Key Takeaways

  • Startup costs include both pre-operational expenses and the funds needed to cover short-term post-launch cash flow gaps.
  • Categories of startup costs are: expenses (e.g., legal fees, branding), assets (e.g., inventory, equipment), and operating cash reserves.
  • Accurate estimates in your business plan are essential to avoid undercapitalization, delayed launches, or strained investor relations.
  • IRS rules limit which startup and organizational costs are deductible or amortizable, but real-world needs go beyond tax code categories.
  • Additional costs to consider include contingency funds, emergency reserves, and post-launch scaling expenses.

What are Startup Costs?

Startup costs are (1) the expenses a business incurs before it is actually operating plus (2) the cash the business will need to pay its recurring operating expenses during the post-launch period when it is generating insufficient cash flow to cover those payables.

A Good Business Plan Is Crucial

The founders of a new business should devote significant time and effort to the preparation of detailed business plan so that the startup costs are not underestimated. A miscalculation in this area can have a variety of bad consequences:

  • A delayed store opening or product launch
  • Last minute borrowing for startup expenses and working capital at high interest rates
  • An inability to hire enough staff
  • Angry investors who were expecting larger profits based on the inaccurate numbers
  • Unpaid vendors and consultants who withhold products and service deliverables
  • Founders trying to save money by adopting a do-it-yourself approach to business needs that should be outsourced to specialists (e.g., legal contracts, software implementation, trademark searching, logo design)

Additional Cost Planning Considerations

Startup founders should go beyond itemized cost projections and account for contingencies and growth scenarios. It’s wise to include:

  • Emergency Fund: Unexpected costs like supplier delays, compliance violations, or legal disputes can derail a launch. Budgeting 10–15% of the total startup budget as a reserve is common practice.
  • Post-Launch Scaling Costs: If early demand exceeds expectations, you'll need funds to increase inventory, add staff, or upgrade infrastructure. Planning for scale is essential for high-growth startups.
  • Seasonal Adjustments: Businesses with seasonal trends (e.g., retail, agriculture) may need to frontload more cash to survive low-revenue months.

Tax Matters

Keep in mind that the expenses in this summary include more than just the "start-up" and "organizational" costs that the Internal Revenue Service permits a new business to deduct or amortize. The IRS's rules about startup costs are technical, complicated, and include various limitations. This summary is instead designed to give you a comprehensive real world picture of the resources you'll need to launch your new business without regard to their tax treatment.

IRS Deduction and Amortization Rules

Under the Internal Revenue Code, you can deduct up to $5,000 in qualified startup costs and $5,000 in organizational costs in the first year of operation, provided total startup costs don’t exceed $50,000. Any remainder must be amortized over 15 years. These limits can phase out, and timing is crucial—the costs must be incurred before your business is officially operational.

Examples of costs that qualify:

  • Legal and accounting fees
  • Market and product analysis
  • Employee training prior to launch

Costs not eligible for deduction or amortization include those incurred after the business begins operations, capital expenditures, and acquisition of business interests.

Categories of Startup Costs

Startup costs fall into three categories:

  • Startup expenses: costs incurred before the business opens
  • Startup assets: assets acquired before the business opens
  • The cash you need on Day 1 to pay recurring operating expenses during the immediate post-launch period that can't be paid by the business' cash flow.

The exact mix of these categories (and the items within them) will differ depending on the type of business you're starting. E-commerce businesses will have different startup costs than brick-and-mortar ones. A manufacturing business will have different needs than a retail or service business.

Understanding the Difference Between Startup and Running Costs

It’s important to distinguish between startup costs, which occur before your business is operational, and running costs, which are ongoing expenses necessary to keep the business afloat post-launch.

Startup Costs: One-time costs incurred before opening day (e.g., incorporation fees, website development, inventory purchase).

Running Costs: Recurring expenses such as rent, utilities, payroll, and marketing campaigns needed to sustain daily operations over time.

Being able to clearly separate and categorize these costs can improve your financial forecasting, increase funding credibility, and ensure tax compliance.

Startup Expenses

Research/Training:

  • This is all the money you spend analyzing the feasibility of the ideas you have for your new venture. Examples: market and product research; trademark searches; the founders' travel and other expenses for attending trade shows and industry conferences; and the cost of any courses or workshops attended by the founders or employees before actual operations begin.

Legal:

These are the fees paid to lawyers and government entities to:

This category also includes filing fees for:

  • Corporate charters
  • Fictitious names
  • Business licenses
  • Tax registrations
  • Other permits and regulatory filings

If you're raising money from investors before launch, your lawyers will also be paid for drafting:

  • Private placement memos
  • Subscription agreements
  • Securities filings
  • Other seed money or venture capital documents
  • Negotiations with the investors

You may also want lawyers to take a look at your:

If you are borrowing money from a bank, there may also be legal fees to draft and negotiate loan documents before launch as a startup expense.

Depending on your business you may want your lawyers to apply for patents or trademark registrations prior to launch. Provisional patent applications and intent-to-use trademark applications can be particularly useful before operations begin. These startup expenses would consist of legal, filing and search fees paid prior to launch.

Finance

  • Opening a business bank account becomes and legal and operational necessity once your new entity is formed and obtains an EIN. Business bank accounts will typically require payment of a monthly service fee and additional per transaction fees if you exceed a certain volume of checks or deposits.

Branding:

  • This is your spending related to your business identity -- logo and initial website design, signage, business cards, stationery, packaging and brochures. The category is mostly fees paid to various designers and consultants, as well as printing companies.

Insurance:

  • Premiums paid before the launch date for property and liability insurance for your office, store, factory, warehouse, inventory and vehicles. Business interruption insurance premiums paid before launch would also qualify, as well as fees paid to insurance brokers and risk management consultants.

Payroll/Employee Benefits:

  • If you onboard employees or contractors pre-launch, the wages, salaries or fees paid to them (or withheld and paid to insurance companies and governmental entities as premiums and taxes) qualify as startup expenses. Any pre-launch workers' compensation and health insurance premiums you paid are also startup expenses.

Rent/Security Deposit:

  • Rent and security deposits paid prior to Day 1 are a startup expense, along with any utility charges paid pre-launch (electricity, phone service, water, gas). Don't forget utility deposits, parking fees or garage rent, and warehouse or storage fees.

Computers and office equipment:

  • Although these would usually be considered startup assets, a limited amount (around $100,000) can be deducted as expenses. Point-of-sale equipment for a retail business would qualify here.

Technology:

Typical fees incurred pre-launch are for:

  • Internet access
  • Website creation
  • Data hosting and storage
  • SSL Certificates
  • Payment gateways (for accepting payments online)
  • Email accounts
  • Email newsletter software
  • Tracking and onsite website analytics
  • Customer Relationship Management systems (CRMs)
  • Customer support software
  • Mobile app store fees (if creating a mobile application)
  • Payroll, Accounting, and document management software (or SAAS fees for those functions)
  • Any fees paid for custom software design and implementation and the cost of buying up domains.

Pre-Launch marketing/PR:

  • Advertising and marketing expenses, grand opening signs, the cost of investor and trade show presentations, and the fees and dues paid to join trade associations and industry groups.

Office supplies:

  • You need these on Day 1 so some will be purchased pre-launch: paper, pens, stationary, staplers, packaging, coffee, water, etc.

Consultants:

  • In addition to your lawyers and accountants, your startup may have paid for the services of other consultants for graphic design, IT, marketing, human resources, employee benefits, site acquisition, leasing, and insurance.

Borrowing Costs:

  • Startup expenses paid with bank financing or credit cards will presumably require interest payments before the launch date.

Miscellaneous:

  • Think of any other business-related expense paid prior to launch.

Startup Assets

Startup assets are the tangible things acquired for the business pre-launch, like furniture, equipment, machinery and land. The costs of these are depreciated over a period of years in accordance with IRS rules.

  • Starting inventory or raw materials
  • Other current assets (supplies and other small items that last less than a year but are still considered assets)
  • Office furniture/store fixtures
  • Signage
  • Leasehold improvements: expenses incurred prior to launch to renovate your business space (including lighting, paint, repaving the parking lot)
  • Plant, machinery and other equipment
  • Land
  • Vehicles
  • Other assets: intellectual property acquired prior to launch; office equipment and computers in excess of IRS expense allowances

Cash for Recurring Operating Expenses

These are the items that make up your monthly "burn rate," and most startups will need cash on Day 1 to pay these for 3-6 months.

  • Rent
  • Utilities
  • Web hosting, data storage, SAAS fees
  • Employee payroll and sales commissions
  • Inventory/Supplies
  • Marketing/Advertising
  • Taxes (other than those relating to payroll)
  • Interest payments on loans, bank account fees
  • Legal, accounting and other consulting fees; payments to other contractors
  • Other Expenses: Shipping/postage, maintenance, insurance premiums, etc.

If you are looking for more information on startups, you may be interested in learning about how to choose your business structure, how to do an equity split to distribute founder and employee stock, or how you can protect your intellectual property.

Tips for Managing Cash Flow in the Early Months

Managing cash flow is crucial in the early months when revenue is often limited. Here are key strategies:

  • Create a Cash Flow Forecast: Estimate your income and expenses monthly for the first 6–12 months.
  • Delay Major Purchases: Lease or rent equipment instead of buying outright.
  • Negotiate Payment Terms: Ask suppliers for net-30 or net-60 payment terms to keep cash in hand longer.
  • Prioritize Essential Spending: Focus on activities that directly generate revenue or fulfill legal obligations.
  • Track KPIs: Monitor burn rate, customer acquisition cost, and profit margins closely.

Sound cash flow management ensures your business survives its critical first year.

Frequently Asked Questions

1. What is the start up and running costs definition?

Startup costs are the expenses incurred before a business starts operating, while running costs are the ongoing expenses needed to keep the business functioning post-launch.

2. Are startup costs tax deductible?

Yes, the IRS allows a deduction of up to $5,000 for startup and organizational costs, with any excess amortized over 15 years, subject to limitations.

3. How much should I set aside for unexpected startup costs?

It's advisable to allocate an emergency reserve of 10–15% of your total startup budget to cover unforeseen expenses.

4. What’s the difference between startup expenses and startup assets?

Startup expenses are non-tangible costs like legal fees or marketing. Startup assets include tangible items like inventory, machinery, and computers.

5. How can I improve cash flow after launch?

Use cash flow forecasting, delay major purchases, negotiate supplier terms, and prioritize essential operations to manage cash during early months.

Support for Founders

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