Guide to Startup Costs
Every startup has different types of expenses and varying cost volumes. For example, an ecommerce startup will have different costs than a food delivery app startup. However, there are some commonalities, such as marketing, technology, and formation costs — just to name a few. For new entrepreneurs, identifying, understanding, and planning for business expenses is crucial to the success of the startup. To get your startup off on the right track, we developed this guide on not only the startup costs you can expect but how to calculate them as well.
What Are Startup Costs?
First, it’s important to be familiar with the type of costs you can expect to accrue as a startup. Startup costs range from payments that are repeated and unchanging to costs that vary based on your business’s sales volume — these are called fixed and variable expenses.
Your startup’s fixed expenses are unchanging, repeated costs that you can expect to pay monthly or annually. A few examples of fixed expenses for startups include:
- Monthly rent
- Insurance and administrative costs
Comparatively, variable expenses are costs that will change depending on a few factors such as sales, state of the market, and circumstances outside your control. A few examples of variable expenses for startups include:
- Shipping costs
- Sales commissions
Common Startup Costs
Startup formation fees vary based on your chosen business structure. There are four common business structures: sole proprietorship, limited liability company (LLC), corporation, and partnership. Each structure includes different fees and requirements to qualify. For example, forming an LLC costs between $50 and $500, while forming a sole proprietorship costs nothing but offers fewer benefits than the former.
Effective market research is an integral part of developing a strong foundation for your startup. Whether it’s focus groups or market surveys, investing in market research can be a costly but invaluable tool for any startup looking to build consumer-friendly products and an effective marketing strategy.
Hiring legal help can mitigate the risk of negative legal repercussions during the formation and operation of your startup. Typically, attorneys charge by the hour and vary greatly in cost. You can also opt to keep attorneys on retainer if their services will be used actively.
The type of insurance your startup needs will vary depending on where you’re located, what type of business you’re operating, and more. The most common insurance types that startups need are general liability insurance, professional liability insurance, and workers’ compensation insurance.
Payroll or Self-Employment Taxes
Paying your employees is one of the biggest expenses your startup needs to prepare for — making up between 25% and 50% of most businesses’ budgets. This can include net pay, paid time off, benefits, and any additional expenses such as commissions. In addition to this, you should factor in self-employment taxes if applicable, which is a tax rate of 15.3% to cover Social Security and Medicare.
Rent and Utilities
Rent and utilities are fixed expenses that will vary based on your location and type of space. Generally, you can expect to pay around $2 per square foot for utilities; however, this is dependent on location and the type of business you’re operating.
Supplies and Equipment
All the materials you’ll need to launch and operate your business fall into this category. Depending on your business type, this can be a hefty percentage of your starting costs. Variable expenses for supplies and equipment will be maintaining, repairing, or replacing your equipment.
A variable cost, inventory expenses will typically depend on the number of sales your startup is making. A few factors that can affect the number of inventory costs you can expect are the time of year, state of the economy, and state of the market, such as its saturation level.
Marketing is essential to the success of any startup; however, it doesn’t have to take up your entire budget. Your startup’s marketing costs should account for roughly 0% to 10% of your budget. Fortunately, with social media and online marketing available for free, a strong online marketing strategy can bring in customers without draining your budget.
Technology (Website, Software, etc.)
It’s no secret that technology is an invaluable tool for startups. Whether it’s software to manage and operate your business or developing and maintaining your startup’s website, this is an important fraction of your budget in an increasingly technological world.
How to Calculate Startup Costs
Research and Determine Expenses
Startup costs vary greatly depending on several factors, including location and industry. Research is pertinent to identifying what your expenses are and how to budget for them. This includes the necessary expenses to operate your business as well as state and federal requirements such as fees, taxes, and insurance expenses. The latter is especially important to avoid fines and citations when launching your startup company.
Add Up Total Expenses
Once you’ve identified the expenses that apply to your startup, create a list with corresponding estimates to establish a total that you can plan your budget around. It’s a good idea to overestimate the amount of money you’ll need (unless there is a flat, unchanging cost) to provide your startup with a financial cushion.
Write a Business Plan and Include Expenses
Finally, and arguably most importantly, write a business plan that includes your expenses. A business plan is a roadmap for the beginning years of your startup’s life. This plan outlines the necessary steps to achieve important milestones. Additionally, investors will undoubtedly want a well-crafted business plan to understand your business goals and capabilities before investing in your startup company.
Startup Costs Calculator
Disclaimer: This calculator is only meant to be an estimate of startup costs. Startup expenses can vary depending on the type of business you’re running.
Enter the startup expenses that apply to your business:
Startup Costs Summary
Identifying and budgeting for business costs are both essential steps to starting a startup. For new entrepreneurs, it’s important to identify, understand, and plan for the obligatory expenses that come along with business ownership in order to build a strong foundation for your startup’s success. For more in-depth information about launching your business, read our guide on How to Start a Startup to learn more.