How Much Does It Cost to Start a Small Business?
Would-be entrepreneurs have a plethora of factors to consider when they’re starting their small business. But perhaps none are more practical and pressing than the numbered answer to a single question: How much does it cost?
After all, as the saying goes, “you have to spend money to make money.” It’s exceedingly difficult to start a small business with no capital whatsoever. But in some cases, it can be done. And even on average, the amount of money it takes to start a small business … well, it’s not exactly couch-cushion money, but it might be considerably lower than you expect.
The following is a brief look at the average amount you’ll need to create your own small business, and what factors you should consider when estimating your startup costs.
The Average Cost of Starting a Small Business
$40,000. That’s what Shopify research says your average business owner spends across their first full year in business.
But the most important word there is “average.”
For instance, if you wanted to open a restaurant, enterprise accounting software firm Sage says startup costs are closer to $275,000 if you’re leasing the building — and $450,000 if you want to own the space. However, the Small Business Administration (SBA) says microbusinesses (one to three employees) cost a mere three grand to get off the ground, with home-based businesses averaging around $3,500 or so.
That’s an awfully wide range of numbers, which is why knowing the average cost of starting a small business isn’t really all that big a help. What matters more is knowing what costs go into those averages – and which ones will actually apply to your situation.
Various Startup Costs
Incorporation/Licensing
Just about any business will have to incur a small fee up front for registering the business entity they want to operate as. Those electing to file articles of incorporation or organization will have to pay a filing fee that differs from state to state, from between $50 to $725.
On top of that, your business might require specific permits, certificates or licenses depending on where you’re headquartered/where you’re conducting business, as well as what industry your business is in.
Office Space/Utilities
Among the fixed costs you might have to incur are office space and utilities – two “indirect costs” that should always be thought of hand-in-hand.
Per office space, you should allocate anywhere between 75 to 200 square feet per employee. On average, U.S. office space will cost about $40 per square foot, though it can vary widely – Manhattan average listing rates were more than $85 per square foot in 2021, according to CommercialEdge.
What some entrepreneurs overlook, however, is that they’ll also have to pay utilities for that office space. The average cost of utilities (electric, water, etc.) adds another $2-plus per square foot.
You also need equipment in the office for employees to use. As a general rule, this tends to be most expensive for small businesses and becomes cheaper as you scale. But as a small business, you can largely expect office supplies – anything from computers to paper clips – to range around $80 to $90 per month per employee. (But remember: Some office equipment is tax-deductible.)
Marketing
Many startups will try to keep costs low in several areas, marketing chief among them. Some businesses can get away with a threadbare marketing budget early on. But eventually, they will need to spend to grow brand awareness. The SBA recommends small businesses allocating between 7% and 8% of revenues to marketing.
Payroll
This is another highly variable cost. So much so, in fact, that it’s almost impossible to gauge properly without knowing exactly what industry you’re in. Netsuite, for instance, says “Many businesses operate with payroll percentages in the 15%-30% range. But labor-intensive service-based businesses may have much higher payroll costs of up to 50%, and still remain profitable.”
Depending on how your compensation is structured, most of those costs could be regular hourly or salaried wages, overtime pay, or bonuses and commissions. You also must budget for paid time off, if you offer it.
Taxes
Yes, that’s right. Uncle Sam will have his hand out, too. As of 2017, per the Tax Cuts and Jobs Act, the corporate federal tax rate is 21% on all taxable income. However, this rate applies to corporations. If your business is structured as a pass-through entity, it could deduct up to 20% of net business income.
Unfortunately, small businesses face a complex tax code that makes it overly burdensome for most to tackle on their own. That’s why entrepreneurs looking to stay on the IRS’s good side are best off seeking out professional tax help. And that’s where McManamon & Co. comes in.
We provide a full suite of small- and midsize business tax services, from comprehensive federal, state and local filings, to payroll taxes and compliance services, and even tax strategizing to ensure you take advantage of the various deductions and other breaks the IRS has to offer.
McManamon & Co. is here for your business tax, accounting and consulting needs. Call us at 440.892.8900 or contact us online today.
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