Founding a company takes money. It's the one factor inhibiting many from following their entrepreneurial dreams, and when you have the capital to spend, you want to invest it wisely. In most cases, part of your strategy entails taking maximum advantage of special rules regarding startup costs for businesses to minimize your tax burden and keep more cash for reinvesting in operations.
However, your first year of operation can be a minefield. You'll find no shortage of vendors seeking to partner with you by offering various apps, products, and services that promise to make the entrepreneurial road easier to walk. Spending your money foolishly can result in expenses for your business that make you close your doors in another few months.
What should you know as you prepare to open your doors? Here are five expenses to prioritize and avoid for your startup business.
Common Startup Costs for Businesses
Some business startup costs are unavoidable. For example, everyone has to prepare their taxes and you may not feel qualified to do so, depending on your business structure. Even sole proprietors sometimes need help to complete their annual return on Schedule C of a traditional 1040 return, no matter how easy-to-use their preparation software is. Those starting partnerships or S-corps have to wrangle with Form 1065 or 1120S - which generally requires the help of a competent professional.
Startup costs for businesses are often a matter of law. For example, many states require you to obtain workers' compensation insurance if you hire employees. Depending on your industry, you might be required to carry additional types of coverage.
The Good, Bad, and Ugly About Expenses for Businesses
Is there anything good about expenses for businesses? Surprisingly, the answer is yes. That's because the IRS allows you to deduct certain operating costs - it's how the government encourages industry. For example, you can deduct the price you paid for meals while entertaining potential clients. Typically, the IRS allows 50%, although they made a special 100% exception for 2021 and 2022.
However, there's also the bad and ugly side of business expenses - they can deplete your capital. Capital refers to the financial resources a company has to use to fund operations - items such as cash, machinery, and equipment. Simply put, it's money that helps you make more money.
The tax code allows for the compl exity of depreciation - the IRS understands that the same bulldozer you buy today won't be worth the same amount in five years, thanks to ordinary wear and tear. Your balance sheet might look so intimidating that you leave it to your accountant, but one principle of business accounting is akin to your personal finances if you run out of money, game over.
5 Expenses to Avoid for Your Startup Business
Now that you understand the basics, what specific business expenses should you avoid in your first few months or years until you start turning tidy profits? The precise answers vary depending on your industry, but the following startup costs are almost always a bad idea.
1. Extravagant Webpages
Your business should have a website, if for no other reason than to establish legitimacy. However, that doesn't mean you have to hire an outside designer and spend thousands on bells and whistles. Some plans cost upwards of five figures a month.
It's relatively simple to put up a basic page yourself using GoDaddy's website builder or another user-friendly hosting service like Wix. If you can make a basic PowerPoint, you can get up and running for less than $500 a year, including your domain name, hosting, ad removal, and SSL certificate.
2. Subscription-Based Services
There's an app for everything these days - and they come with a sticker price. $199.99 a year might not seem like much until you have dozens of such plans running at once, draining your coffers each month.
Starting a business often means publishing your intent in local papers, especially if you hope to safeguard your assets from customer lawsuits by forming an LLC. That means solicitors can find your contact information and flood you with offers. Your best bet is to determine what you need and stick to it - and place a "no soliciting" sign on your door.
3. Expensive Equipment
You need a new computer - but does it have to be a top-of-the-line Macbook Pro? One of the toughest business decisions you'll make is choosing what equipment to buy. You don't want to skimp on cheaply made products that will expire in a year or two, but you also don't want to go over the top and drain your coffers.
Think "good enough." Will a less pricey brand fit the bill without cutting corners? If so, choose the least expensive option that fulfills your needs. Consider product half-life, too. Computers tend to lose their usefulness in as little as three years, but a bulldozer could serve you for the life of your business and requires more careful consideration.
4. Luxurious Parties and Trips
It's tempting to incur expenses when you know you can write many of them off on your taxes. However, don't fall into the same trap many startups do by trying to lure top talent with luxurious work parties and corporate trips to exotic locations. Such fluff won't last as your coffers deplete, and your employees could jump ship once you remove the dangled carrot. Save such extravagances for when your profits runneth over.
You want to look good to make a positive impression on new clients. However, you can do so without flashy cars and designer suits. Some of the most successful entrepreneurs keep things low-key in blue jeans and sneakers beneath their blazers.
5 Expenses That Are Well Worth the Price
There are some startup costs for businesses you should always focus on if you want your enterprise to have longevity. Here are five expenses that are well worth the price.
1. Accounting
Your LLC designation won't prevent the IRS from closing your business or even seizing personal assets if you don't pay your taxes. It only protects you from civil liability. A good accountant is priceless, especially if you have employees. Countless employers get in hot water because of the trust fund recovery penalty that makes them personally responsible for withholding they failed to submit to the authorities.
You might not need to keep a full-time accountant on staff. Many enterprises get by with a bookkeeper, outsourcing their tax filing to an outside firm.
2. Market Research
Companies that don't know what their target customers want will struggle to provide products and services that bring in a profit. You can conduct market research yourself, but getting outside opinions is invaluable.
3. Legal Advice
Most startup businesses don't need to add a full-time lawyer to their costs any more than they do a CPA. However, it's vital to have one on retainer. The time to shop around for someone you trust and establish a relationship is before a pressing legal question arises.
4. Customer Service
Dealing with customer issues is challenging. It's perhaps the most soul-draining part of running a business, as you're sure to encounter some folks who are unhappy with your product or service no matter what you do. Such interactions can drain your emotional battery, leaving you little energy to deal with anything else - but you still have a business to run.
Fortunately, you can find affordable solutions for customer service if you have a limited budget. Partnering with an outside call center can help if you want to offer 24/7 support by phone or chat but have those pesky human needs to sleep and eat.
5. Safety Needs
You might think that safety concerns are the sole purview of the construction industry. However, workers' compensation claims and lawsuits can occur in any profession. One of your office employees could twist their ankle on a loose floorboard you neglected to fix, and you'd still be liable for damages.
Get familiar with the OSHA regulations for your industry to avoid future headaches. You can't prevent accidents, but knowledge is power.
Spend Wisely on Your Startup Business
Starting a company takes money. How much depends on your overall plan, but you can bank on startup costs for your business. Knowing what to expect can save you cash in the long run.
Keep these expenses for businesses in mind when launching your entrepreneurial dreams. Directing your limited funds toward the most vital aspects of new ownership will help you build an organization that produces a tidy profit for years.