Startup Costs Definition

Startup costs 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 you incur in the creation, investigation, or acquisition of a business fall under the category of startup costs.

What are Startup Costs?

Quite a few items can be included in the startup costs business definition. Startup costs may include the following:

• 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 you’re acquiring a business, startup costs only include expenses incurred in investigating and deciding if you want to purchase that business.

Startup Costs Benefits

One of the startup costs advantages is that you can deduct some of these costs from your business’s federal taxes. If your state imposes business taxes, these costs are likely deductible from your state’s business taxes as well.

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

Startup Costs Considerations

When exploring opening a new business or acquiring a business, you must consider the startup costs in advance. Startup costs can add up quickly, so it’s important to investigate potential startup costs before you start paying for things. Plus, if you seek investors, they’ll want to know how much you’ve estimated it would cost to start your business. Your business plan should include your startup costs if you’re seeking investors, loans, or other 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

You may still wonder what startup costs cover, so allow us to provide you with an example.

Suppose you’d like to open a shoe store. To open the store, you’ll need to rent a retail space, purchase computers, hire employees, and purchase inventory. You also want to be sure that your personal assets are protected from any business liabilities, so you decide to organize your business as an LLC. You also need to pay for advertising in the local newspaper to get the word out about your soon-to-be new business. Lastly, you decide you want a professional website that’ll require paying for a professional web developer.  

All of the above costs are startup costs. They are all costs you’ll incur before operating your shoe store.  

Summary: Startup Costs Definition

Startup costs are incurred when you start a new business, explore starting a new business, or investigate acquiring an established business.