Startup Costs

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 4,000 reviews

Jump to Section

Need help with an Investment Contract?

CREATE A FREE PROJECT POSTING
Post Project Now

Startup costs are necessary for launching a new business, and it’s essential to plan and account for them carefully since running out of money is the second biggest reason startups fail. However, entrepreneurs can prevent this from happening by creating a crystal clear picture of exactly how much money their company needs to survive and thrive.

In this article, we help you understand how startup costs work, what to expect and how to calculate them so that your new venture starts on the right foot.

What are Startup Costs?

Startup costs are the anticipated or actual expenses entrepreneurs need to start a business. Calculating business startup costs is vital for accounting, business planning , and tracking. A startup’s costs will vary according to the business entity, industry, location, and size.

For example, local retailers with a physical location have much different startup cost needs than those operating solely online. However, most businesses have similar startup costs, including pre-opening and post-opening expenses.

Example of Startup Costs

Seeing a real-world example can help us understand how more complicated or abstract concepts work. Here is an example of startup costs to better understand how they work:

  • Sean has an extensive collection of fine crystals that he wants to sell online
  • He acquired these crystals by purchasing unique stones over several years and valued at $90,000
  • Sean already has plenty of inventory, but for how long and how will he sell them?
  • He also knows that he needs to execute his marketing plan, which includes a website with terms and conditions and a privacy policy
  • Based on projections, Sean believes he can sell $9,000 in crystals every month with $3,000 in startup costs
  • However, he also knows he’ll run out of crystals within ten months of launching the site
  • Sean must also plan for sourcing new products, including shipping costs and travel, but he doesn’t want to spend more than 33 percent of revenue on promotion
  • He is creating his funding objectives for the next three years
  • Sean needs around $3,000 per month or $108,000 in three years for startup costs

How Much Do Startups Usually Cost?

The cost for a startup drastically differs from company to company, and a microbusiness or home-based franchise can start around $2,000. However, the average cost of starting a small business, big or small, is about $31,000 .

Avoid underestimating your expenses, and always keep the changes your business may face at the top of your mind. Overlooking startup costs is easy when focused on the bigger picture. Being a successful entrepreneur requires you to play both positions for the best possible outcome.

Meet some lawyers on our platform

Michael M.

168 projects on CC
View Profile

Briana C.

58 projects on CC
View Profile

Wendy C.

2 projects on CC
View Profile

Justin K.

3 projects on CC
View Profile

How to Calculate Startup Costs

Many entrepreneurs have a closely held belief that startup costs are all about operating expenses. While these costs are vital, you need to consider them from a big picture perspective, too. Building a plan filled with milestones will also keep you on track for the next stage.

Here is a five-step process for calculating your startup’s costs:

Step 1. Set Your Milestones and Objectives

Beginning with the end in mind is an essential step for calculating startup costs. Look at where your company is currently at, and then think about where you’d like for it to be in the next three to five years.

Set financial objectives with milestones along the way that alert you to positive and negative progress so that you can make adjustments as needed. Your business plan should be a treasure trove of insight for this step.

Step 2. Create a Financial Roadmap

After reviewing your objectives, your next step is to create a financial roadmap. Try to anticipate how your business will change as you achieve each milestone set.

While your business’ startup costs may look different, here are a few examples of costs that you may incur:

  • Business structure fees
  • Consultants
  • Equipment
  • Furniture
  • Insurance
  • Inventory
  • Marketing
  • Payroll
  • Rent/mortgage
  • Shipping
  • Supplies
  • Taxes
  • Travel
  • Utilities
  • Website

Account for these items, line by line and phase by phase. As you achieve milestones, such as moving from the pre-launch to the post-launch stage, some of these costs may change over time. Consider how you can partner with collaborators to enhance your results or reduce costs.

Step 3. Start Looking at Funding

Now that you know exactly how much money you need, it’s time to determine your funding approach. Can you bootstrap your efforts, or do you need outside help? The best way to answer this question is by calculating your startup’s burn rate , which is the amount of capital your company will need each month.

There are several ways to calculate your burn rate, such as using pro forma template data. However, this article assumes that you’re a brand new startup without any funding whatsoever. So, what you’ll do in this situation is take your anticipated expenses for each year and divide it by 12 to get annual projections.

For example, let’s say you anticipate spending $100,000 in the first year and $50,000 for the second year, then your burn rates are roughly $8,333 and $4,167, respectively. These numbers will tell you if you need to seek additional funding from outside investors, such as venture capitalists, angel investors, and banks.

Step 4. Set Funding Goals

Depending upon your results from the preceding steps, there are several ways you can approach funding. From convertible debt to SAFE notes to family and friends, set and structure your funding goals so that they’re sensible for your situation.

Your burn rate and total expenses are merely a baseline that establishes how much money you will need. Think about what you’ll need for a cushion, but don’t go overboard since too much funding can be a bad thing at the wrong time.

Step 5. Use Funding to Balance Milestones

When you know how much money you need to hit your primary objectives, it’s time to start thinking about what you’ll need to hit your milestones in between. You’ll need to consistently review these two points so that you hit your funding and business goals as expected.

You can also check out this article to learn more about calculating startups costs.

How Do Startup Costs Impact Taxes?

The Internal Revenue Service (IRS) allows startups to deduct some or all of their startup costs on income tax returns for the year they launched their business. However, this amount also depends on the amount spent and amortization. If you spend less than $50,000, then you can deduct $5,000 from your taxes immediately.

However, if you spend over $50,000, the deduction decreases by $1 for every dollar over $50,000 spent. You can also amortize assets by writing them off over time. So, if you purchase a $5,000 server and amortize it over five years, then you can write off $1,000 for each year in service.

For more information about startup costs and taxes, this web page may be helpful.

You cannot deduct startup costs from taxes, including research, development, taxes, depreciation, and asset transfers, and these costs don’t qualify for amortization or deduction.

If you have questions about how startup costs impact your business, speak with a lawyer for a startup in your state. They can help you develop your projections and install the necessary legal documents to protect your new business.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

Michael B. on ContractsCounsel
View Michael
5.0 (10)
Member Since:
October 30, 2020

Michael B.

Attorney
Free Consultation
Get Free Proposal
Illinois
13 Yrs Experience
Licensed in IL, MN, WI
University of the Pacific

Michael has extensive experience advising companies from start-ups to established publicly-traded companies . He has represented businesses in a wide array of fields IT consulting, software solutions, web design/ development, financial services, SaaS, data storage, and others. Areas of expertise include contract drafting and negotiation, terms of use, business structuring and funding, company and employee policies, general transactional issues as well as licensing and regulatory compliance. His prior experience before entering private practice includes negotiating sales contracts for a Fortune 500 healthcare company, as well as regulatory compliance contracts for a publicly traded dental manufacturer. Mr. Brennan firmly believes that every business deserves a lawyer that is both responsive and dependable, and he strives to provide that type of service to every client.

Brad H. on ContractsCounsel
View Brad
5.0 (5)
Member Since:
November 5, 2020

Brad H.

Principal
Free Consultation
Get Free Proposal
Raleigh, NC
11 Yrs Experience
Licensed in NC
University of North Carolina

Brad is a business attorney with experience helping startup and growing companies in a variety of industries. He has served as general counsel for innovative companies and has developed a broad knowledge base that allows for a complete understanding of business needs.

Matthew R. on ContractsCounsel
View Matthew
5.0 (2)
Member Since:
November 6, 2020

Matthew R.

Attorney
Free Consultation
Get Free Proposal
Denver, Colorado
16 Yrs Experience
Licensed in CO, OH
Case Western Reserve University

I am an attorney located in Denver, Colorado with 13 years of experience working with individuals and businesses of all sizes. My primary areas of practice are general corporate/business law, real estate, commercial transactions and agreements, and M&A. I strive to provide exceptional representation at a reasonable price.

George O. on ContractsCounsel
View George
4.9 (4)
Member Since:
November 2, 2020

George O.

Managing Attorney
Free Consultation
Get Free Proposal
Houston, Texas
16 Yrs Experience
Licensed in TX
South Texas College of Law

George is a lifelong Houston resident. He graduated from St. Thomas High School and then Texas A&M University. He obtained his Doctor of Jurisprudence from South Texas College of Law in 2007. He is experienced in real estate, estate planning & probate, civil/commercial matters, personal, injury, business matters, bankruptcy, general counsel on-demand, and litigation. He is active in the community serving as past-president of the St. Thomas Alumni Board, a current member of the Dads Club Aquatic Center Board of Directors, current member of the Dickinson Little Italy Festival of Galveston County Board of Directors, and former PTO President for Briarmeadow Charter School.

Ramsey T. on ContractsCounsel
View Ramsey
4.9 (5)
Member Since:
November 3, 2020

Ramsey T.

Founding Partner
Free Consultation
Get Free Proposal
New York
26 Yrs Experience
Licensed in NY
William and Mary

My clients are often small and medium size technology companies, from the "idea" stage to clients who may have raised a round or three of capital and need to clean up a messy cap table. I help with all legal matters related to growth that keep founders up at night - hiring people, allocating equity, dealing with shareholders and investors, client negotiations and early litigation counseling (before you need a litigator). I've seen a lot, and because I run my own business, I understand the concerns that keep you up at night. I’ve been through, both on my own and through other clients, the “teething” pains that will inevitably arise as you scale-up – and I’m here to help you. I have over 20 years international experience devising and implementing robust corporate legal strategies and governance for large multinationals. I now focus on start-ups and early/medium stage technology companies to enable a sound legal foundation for your successful business operations. Many of my clients are international with US based holding companies or presences. My 17 years abroad helps me "translate" between different regimes and even enabling Civil and Common Law lawyers to come together. Regularly, I handle early stage financings including Convertible Notes, Seed and Series A/B financings; commercial and technology contracts; international transactions; tax; mergers and acquisitions.

Ross F. on ContractsCounsel
View Ross
Member Since:
October 27, 2020

Ross F.

Managing Partner
Free Consultation
Get Free Proposal
Bedford, New Hampshire
12 Yrs Experience
Licensed in MA, NH
University of Arizona

I am an experienced technology contracts counsel that has worked with companies that are one-person startups, publicly-traded international corporations, and every size in between. I believe legal counsel should act as a seatbelt and an airbag, not a brake pedal!

John H. on ContractsCounsel
View John
Member Since:
November 10, 2020

John H.

Attorney-at-Law
Free Consultation
Get Free Proposal
Mobile, AL
12 Yrs Experience
Licensed in AL
Thomas Goode Jones School of Law

John Daniel "J.D." Hawke is an experienced attorney with a law practice in Mobile, Alabama. He was born in Fairhope, Alabama and after earning his undergraduate degree at Auburn University, he received a law degree from Thomas Goode Jones School of Law in 2010. After law school, he formed the Law Office of J.D. Hawke LLC and over the last decade he has fought incredibly hard for each and everyone of his clients. His practice focuses on representing people facing criminal charges and clients dealing with family law matters. In addition to criminal defense and domestic relations cases, he also regularly handles contract disputes, personal injury cases, small business issues, landlord/tenant disputes, document drafting, and estate planning. He is licensed to practice law in the State of Alabama and the United States District Court for the Southern District of Alabama.

Thomas C. on ContractsCounsel
View Thomas
Member Since:
October 30, 2020

Thomas C.

Partner
Free Consultation
Get Free Proposal
Denver, CO
10 Yrs Experience
Licensed in CO
University of Colorado Law School

Thomas Codevilla is Partner at SK&S Law Group where he focuses on Data Privacy, Security, Commercial Contracts, Corporate Finance, and Intellectual Property. Read more at Skandslegal.com Thomas’s clients range from startups to large enterprises. He specializes in working with businesses to build risk-based data privacy and security systems from the ground up. He has deep experience in GDPR, CCPA, COPPA, FERPA, CALOPPA, and other state privacy laws. He holds the CIPP/US and CIPP/E designations from the International Association of Privacy Professionals. Alongside his privacy practice he brings a decade of public and private transactional experience, including formations, financings, M&A, corporate governance, securities, intellectual property licensing, manufacturing, regulatory compliance, international distribution, China contracts, and software-as-a-service agreements.

Lyndsey G. on ContractsCounsel
View Lyndsey
Member Since:
October 30, 2020

Lyndsey G.

Attorney
Free Consultation
Get Free Proposal
Roseville, MN
9 Yrs Experience
Licensed in MN
Mitchell Hamline College of Law

Attorney of 6 years with experience evaluating and drafting contracts, formation document, and policies and procedures in multiple industries. Expanded to estate planning last year.

Sammy N. on ContractsCounsel
View Sammy
Member Since:
November 4, 2020

Sammy N.

Attorney
Free Consultation
Get Free Proposal
Raleigh, NC
4 Yrs Experience
Licensed in NC
Campbell University School of Law

Sammy Naji focuses his practice on assisting startups and small businesses in their transactional and litigation needs. Prior to becoming a lawyer, Sammy worked on Middle East diplomacy at the United Nations. He has successfully obtained results for clients in breach of contract, securities fraud, common-law fraud, negligence, and commercial lease litigation matters. Sammy also counsels clients on commercial real estate sales, commercial lease negotiations, investments, business acquisitions, non-profit formation, intellectual property agreements, trademarks, and partnership agreements.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call