How much does it cost to start a business? An itemised worksheet

How much does it cost to start a small business?

The cost to start a small business depends on what you sell, where you sell it and how much you buy before the first sale. A maker selling online from home can start with materials, a few tools and a store. A shop with a lease, staff and a large first order of stock needs far more cash before it opens.

Because the range is so wide, a national average tells you little about your own business. The useful number is your own total, built line by line. The SBA's method has three parts: list every expense, estimate what each one will cost, then add the one-time costs to a run of monthly costs. It recommends counting at least one year of monthly expenses, but counting five years is ideal.

The SBA groups businesses into brick-and-mortar businesses, online businesses, and service providers. Each type has different costs. A product business usually spends most of its early money on inventory, materials, equipment and packaging, while a service business spends more on licenses, insurance and marketing.

Startup cost worksheet: every line to price

The SBA lists the startup costs most businesses have no matter what they sell: office space, equipment and supplies, communications, utilities, licenses and permits, insurance, lawyer and accountant, inventory, employee salaries, advertising and marketing, market research, printed marketing materials, making a website. The table turns that list into a worksheet for a small product business, with a note on whether each line is usually paid once or every month.

The SBA also publishes the worksheet as a fillable PDF you can download and fill in to total your own costs.

Add any line that is unique to your business. The SBA notes that permits and licenses tend to have clear, published costs, so price those first, then estimate the less certain lines by asking suppliers and other owners what they pay.

One-time costs and monthly costs

The SBA asks you to sort every line into one of two groups. One-time costs are paid to open the business. The SBA's examples are buying major equipment, hiring a logo designer, and paying for permits, licenses, and fees. Monthly costs keep coming after you open; the SBA's examples are salaries, rent, and utility bills.

The split matters because the second group decides how much cash you need. A business rarely covers its monthly costs from its first month of sales, so the cash you raise has to pay for the one-time costs and for several months of running costs. That is why the SBA asks for at least one year of monthly expenses, but counting five years is ideal rather than a single month.

Inventory sits in both groups. The first batch of stock is a one-time cost to open; restocking after each sale is a running cost that sales should pay for. Count the first batch in your startup total and price the rest into each product.

Example: adding up startup costs for a home candle business

Example only. The amounts are assumptions for a one-person candle maker selling online from home, with no lease and no staff. Replace each one with the prices you are quoted.

1. List the one-time costs

   Example: equipment such as a pouring pot, thermometer and scale ($300), the first batch of wax, wicks, fragrance and jars ($600), labels and a logo ($250), and state and local registration ($150). One-time total in this example: $1,300.

2. List the monthly costs

   Example: store plan and domain ($40), liability insurance ($35), packaging and postage supplies ($60), and ads and samples ($100). Monthly total in this example: $235.

3. Multiply the monthly costs

   Example: twelve months of running costs at $235 is $2,820. The SBA suggests at least one year of monthly expenses, but counting five years is ideal, so a longer plan would multiply further.

4. Add the two totals

   Example: $1,300 in one-time costs plus $2,820 in running costs gives $4,120 of cash needed before sales are counted. Sales will cover part of the running costs, and the break-even point tells you how many sales a month it takes.

Startup costs tax deduction: the IRS rule

For federal income tax, the IRS defines business start-up costs as the expenses you incur before you actually begin business operations. They can include costs for advertising, travel, surveys, and training. They are generally capital expenses, which means they are not simply deducted like an ordinary expense.

Instead, you can elect to deduct up to $5,000 of start-up costs in the year your business begins. A corporation or partnership can also deduct up to $5,000 of organizational costs, the costs of forming the entity. Each limit shrinks when costs are high: it is reduced by the amount your start-up or organizational costs exceed $50,000.

Whatever you do not deduct in the first year is spread out. The Form 4562 instructions say any cost not deducted currently must be amortized over a 180-month period, starting with the month you begin business operations. You are not required to attach a statement to make the election, but once made it is irrevocable.

Example: a business with $8,000 of start-up costs can deduct the full first-year limit in its first year and amortize the remaining $3,000, about $200 a year, over the amortization period. The amounts are an example only.

Tax rules change and state income tax rules vary by state. This page is general information, not tax advice. Check the current IRS publications or ask a tax professional before you file.

Ways to lower startup costs for a small business

None of these remove the costs every business has. They cut the ones you control.

• Start from home if your city's zoning allows it, and add a lease only when sales need the space.
• Buy materials for one small batch first, then reorder once you know what sells.
• Rent or borrow expensive equipment until the business can pay for it.
• Use a store plan with no long contract, so you can change it as sales grow.
• Keep receipts for every cost before launch, so you have records of your start-up costs when you file.

Using your startup cost estimate

A written estimate is the part of a business plan that lenders and investors read closely. The SBA says compare expected costs to projected revenue to judge whether the business can make a profit.

The same numbers give you your break-even point. The SBA's formula is Fixed Costs ÷ (Price – Variable Costs) = Break-Even Point in Units. Your monthly costs are the fixed costs; the materials and fees on each sale are the variable costs. If the result is more sales a month than you can make or sell, change the price, the costs or the plan before you spend the money.

Where Nation fits

Questions about startup costs