The True Cost of Starting a Small Business

If you're ready to start a small business, congratulations! Here's a breakdown of what to expect so you don't lose sight of any challenges that can come along the way.

Woman business owner setting up an Open sign in cafe window
Author By the Axos Bank Editorial Team on October 27, 2022
Reading Time 4 min read

If you’re ready to start a small business, congratulations! It can be easy to get so excited about your ambitions that you lose sight of, or underestimate, some of the challenges that inevitably come along with the process. That’s why it’s important to know the true cost of starting a business before you begin.

The type of business you’re starting will play a large role in that cost, as will the number of employees you plan to hire. Perhaps yours is a solo endeavor that will begin without any employees. There are expenses that will be obvious and others you may have never considered. Here’s a breakdown of what you can expect.

Ready, Set, Go!

Your feet are in the starting blocks, and you’re ready for the race. You already know starting a business will cost significant money. But what does that mean for you?

Small business owners spend an average of about $40,000in their first year of business. A variety of factors will play into your specific cost. But that gives you a good idea of what it will take to prepare, so you’re not diving into a swimming pool with no water.

That $40,000 figure isn’t an upfront cost but rather one that is incurred over the course of the first full year running a business. And some of that cost is offset by any revenue you earn during the first year of operation.

Take Stock of Your General Costs

Let’s start with the more obvious costs. The following list includes a few line items that most business owners would expect to pay when getting started.

General costs include:

  • Office space
  • Utilities
  • Inventory
  • Employee salaries
  • Equipment and supplies
  • Furniture
  • Software

Office space/utilities

While not essential to all businesses, office space can be very valuable. It’s also one of the most expensive costs for a business owner. Where your business is located plays a large role in that cost. Renting office space in New York City is far more expensive than in Dayton, Ohio. And some areas of each city can be pricier options than others.

If you choose to have a physical space, make sure to add in the cost of utilities. Depending on the local utility provider, this cost could be reasonable or surprisingly expensive.


Your product, and how much of it you need, is one of the more obvious expenses. The question of how much inventory to purchase is not as simple. Take time to crunch the numbers, and don’t order more than you need. That surplus inventory can end up as a sunk cost. This refers to an investment already incurred that can’t be recovered. Some larger companies are having to slash prices to move the extra inventory that they now have in their warehouses. The impact that surplus inventory has on a small business can be devastating.

Equipment and supplies

Equipment can be a significant expense, depending on your business. If industrial equipment or heavy machinery or top-of-the-line tech is required, you could spend tens of thousands of dollars or more. On the other hand, if your business sells a service, this cost could be very low.

Employee salaries

Many businesses require employees, and if that describes your business, the biggest question is how many employees do you need? A survey conducted by e-commerce company Shopify found that businesses with no employees spent $18,000 in their first year, while businesses with one to four employees spent $60,000.


Maybe your office space is large, or maybe most of your employees are remote. Either way, you’ll probably need some combination of tables, chairs, sofas, desks, and cabinets. This could run from several hundred to several thousand dollars.

Depending on your business, accounting software or other software programs may be necessary to operate efficiently. Need payroll software? Roll by ADP® is the first chat-based payroll app for small businesses and lets you pay your employees fast.

Unexpected Costs of Doing Business

Here come those sneaky costs that perhaps you’ve never considered. A list of some less commonly known expenses to have on your radar include:

  • Shipping
  • Web hosting
  • Permits and licenses
  • Insurance
  • Legal and financial services
  • Repairs and maintenance
  • Advertising
  • Taxes


If you have product, you need the ability to ship that product to customers. On top of general shipping fees, you may have additional costs from shipping damaged or returned items, as well as packaging costs.

Web hosting

If you have a website, you may need to plan for internet and web hosting fees, purchasing a url or web address, creating a shopping cart, and maintaining and updating your website. You may have an employee who can handle the web updates, design, and product launches or you may turn to a web service provider and an online store platform.

Permits and licenses

To run your business, you may need a business license from your state, county, or city. Visit your state government’s website to determine which permits and licenses you need. Many of these renew on an annual basis.


Protecting your business from risks – and there are potentially many of them – requires insurance. General liability insurance protects businesses from losses due to lawsuits, bodily injury, property damage, and more.

There are several different types of business insurance. Speak to an insurance agent to find out what type of insurance makes the most sense for you.

Legal and financial services

New business owners often hire a corporate lawyer to draft articles of incorporation, which are documents required to legally operate your business. Incorporation costs can be a few hundred dollars.

Financial services costs could come from paying bookkeepers, accountants, or other financial professionals. Your expenses will vary on how much help you need, and you can save money by doing some of the tasks yourself.

Repairs and maintenance

Equipment breaks. Electrical and plumbing issues in an office space happen. General maintenance is a given for any business. You can plan for some of these expenses, while others will be random and unplanned.


Your revenue may largely determine how much you spend on advertising. Depending on your business, a reasonable amount to budget for advertising is between 1 to 5% of your revenue. The number that makes sense for you may be much closer to 1%. Check out these eight tips for cost-effective strategies to market your business.


You are subject to a 15.3% self-employment tax, which pays into Social Security and Medicare. You must file a tax return if the net income from your business exceeds $400, and you likely need to pay estimated taxes quarterly. You may also be expected to pay state and federal sales tax on the items you sell. If you have an online store, you can add this tax into the checkout process.

Additional Fees

If your customers use credit cards to pay for your good or services, you may be charged a fee or “Interchange rate” for processing those transactions. Credit card charges can range from 2.87% to 4.35% of each transaction, not including merchant service provider fees. For a small business owner, those fees can add up quickly. You can pass some of those charges on to your customer, but the fees can’t exceed the cost of accepting the card or 4%, whichever is the lowest amount.

Looking to start your own business? Our partner, Axos Bank has resources to help you begin your journey as a business owner, including interest-bearing checking, savings, and money market accounts. Axos Bank also partners with Centerstone SBA Lending to provide small business loanswith a federally backed guarantee.

Small Business Payroll • Business Basics • Small Business • Tax Filing • Payroll
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