Starting your own business is an exciting journey, but it also comes with its fair share of challenges. About a third of businesses with employees fail in the first two years, that’s why it’s important to stack the odds in your favor from day one.
Understanding the hidden costs of starting a small business in detail is important. It’s not just about the obvious expenses such as rent, utilities, and equipment but also about being prepared for those invisible industry-specific costs that can catch you off guard.
Commonly overlooked expenses
Sometimes industry-specific costs can be overlooked. Some of the well-known costs that can be overlooked by an aspiring entrepreneur are discussed below.
Licenses and permits
Depending on where your business is located and how you’re structuring it, your fees may vary. The fees may vary depending on whether you plan to operate as a partnership, corporation, nonprofit, or limited liability company.
Let’s take the example of New Jersey. A for-profit LLC will have to pay a fee of $125 to register, Tennessee requires a filing fee of $300 and San Diego charges $34 for all the businesses operating within the city limits for a Business Tax Certificate.
Again, depending on what your business does, you might need additional licenses and permits. Selling alcoholic beverages? You must meet the requirements of the Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau along with state and local regulations, and a business operating an oversized vehicle will often need a state permit. This might sound too much but with patience and planning, you’ll have everything to kickstart your business journey.
Business Software
Business software is required for efficient operations, with monthly fees common for accounting, payroll, and other necessary tools. If you opt for a POS system to process customer payments, be prepared for processing fees for each debit and credit card transaction. These fees can quickly add up, especially for businesses with high volumes of card transactions. You must keep an eye on these expenses for budgeting and financial planning.
Business Insurance
Ensuring your business is adequately protected means having the right insurance coverage in place. Common types of insurance include general liability, professional liability, commercial auto, and commercial property insurance. You can save a decent money if you bundle different insurances with a business owner’s policy.
If your business operates from your home, it’s wise to consider adding a home-based business insurance rider to supplement your homeowner’s insurance. This provides additional protection for business-related liabilities and assets that may not be covered under a standard homeowners policy. If you have employees, it’s important to have workers’ compensation insurance.
In most states, this coverage is mandatory and ensures that your employees are financially protected in case of workplace injuries or illnesses. By being informed about insurance, you can safeguard your business and its assets while also meeting legal requirements and providing peace of mind for yourself and your employees.
Social Security and Medicare taxes
When you are self-employed, it’s important to understand the taxes you are responsible for. As a self-employed individual, you’ll face a self-employment tax rate of 15.3% on your net earnings. This comes down to 12.4% for Social Security and 2.9% for Medicare. When you have employees, this burden gets shared. As the employer, you’ll cover 6.2% of your employees’ wages for Social Security and 1.45% for Medicare. There are other taxes that you need to factor into your budget such as federal and state unemployment taxes.
Understanding these tax obligations upfront can help you plan effectively and avoid any surprises at the last moment.
Uncovering additional costs
When it comes to starting a business, there are endless possibilities. Every business is different, which means the costs can vary depending on factors like the industry, where you’re located, how big you want to go, and even how you plan to sell your goods or services.
You must tap the wisdom of those who’ve been there before and do a bit of good old-fashioned research. Talk to other business owners, search on the web for resources, or can also chat with a mentor.
Talk with an expert
The Small Business Administration (SBA) is a great resource for aspiring entrepreneurs. They offer a treasure trove of resources, including free business counseling through partner agencies like Small Business Development Centers, Women’s Business Centers, and Veterans Business Outreach Centers. These places aren’t just for getting advice on the basics; they can also clue you in on some of those sneaky, lesser-known costs of starting a business, like throwing a killer grand opening, training your future rockstar employees, or getting those all-important certifications for your managers.
Running a business for the first time can feel like tackling a mountain with no map. If you’re feeling a bit lost, you can surely think of bringing someone on board who’s been there and done that. You can also think of a crash course for yourself. You should always stash away some cash for a rainy day, budgeting three to six months’ worth of working capital can be a lifesaver in those early days when the revenue from sales hasn’t quite caught up to your expenses.
Due Diligence
You don’t want to be surprised by back taxes, liens, or other liabilities when you think of purchasing a business, acquiring existing inventory, or accepting the transfer of a liquor license. You must thoroughly research a company before arriving at a decision. You can get information about the company through online searches, public records, and more. Have patience and don’t rush through the process, take your own time and make sure you go through every detail.