8 Overlooked Costs of Running a Business
Successful entrepreneurs do one vital thing before taking the leap to founding a business. They assess the real cost of starting a business, including all of the hidden expenditures most people overlook, and then double their budget. One thing can be certain when founding a company: It will take twice as long and cost twice as much as expected. Even if you think you’ve saved up enough money to sacrifice a salary for the foreseeable future, you might not have enough to cover all of the sneaky bills founders must pay. Before starting your own, scroll through to make sure you are well aware of all the costs of running a business.
One of the first decisions you need to make as a business founder is whether to form an LLC (a limited liability company) or a C corp (a traditional corporation). LLCs are extremely flexible when it comes to ownership structure. However, if you are looking to grow your company and plan to seek out significant angel investment or institutional capital, such as from a venture capital firm, you should form a C corp. Unlike an LLC, a C corp allows you to issue stock as a means of attracting investors. Whichever entity you choose, incorporating your business requires lawyers, and lawyers cost a lot of money. We recommend working with a lawyer who specializes in startup businesses or a less expensive legal service like LegalZoom. Filing fees are fixed, but the amount you’re charged to work with a lawyer can vary. Make sure you have a preliminary call with whomever you’re working to talk about legal fees and invoice maximums. If you can negotiate a package deal—i.e., you’re charged for the service of incorporating as one fixed cost, versus an hourly lawyer fee—do so. This will save you the headache and anxiety of accidentally going far beyond your legal budget.
Your annual taxes depend on the type of entity you choose to set up for your business. An LLC affords its partners a flexible tax structure. Owners can choose whether or not to be taxed as a partnership or a corporation. When taxed as a partnership, profits and losses pass through to the owners of the LLC. Each partner pays self-employment taxes on her share of the partnership profit. A C corp, on the other hand, is often double-taxed. A C corp issues stock and, therefore, dividends. A C corp pays taxes on its corporate profits (usually between 20% and 40%) and pays taxes again on any dividends it issues, hence the term “double-taxed.” C corp founders must also be prepared to pay a first-year franchise tax prepayment. This is a fee that usually ranges from $800 to $1000 and is paid for the privilege of doing business as a corporation in a particular state.
A lot of first-time co-founders make the big mistake of treating their deal terms too casually. Our advice? Think of the founder agreement as a prenuptial agreement. Hire a lawyer to help you figure out terms, and do so when you’re both on equal footing—that is, before the business picks up steam. You want to clearly define your roles and responsibilities, your equity ownership and vesting schedules, and your intellectual property assignment. You also want to talk about worst-case scenarios and how you will handle them. Have an experienced lawyer moderate this discussion and compose a legal document binding your conclusions in a founders’ agreement. Paying for this service upfront will save you a lot of drama and potential ugliness down the line.
Office overhead can include many things: the space you work in, your parking, your utilities, your printing paper and ink, and your food. Co-working spaces are the office of choice for many lean startup founders today. They run anywhere from $100 to over $500 per month and can include common area maintenance, printing, and kitchen use. If you’re working from home, make sure you budget for office supplies. Printer ink is extremely costly, and forgetting to include that in your budget can be an unfortunate mistake. Subscriptions to software like Adobe Suite, Microsoft Office, and Quicken or other accounting tools must be accounted for as well. When you start your own company after working for a larger corporation, it can be shocking to learn to how much of your budget goes toward setting up and maintaining your company’s infrastructure.
When you start a company, especially in the early stages, there is no tech support email to reach out to. You are your only resource unless you pay for additional support. We recommend opening an Apple for Business account so you have priority Genius Bar access 24/7. Also, make sure you’re buying adequate iCloud storage space and/or backing up all of your work. You need to make sure to implement IT redundancy so as not to lose everything you’ve poured your blood, sweat, and tears into.
Trademarking is a long process. It costs upward of $400 to apply to trademark a business in one category and an additional $300-plus for each additional category for which you choose to apply. Of course, if you skip trademarking altogether, you may be in for an even costlier settlement when your company starts gaining traction and producing revenue. If you haven’t trademarked your name, chances are someone else has or will, and it will cost you a pretty penny to deal with the legal repercussions of not owning your company’s name.
Make sure you spend the money and time to come up with an original, beautiful logo for your company. Also, factor the cost of quality business cards into your budget. In today’s world, branding is paramount, and it’s definitely worth the cost of hiring a graphic designer so that your company’s brand is poised to make a strong impression. Graphic design is also important for your website and any other published materials. For a low-cost approach to graphic design, consider crowdsourcing your logo from a site like 99 Designs, Design Crowd, or CrowdSpring.
If you don’t have the $60K-plus budget to hire a full-time developer, consider hiring freelance developers on an hourly wage. Companies such as Toptal serve as marketplaces to connect businesses to freelance developer talent. Also, consider looking overseas for development teams. Ukraine is known for its outstanding IT sector. Many U.S. companies will outsource their web development to dedicated teams abroad for quality coding at a fraction of the cost of a dedicated team in the States.
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Have you ever been surprised by a bill? What budget items have you overlooked in the past? Share with us in the comments.