Startup Costs Definition

Startup costs are the expenses a small business owner incurs to open a new company. Startup costs can also cover money spent or costs associated with acquiring an existing business. Additionally, start-up costs include money paid or costs incurred in anticipation of creating a business. Any costs an entrepreneur incurs in the creation, investigation, or acquisition of a business are classified as startup costs.

What are startup costs?

Quite a few expenses can be considered startup costs. Here are a few of the most common ones:

• Advertising and marketing before the business opens
• Office space and associated expenses 
• Lawyer and accountant fees
• Business formation costs
• Market research
• Inventory purchases
• Employee salaries
• Creating a website
• Rental of a retail space or warehouse

However, if an entrepreneur is acquiring an existing business, startup costs only include expenses incurred in investigating and deciding if they wanted to purchase that business.

Startup Costs Benefits

When business owners think of costs, they might not associate those costs with benefits. But startup costs have the notable benefit of being tax-deductible. These costs are often deductible on the federal and state levels (but business owners will be wise to consult their state’s revenue codes for full guidelines about deducting startup costs).

Other startup costs may include purchasing certain assets that may be considered capital expenditures. Capital expenditures are funds allocated for purchasing fixed assets or assets that will last longer than one year. These include real estate, computers, vehicles, and other machinery. Although business owners cannot deduct the full costs of capital expenditures from their federal taxes all at once, they can gradually deduct those costs over time. 

Startup Costs Considerations

When exploring opening a new business or acquiring a business, entrepreneurs must consider their startup costs in advance. Startup costs can add up quickly, so it’s important to investigate potential startup costs before paying. Plus, if an entrepreneur is seeking investors, they’ll want to know how much a business would cost to start. A good business plan will include a detailed estimate of startup costs, particularly if the business owners plan to seek investors, loans, or other forms of funding. 

Other Names for Startup Costs

Other terms that similarly capture the startup cost’s meaning include pre-opening costs or organizational costs. People may use other terms, but the definition remains the same: costs associated with starting a business.

Startup Costs Examples

Sometimes definitions are a bit abstract. Here’s an example of startup costs in the real world.

Suppose an entrepreneur wants to open a shoe store. To open the store, they’ll need to rent a retail space, purchase computers, hire employees, and purchase inventory. The owner also wants to protect their personal assets from business liabilities, so they decide to organize as an LLC. They also advertise in the local newspaper and hire a professional web developer to help them set up a business website.

All of those costs are startup costs because they’d be incurred before the shoe store even opened.

Summary: Startup Costs Definition

Startup costs are incurred when an entrepreneur starts a new business, explores starting a new business, or investigates acquiring an established business.

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