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Key Points:
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Manufacturers must purchase machinery, equipment and raw materials.
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Many retailers sell through both physical stores and using e-commerce.
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All startups incur costs for accounting, legal, and insurance services.
Startup founders can expect to incur several costs to start a business. Some costs are unique to your particular industry, while every startup incurs other expenses. Here’s a user-friendly guide to determining a business's total startup cost and confidently launching your firm.
The average startup cost for a business in 2024 is $40,000.
Understanding Your Business Industry
The business industry you choose impacts the types of startup costs that you’ll have to pay. The type of business may require a large initial investment, or you may be able to launch a low-cost startup business.
According to Shopify, the average startup cost for a business in 2024 is $40,000. However, the costs can vary widely, depending on the factors discussed below.
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Here are some common costs for starting a business:
1. Fixed costs
Manufacturers produce a physical product, and these firms must make a big investment in machinery, equipment, vehicles, a manufacturing location, and possibly a warehouse to store products before sale. Fixed costs may total over $100,000 for a startup manufacturing business.
A business plan for a manufacturer requires a large amount of money, and these business models must generate enough cash flow to repair and maintain assets purchased for operations.
2. Raw materials
Manufacturers also need to purchase raw materials to make the product. A furniture manufacturer, for example, must purchase wood, metal, and other raw materials to make furniture.
A small business owner may start by producing one or two products in the short term, then add more products or services over the long term.
3. Inventory
Retailers must purchase inventory to fill customer orders, and many retailers sell through physical and online stores. Retail startup cost examples also include firms that sell exclusively online.
4. Leases, buildout costs
Retailers typically lease store locations, and they also pay for the location’s buildout. Buildout includes costs for furniture, shelving, lighting, and signage. These costs can range from $50 to $200 per square foot of space leased.
A word of caution: Many retailers sign long-term leases for space. If the business struggles and isn’t profitable, the retailer may be legally required to make lease payments until the end of the lease. Some retailers must make lease payments for years, even if the business is operating at a loss or is shut down completely.
5. E-commerce costs
Customers buying online expect to have a smooth buying experience. Startups using e-commerce need to provide a website that is easy to navigate, and a seamless process for ordering and checkout. Shopify and other vendors provide software for online shopping automation.
Some e-commerce startups are able to create a low startup cost passive income strategy. Businesses that sell subscriptions for video content, for example, may be able to launch at a low cost and drive passive income from video content subscriptions. Online businesses can also generate passive income using affiliate marketing techniques.
6. Professional fees and continuing education
Many service professionals pay annual licensing fees and must pay for continuing education (CE) courses each year. You can expect to pay about $150 to incorporate your business, in addition to annual fees and CE courses.
Service-focused companies may not have to spend nearly as much on fixed assets (equipment, machinery, leased space). To serve clients, attorneys and accountants must invest heavily in IT, including hardware and software.
Doctors, dentists, and other medical professionals incur costs for fixed assets, office buildout, and IT costs. Dentists, in particular, invest thousands of dollars in equipment and suppliers.
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Startup Costs For All Businesses
Some costs are incurred by all businesses, regardless of the company’s industry:
7. Covering payroll costs
Unless you’re a sole proprietor or independent contractor, you will incur payroll costs. Every business, including solo business owners, have to pay other professionals for accounting, legal, and other types of services.
As your company grows, you’ll need to hire more full time employees and contractors to produce your products and services. According to the Bureau of Labor Statistics, the average cost of an employee is $41 to $43 dollars per hour.
The accounting, banking, and tax reporting requirements for processing payroll are complex, and many businesses hire an outside payroll company to manage the process. Even small companies with a handful of workers can save time by outsourcing payroll processing.
Handling payroll also requires startup firms to collect information from employees, including social security numbers and tax withholding data. As an employee’s tax situation changes, you may need to update information to accurately process payroll. Pay raises, bonuses, commissions, overtime pay, and paid time off must be recorded in the payroll data.
8. Paying for legal costs
Startups need several forms of legal advice.
- Legal formation: What type of legal entity will you form? An attorney may recommend a corporation, partnership, or some other type of legal structure.
- Contracts: Use an attorney to review all contracts and other legal agreements before you sign them.
- Operational issues: You need access to an attorney as legal issues come up during business operations. Situations with employees or customers may require a discussion with an attorney.
You will likely pay fees to incorporate your business, and many cities and states require businesses to pay annual fees.
9. Hiring an accountant
Once an attorney determines the legal structure of your business, an accountant can use the information to prepare business tax returns each year. While you may generate your own monthly financial statements using accounting software, you’ll eventually need to hand off that task to a bookkeeper or an accountant.
10. Working with a bank
Your startup needs a business checking account, in order to make deposits, write checks, and to manage debit transactions. As a business grows, many companies use a line of credit to finance operations.
11. Working with an insurance agent
Startups need different types of insurance. You need insurance to protect business assets from damage or theft. In addition to insuring IT equipment, vehicles, and machinery, you may need insurance for your own raw materials or inventory.
Liability insurance protects you from legal issues related to your products and services. When you hire employees, you’ll need more types of insurance. Your insurance costs may range from $500 to $1,000 per year.
12. Planning for marketing costs
Every business needs a website, and you need to invest in site design that professionally explains what you do and how your business differs from the competition. On average, business owners pay $200 to build a website, and $50 a month to host the site.
Marketing costs may include producing blog posts and other content, social media campaigns, email marketing, or traditional advertising. Marketing typically requires 10% to your startup’s total costs.
13. Covering travel costs
Startup founders and salespeople may incur travel costs to serve clients and to call on prospects. Travel costs include airline, hotel, car rental, meals, and entertainment.
14. Thinking about office space
Your startup may rent office space, or you might operate remotely. In either case, you need a certain amount of office furniture, including tables, desks, chairs, and office supplies. Monthly office space will cost $300 to as high as $1,200 per worker per employee.
15. Paying for utilities
Startups must pay for heating, cooling, electric and other costs to operate each physical location. The average monthly utility cost is $2.50 per square foot.
As technology changes, businesses may pay monthly amounts for IT software subscriptions. These costs may increase as your business becomes more complex.
16. Paying for taxes
Business owners must pay taxes on company profits. If your business is a corporation, you’re taxed on dividend payments received from the corporation. Partnerships and other business entities pass through the profits to the owner’s personal tax return.
An accountant can help you plan for taxes, and determine the types of tax returns you must file. The average tax rate for a small business ranges from 13% to 27%. As the business generates higher profits, the tax rate you pay may increase.
Financing Your Startup Costs
Startup founders frequently use their capital (cash or other assets) to finance a startup. Some founders bring in outside investors by selling ownership in the business. You may also consider a startup business loan to finance a purchase of equipment or other assets.
The Bottom Line
Startup founders can get off to a solid start by developing a comprehensive list of startup costs. Get fully informed by talking with accountants, attorneys, and other business founders. Once you launch your business, keep an eye on costs and compare business expenses to revenue.
Adaptability is the key to a startup’s success, so make changes when necessary.
FAQ
What are buildout costs that are paid for a physical store location?
Buildout includes costs for furniture, shelving, lighting, and signage. These costs are incurred to prepare the physical location for use in the business.
What types of insurance policies do many startups purchase?
Startups may purchase insurance coverage to protect property and other fixed assets from damage or theft. Many startup founders also purchase insurance to cover the risks of selling specific products and services.
What is a potential risk of signing a long-term lease for a business?
If the business struggles and isn’t profitable, the retailer may be legally required to make lease payments until the end of the lease. Some retailers must pay on leases for years, even if the business is operating at a loss or is shut down completely.
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Kenneth Boyd is a four-time Dummies book author, including the book Cost Accounting for Dummies. Ken writes, blogs, and provides video content on business topics.
