with different types of equipment. Buying government surplus gear or used equipment is another lower-cost option.Check out these three sites for used equipment or upcoming auctions:
If you’re opening a restaurant, starting a catering business or planning some other food-service related business, equipment may be one of your biggest startup costs, but it will be vital to have the proper kitchen gadgets you need to make delicious food for your customers.
Average costs: 20% to 30% of your company’s gross revenue
Your business will need a system for paying employees and contractors, even if you’re starting out. Payroll typically includes the following costs:
- Net pay
- Paid time off
Take away the brain work by investing in a payroll service, which can start as low as $17 a month. However, you can likely skip using an official service if you’re a sole proprietor mainly using 1099 contractors.
Average cost for office supplies: $1,844 per employee per month
Depending on your type of business, you’ll likely need various supplies to keep things up and running. Office supplies typically include paper, pens, staplers, notepads, as well as printers and computers.
Certain industries might incur more expenses, such as food and accommodation businesses.
Average costs: 25% to 35% of annual budgetBusinesses like a clothing shop, pizza shop or bakery need a steady supply to meet ongoing customer demands. Consider the size of your store and your potential market before investing in inventory.
It’s better to start with a well-stocked supply to attract customers and establish a reliable service. However, you don’t want to get stuck with excess inventory like out-of-season fashions or spoiled food.
If you have a lot of capital tied up in inventory, you can consider inventory financing to help improve your cash flow.
Average costs: About 3% to 6% of annual budget
Many businesses rely on accounting software and bookkeeping services to manage their daily operations. These programs typically charge a monthly or one-time purchase fee.
Depending on your business’s needs, you might need to invest in additional software or programs, such as:
- Cloud computing
- Project management
- Online payment systems
- Customer relationship management (CRM)
- IT programs
Average costs: About 13.6% of the company’s annual budget
How much you spend on marketing depends on your industry, budget and overall business goals. You can use physical materials to spread your name — like banners, brochures and business cards — though printing costs can quickly add up.
Alternatively, consider implementing the following digital marketing approaches:
- Website: Make sure to post regularly to attract new customers, such as having a weekly blog or monthly promotions.
- Social media channels: Create engaging and authentic posts for your target audience on platforms such as Twitter, LinkedIn, Instagram and Facebook.
- Digital advertising: Explore paid ads on Google, YouTube or Facebook.
- Email marketing: Use MailChimp or other email marketing services to send regular blasts to your growing customer base.
In addition, you can pay for market research and competitor analysis to get an upper edge on your marketing strategies.
Average costs: Varies
Many businesses don’t need to consider shipping costs, especially if you run a remote business without inventory. However, retail owners must factor in the cost of shipping goods to customers. The total price will vary based on what you’re sending, the packaging materials and where you’re located.
Average cost for a small business accountant: $1,000 to $5,000
You might be a jack of all trades, but you’ll likely need extra help from time to time. For example, hiring an accountant to file your tax return can help unlock more tax credits while freeing up time to focus on your business’s success and growth. Some startups may also consider paying for a business consultant to improve their chances of success.
You might also need to use an attorney to navigate tricky legalities. A business attorney can help trademark your logo, draft legal contracts or transfer business ownership while ensuring you follow all local and federal guidelines.
Average cost: Variable
Entrepreneurs typically don’t need to factor travel costs into their startup budget. However, if your job requires you to hop around the country or globe, you need to add this expense to your list.
Travel costs typically include transportation, meals and lodging. Be sure to account for extra employees who might accompany you.
Try to minimize travel costs in the beginning to ensure you meet your business’s basic expenses, such as rent, payroll and inventory. However, if traveling is necessary, opt for low-budget lodging and meals to control costs. You can also consider opening a business credit card specializing in travel rewards. You might as well earn bonus points while galavanting around the world, right?
Average costs: 21% for corporations; variable for other entities
Understanding business tax rates can take time and effort. How much you’ll owe depends on your revenue, business deductions and your company’s entity.
Federal law stipulates that corporations must pay 21% of corporate income tax. Other business types, like LLCs and sole proprietorships, are labeled as “pass-through entities,” meaning their profits are taxed at the owner’s personal rate. This is typically between 10% and 37%.
Working with a skilled CPA from the start can help you set aside adequate funds to prepare for your tax bill. In addition, your CPA can point out deductible expenses while outlining next year’s tax preparation checklist.
How to reduce startup costs
Starting a business is no easy feat. You don’t want to take shortcuts and risk your business failing. However, it’s hard to invest a lot upfront if you don’t know how much revenue your business will generate.
Tweaking your budget can help stretch any startup funds you have. Here are some ways to cut back on basic expenses:
- Use accounting software instead of a professional bookkeeper.
- Work from home instead of renting an office space.
- Build an authentic social media presence to minimize paid advertising.
- Buy used equipment.
- Use online documents and contracts to reduce paper usage.
- Design your own website instead of hiring a professional.
- Create an online business instead of a brick-and-mortar business.
You should also create a detailed business plan to define your business model, overall budget and to ensure you stay on track.
How to get money to start a business
Even if you manage to keep startup costs to a minimum, your company may need startup loans or other forms of financing to help sustain its growth and expansion.
Small business loans: Newer companies may have difficulty qualifying for small business loans, especially with traditional banks, but online lenders may be an option. They offer faster funding with lenient credit requirements but tend to come with higher rates.
Business credit cards: Business credit cards offer rewards points and relatively easy applications but typically have higher interest rates and smaller credit limits, especially when compared with bank loans.
Crowdfunding: Crowdfunding allows you to raise donations for your business through an online platform, but you’ll need to make sure their campaigns stand out in a sea of similar posts, which may require significant time and even money. When the campaign is over, you’ll also need to follow the rules for reporting any earned income.
Grants: Small business grant programs are offered by federal, state or local government agencies, as well as private entities. There may also be additional grant options for women- and minority-owned businesses.
Venture capital: For small businesses with high-growth potential, venture capital could give you financing in exchange for an equity stake in your company. Business owners would not have to take on debt to finance their companies, but they must be willing to give up a certain amount of control.