How Much Does it Cost To Start a Business? + Other Key Questions

Dreaming of being your own boss and launching a new business? With 16 million new business applications since 2021, you’re not alone. But whether your dream comes true depends on many factors, and every small business owner needs to ask themself some hard questions. For example, how much does it cost to start a business?

Turning that entrepreneurial vision into reality is exciting, but it also requires careful planning, especially when it comes to business startup costs. Understanding financial obligations for your particular business is necessary to survive the competition and get started on the right foot.

So how much money do you need to start a business? This guide will break down the numbers you need to get a handle on. We’ll cover the key factors that impact startup budgets, from licensing fees to inventory and marketing spend. You’ll learn how to realistically calculate the costs of getting your business off the ground.

What are the startup costs to start a business?

Every new business venture requires capital. This covers startup costs before you can officially open your doors. Exactly how much money you’ll need can vary depending on factors like the actual costs involved in the first year of business. In other words, there’s no simple figure that can answer what the start up costs are to start a business, but here are some factors to consider:

Business type.

The startup costs for a small home-based operation like a consultancy can be minimal. It’s different from opening a restaurant or retail store, where the business model determines inventory needs, marketing strategy, and costs. These types of businesses require things like inventory and employees.

When researching business costs, make sure you compare against other businesses similar to yours for an accurate measure. If you’re starting a business online, you may be able to save on big startup costs associated with brick-and-mortar businesses.

Location.

Costs like commercial rent and taxes depend on the city and state. A small business based in a major metropolitan area could have higher overhead costs due to expensive office space. But your small business might be catering to a target audience in the city, so a rural office may be inconvenient at best, or cause you to lose business at worst. Balance what your business needs for success with your existing budget.

Industry.

Certain industries like food service or healthcare have bigger regulatory hurdles. They also have upfront requirements for things like specialized equipment, licenses, insurance policies, and legal fees. It’s important to estimate your total startup costs based on your specific business circumstances. Make sure you thoroughly understand what legal and regulatory obligations you have to follow in your industry. 

3 business expense types to be aware of.

When you create a business plan to lay out the blueprint of your business, you’ll have the opportunity to sit down with the nitty-gritty financial details. Getting your dream off the ground is the first and most important part, but without a sustainable plan, you won’t stay in the sky for long. That’s why every small business owner needs to understand the different kinds of expenses that will show up as you run a business. 

1. Startup costs.

As discussed above, there are certain costs that every business has to incur to even begin operation. That’s why you need to be prepared with money upfront to cover the costs of starting a business. Startup costs are one-time costs, that you have to pay right at the start to get your business working.

One big example is equipment—while it’s true you may need to perform maintenance or replace equipment as the years go by, when you’re starting from nothing, every piece of equipment is an upfront cost. This can range from industrial equipment for a restaurant kitchen, to POS equipment and software for retail businesses, to a properly outfitted computer for you and employees in your home consulting business. 

Another cost almost every business will have to pay is incorporation fees or other registration fees depending on the state. This move is crucial for legal and tax reasons, so that your business can be considered a distinct entity from your personal finances and legal obligations. 

Other startup costs include: 

• Office space rental
• Renovations
• Starting inventory 
• Marketing
• Website—hosting and design
• Payroll
• Office supplies and furniture
• Insurance
• Consultants

2. Overhead expenses.

Once your business is up and running, you’ll need to keep it running! This might feel far off when you haven’t started your own business yet, but a wise business owner thinks ahead. Some of your startup costs will truly be one-time payments, such as the purchase of new equipment. However, every small business owner should keep in mind that certain expenses will be ongoing, regardless of how well business is doing.

Expenses that are not related to labor, direct materials, or production are referred to as overhead expenses—they exist whether or not your business is generating revenue. Some examples include the costs that come of leasing office space or maintaining a web presence, payroll for your team, utility costs, and so on.

Overhead expenses can be either fixed or variable. Fixed costs, like your monthly lease payments, stay unchanged regardless of your business activities. Variable costs—like the utilities you use in a month where your restaurant is open more days than usual—change depending on your business operations. Either way, you should factor overhead expenses into your future financial planning.

Other overhead expenses include: 

• Rent
• Utilities
• Insurance
• Web hosting 
• Sales and marketing
• Bookkeeping
• Payroll 
• Maintenance and repairs

3. Cost of goods sold (COGS).

Once business is booming, you’ll need to spend money to keep the money coming. The cost of goods sold refers to the costs incurred when you make a sale. For example, if you run a bakery, then the ingredients and labor that went into making the croissant a customer bought would count as a COGS expense. Sometimes also known as the cost of services (COS), this type of expense is directly tied to how well your business is doing. 

Some examples of COGS expenses include:

• Product costs and inventory
• Raw materials
• Payroll to cover cost of direct labor
• Transportation and shipping

Both overhead and COGS qualify as operating expenses—the kinds of expenses you incur as a result of operating your business. Operating expenses will exist as long as your business does, but the actual numbers will look different depending on how business is doing. When considering how much it costs to start a business, you should factor in which costs will become operating expenses after your initial startup payments. 

Hiring your first employee? Check out our new hire training checklist and onboarding guide.

5 factors that influence startup business costs.

Once you’ve determined your startup costs and you’re ready to get your business off the ground, it’s time to start checking off the major action items. Here’s a look at some of the items to put on your to-do list.

1. Determine the right business structure.

The legal structure you choose impacts everything from taxes to operations costs. Evaluate the pros and cons of each. You can do this by considering things like ownership, funding needs, and administrative work.

Common structures for businesses just starting out include:

Sole proprietorship: The company and the owner are considered the same. The owner is personally responsible for all business responsibilities.

Partnerships: A business with more than one individual. A partnership requires a partnership agreement, and partners have limited liability for the debts of the LLP.

Limited liability companies: Can be owned by one or more people/companies and limit your personal liability for business debts. They’re one of the easiest business structures to establish. The process of incorporation and filing fees for a limited liability company can vary by state.

2. Register the business.

One of the first major steps is legally registering your trade name with federal or state authorities. Make sure to research if your chosen business name is still available. Fees for this can range from a few hundred dollars to thousands of dollars. 

3. Handle legal fees and tax obligations.

Obtain licenses and permits required for your industry. You’ll also need to set up the appropriate tax accounts and procedures for payroll. Many states and localities have their own obligations to ensure regulatory compliance from day one, so be sure to follow all rules that apply to your business.

For example, it’s important to apply for an employer identification or tax I.D. number. You can apply for an employer identification number (EIN) through the IRS. You need one so you can file federal taxes, hire employees, and open a business bank account. Some states also require a state-level tax I.D. number, so check if one is needed in your state.

4. Secure funding.

Now that you have a solid business plan, you can begin putting money toward startup expenses. You may need to get a small business loan or investors beyond the capital you have access to, and that takes time. Make sure all your timelines align before you launch.

Keep in mind that you should also have some money set aside in a bank account to cover ongoing or unexpected expenses. Research shows that 55% of business owners say they have $50,000 or more across all their business bank accounts. And 23% report having $250,000 or more on deposit.

Need additional help working through this step? The Small Business Administration offers additional resources to help estimate employee costs and apply for startup loans and business credit cards.

5. Officially launch your business.

With planning complete and operations ready, it’s finally time to start selling your products or services. Have a strong promotional strategy for attracting those first customers so that you hit the ground running. Also, continue keeping an eye on your expenses to keep your business in good standing as you get the ball rolling.

Getting the foundational finance work done upfront goes a long way to setting yourself up for sustainable growth. Putting in the work now will continue to pay off as the business evolves. 

Start your small business on the right financial footing. 

Being a new business owner and starting your own business is exciting. Getting a handle on the financial and operational costs upfront goes a long way toward increasing your odds of success. Carefully calculate spending and think through your goals now and you’ll make a positive impact on your business for years to come.

From there, you can focus on things like remaining compliant and coordinating your team. Thriving businesses are built on operational efficiencies that allow you to maximize productivity and profitability from the first day. But cutting costs doesn’t have to mean cutting quality—it just means working smarter, not harder.

You can get started with efficient tools right out the gate by using Homebase for all your team management needs. Designed for hourly work, Homebase will help you schedule your team and track their hours for free. You can even run payroll seamlessly in-app, or export to your chosen payroll tool, and bring new employees onboard your new business with our hiring and onboarding tools. 

Homebase is the all-in-one management app that simplifies running your small business. Get started now for free.