Ever wondered how much it costs to start a business? Although the startup cost varies depending on the type of business, industry, and location, you can still get a rough idea of what you’d have to pay by factoring in typical business expenses.
We’ve compiled the initial business startup costs for you below so you know what to expect as a future small business owner.
How Much Does It Cost to Start a Business? Factor in These Expenses
There’s a lot of startup expenses to consider when opening a business. From one-time costs to ongoing expenses, we’ve outlined what you need to be aware of below.
Before registering your business or getting a business bank account, you need to first pick a business structure. Your business structure, also known as a “legal structure,” is important because it determines how your business is taxed, your personal liability, and your business’s ability to raise money (like stocks).
There are four main types of business structures:
- Limited liability corporation (LLC)
- Sole proprietorship
There are other types of business structures, but these are the most common. For our purposes, let’s assume you’re going with an LLC. Small business owners often favor LLCs because of their tax benefits and legal liability protection. They also come with less paperwork and are generally inexpensive to form.
The cost to form an LLC varies by state. In Arizona, for instance, you must pay a one-time $50 filing fee. In Massachusetts, however, you must pay a $500 filing fee and an additional $500 annual fee every year. The average cost of forming an LLC in the U.S. is $127, but check out this LLC cost-by-state list
to see exactly what you’d have to pay.
PURCHASING BUSINESS INSURANCE
There are many types of business insurance out there, including a few that are required by law if you have employees. There’s a lot of variation from state to state on requirements, so here’s a list of common insurance policies you should be aware of:
Worker’s compensation: Covers your employees’ work-related injuries or illnesses
Unemployment insurance: Pays toward a fund that supports unemployed workers in your state who are actively seeking a job.
Disability insurance: Helps cover an employee’s wages when they can’t work
General liability insurance: Helps cover costs if someone claims your business caused bodily harm or property damage
Property insurance: Helps cover damaged or stolen physical assets, such as your computer or your place of business
Errors and omissions: Protects your business if someone claims your service was inadequate
Because not all jobs carry the same amount of risk, the type of insurance you purchase depends on your field and industry. For example, jobs requiring heavy physical labor are seen as high-risk (think construction jobs or tree trimming), while jobs in the service industry tend to be lower risk.
Depending on what business you plan to open, you should consider getting a Business Owners Policy (BOP), which typically bundles liability and property insurance. You will probably have to get a workers’ compensation policy as well if you plan to hire employees.
So what’s the damage for business insurance? According to Progressive, small business owners in 2017 paid an average of $732
a year for their BOP policy and $2,304
a year for workers’ comp.
The actual total amount you’ll pay may differ, but business insurance is a safety net you’ll need throughout the life of your business.
RENTING A LOCATION
What you pay for rent varies widely based on your type of business and location. Online businesses, for instance, sometimes avoid the cost of rent and overhead altogether because they work out of home
, while other online businesses operate out of coworking spaces to reduce office space costs.
So what should you expect if you’re in need of an office or storefront? It’s difficult to calculate an average because some locations are more expensive than others, and even then you have to factor in additional charges, like common area maintenance, insurance, and taxes.
To put a figure on it, though, we should look beyond rent averages and discuss what portion of your revenue is typical to spend on rent. Here’s a brief list of businesses
and what percentage of revenue is typical for rent in their respective industries:
Restaurants: 6%-10% of sales
Retail stores: 5%-10% of annual sales
Auto shops: 12%-13% of annual revenue
Law firms: 6%-7% of revenue
To help this translate better to your situation, you should crunch the numbers yourself to see if a location you’re interested in is out of your budget. To do so, you need to first determine your sales per square foot.
You can get your sales per square foot with some simple math. For the example below, let’s assume your gross monthly sales are $17,000, your prospective location is 1,200 sq. ft., and the monthly rent is $4,000:
Step 1: Divide your gross monthly sales by your location’s square footage to determine your sales per square foot. Here’s an example with our sample numbers plugged in: $17,000 / 1,200 ft2 = $14.16 per ft2
Step 2: Determine your monthly rent by square foot ($4,000 / 1,200 ft2) and divide it by your sales per square foot to see your percentage of gross revenue spent on rent: $3.33 / $14.16 per ft2 = 23.5%
We see that almost 24% of gross monthly sales would go to the landlord, which is way too high. Using this formula, you can roughly determine how much (or how little) you want to spend on rent. If you’re not sure how much to allocate to rent, it may be best to err on the side of a cheaper location.
You also need to factor in other costs associated with your office space, like purchasing office equipment and office supplies to run your day-to-day operations. If you want some perspective, a recent study claimed that startup businesses spent an average of $21,000
on office interiors alone. This includes office furniture, which is a necessity.
Of course, the real rule here is “you do you” — if you need to cut costs initially, skimping on fancy chairs and desks is a must.
You may need to finance your equipment depending on what you’re doing. If you’re starting a landscaping business, you would need to purchase the tools and equipment necessary to lug it around. If you started a coffee shop, you’d need espresso machines, refrigerators, coffee pots, and coffee mugs.
If you don’t have the funds to buy your equipment outright, you can also look into leasing equipment. This may be a better long-term strategy, especially if you’re facing a lot of uncertainties with the size of your business starting out. Once your business grows and has a consistent cash flow to support it, you can look into financing your own equipment.
COST OF LABOR
Employee expenses have to be considered if you plan on hiring people to help. Besides salaries, you also have to factor in other types of compensation, such as benefits and employment taxes.
If you’re unsure how to calculate employee payroll costs, there’s a rule of thumb to help. According to the Small Business Administration (SBA), you should expect to pay up to 1.25-1.4 times their salary
. So, if you pay someone $35,000, you could be paying them anywhere from $43,750-$49,000.
What Does Starting a Business Really Cost?
The real answer is that it depends. But here are a few benchmarks
you can look at based on the type of business you want to start.
Administrative and custodial: $11,000
Professional services: $14,000-$18,000
Real estate: $75,000
Starting a business is a big step, and most small business owners lack the capital to fund their own businesses when starting out. If this is you, then one option is to look into small business loans.
Getting a loan approved by the SBA
or a bank is one way to secure the amount of money you’ll need to get started on a strong foot. The SBA specifically is favored among small business owners because it makes it easier for lenders to help entrepreneurs like yourself secure loans.
Of course, even with a loan, starting a business is expensive. When you start a business by yourself, you also have to navigate the whole process alone. To avoid many of the costs listed above and maximize your chances of success, you can start your business with Main Street.
Start Your Business and Save on Startup Costs With Main Street
If you want to start a new business, look no further than Main Street. We equip you with everything you need to start your very own painting business
— and take the sting out of startup costs.
Here are a few ways we help small business owners like yourself:
5-week training process: To ensure your success, we provide an in-person and virtual training curriculum designed to prepare you for your next venture.
In-house marketing materials: We have a dedicated team that will work with your business to help with your branding, logo, and graphics.
Customized technology: Don’t want to deal with the headache of buying a website? Our team customizes a site just for you before your first day of business.
We also offer ongoing support and check-ins to make sure your business is taking flight.
Get Started on Your Entrepreneurial Journey
Calculating the costs to start your own business gives you a realistic idea of what you’ll encounter as an entrepreneur, from your ongoing expenses to your one-time fees. You’ll face a lot of unknowns and challenge yourself daily. With our support and your hard work, though, you can achieve your dream of becoming a small business owner and run your own profitable painting business in no time.