REALITY CHECK: The cost of starting a business

[byzantium]

Ok, I'm nearing the completion stage of my internet business, and I've spent quite a bit of money, $9,000 or so. For all you morons who think that you can start a business with $8 for your domain name, and then make millions, this is for you. Here's the breakdown of what I spent, all numbers rounded. Note that I had to form a California LLC because California wants to make SURE that they extract as much money from you as they can, therefore it is a felony to incorporate in another state. I am moving to Nevada soon hopefully.

$500 incorporation filing
$800 2007 California franchise tax
$1,400 attorney's fees to write employment contract
$200 accountant to prepare 2007 tax return
$800 2008 California franchise tax
$200 to open business checking and savings accounts ($100 minimum deposit)
$130 various municipal taxes and fees (the city of Sacramento doesn't issue business licenses, instead they charge you a tax on profits)
$3,200 website building fees (includes domain name, secure site license, professional design, and a few other things)

Then there's all the extraneous stuff:
$70 fax machine
$250 copier
$250 Access 2007
$200 QuickBooks 2008

Not to mention the $1,700 new computer I bought so I could run Access and Word and QuickBooks. (I built it myself; I'm not about to pay $500 for some Dell made in China hunk of junk. My dad did that, and the computer died a year later after he put thousands into fixing problems caused when you have slave labor building computers.)

So there you go. I put it all on credit cards. So now I HAVE to succeed to pay off my debts. Don't think that you can make millions without at least a LITTLE money spent. Most "no money down work at home businesses" are in fact network marketing, which few people succeed at. Actually, network marketing DOES require an upfront investment in most cases, but you're so busy listening to them lying to you that you don't realize that you're spending lots of money.

And then there's seminars, which exist to sell you the next level seminar. This is Russ Whitney's gig, some of you may have heard of him. It's telling that your first "homework assignment" in most of the introductory seminars is to amass as many credit cards with sky high limits as you can, and convince your current cards to drastically up your limits. This is so the seminar guru will get rich off YOUR good credit. In the end, your credit is ruined, and some other guy is rich because of it.

If I'm gonna wreck my credit, *I* want to be the one with the possibility of getting rich. You don't need a guru to motivate you, and real mentors don't sell their mentoring for thousands of dollars an hour on websites. If you're not sure you're gonna get rich, you need to either change your business plan or go flip burgers for the rest of your life, and use your credit to pay for Spanish classes so you can talk with your co-workers.

[rogercbryan]

You could have left out the 'moron' comment. I commend you on what you are doing... but don't get cocky.. that is a recipe for failure.

I'm not sure what business you are starting but here are a few things you may have forgotten:
1- Phone Service
2- Internet Service
3- Ongoing Legal & Accounting Fees
4- Ongoing Office Supplies
5- I didn't see any money budgeted for advertising and marketing
6- Secondary web design (the site is never the same 6 months after you start)

Better yet... here is a chart of accounts from my P/L Statement. This might give you a better idea of what the 'operational expense categories' are for running a business.

1280J • Escrow Expense
1288 • Payroll Expense
2210 • Fed Tax
2220 • FICA Tax
2230 • Md State Tax
2270 • D.C. Income Tax
7100 • Accounting
7110 • Advert.
7130 • Auto Work
7135 • Auto Expense
7140 • Auto Gas
7150 • Bank Charges
7180 • Casual Labor
7200 • Cleaning supplies & Expense
7210 • Commission
7215 • Consult
7240 • Equipment Rental
7280 • Dues & Subcrp
7300 • Emp. Benefits
7310 • Entertainment 100%
7320 • Enter 50%
7360 • Ins. Gen.
7365 • Auto Ins
7370 • Ins-Hlth
7410 • Legal Fees
7420 • Licenses & Permits
7440 • Comp. Maint
7460 • Office Supplies
7500 • Payroll Taxes
7510 • Company Specific Exp.
7565 • Postage
7600 • Rent
7650 • Salary Staff
7700 • Supp. Gen.
7750 • Taxes - general
7751 • Corporate Taxes
7770 • Telephone
7790 • Travel
7820 • Utilities

[byzantium]

You could have left out the 'moron' comment. I commend you on what you are doing... but don't get cocky.. that is a recipe for failure.

Sorry, I'm not arrogant, just fed up with the legions of smooth talking scammers who prey on the ignorant and gullible. Just because somebody's gullible doesn't mean that they deserve to get ripped off. Money doesn't grow on trees, after all.

I'm not sure what business you are starting but here are a few things you may have forgotten:
1- Phone Service
2- Internet Service
3- Ongoing Legal & Accounting Fees
4- Ongoing Office Supplies
5- I didn't see any money budgeted for advertising and marketing
6- Secondary web design (the site is never the same 6 months after you start)

1. Covered. I have a landline, a cell phone line, and a fax line. I've been paying for them for so long out of my personal budget that I don't count them as business expenses.
2. Same thing with internet service. I pay for it out of my personal income. $100 a month, I believe.
3. Accountant charges $250/hr. I mainly need him around tax time. Some people suck at record keeping; I don't. I agree that if you suck at financial stuff, you need to sit down with your accountant every few weeks. I can keep track of all that with Quickbooks. I also will contract for the lawyer in case of litigation. I've structured this so that the chances of revenge litigation or suits from people who sue for a living is small, but it is still there.
4. Office supplies shouldn't cost too much. I spent $40 on a box of paper. I have a crapload of blank CDs too.
5. Marketing for this will be word of mouth mostly. To get myself out there, I will use Craigslist and posting on forums. The site will encourage customers to tell their friends.
6. Included in the web design package deal I bought. I get once a month update chances. Network Solutions is the best in the business, and when your business relies on the internet, you want to pay for the best.

I wish I could tell you exactly what this is, but for now I can't. I will reveal it soon.

Better yet... here is a chart of accounts from my P/L Statement. This might give you a better idea of what the 'operational expense categories' are for running a business.

1280J • Escrow Expense
1288 • Payroll Expense
2210 • Fed Tax
2220 • FICA Tax
2230 • Md State Tax
2270 • D.C. Income Tax
7100 • Accounting
7110 • Advert.
7130 • Auto Work
7135 • Auto Expense
7140 • Auto Gas
7150 • Bank Charges
7180 • Casual Labor
7200 • Cleaning supplies & Expense
7210 • Commission
7215 • Consult
7240 • Equipment Rental
7280 • Dues & Subcrp
7300 • Emp. Benefits
7310 • Entertainment 100%
7320 • Enter 50%
7360 • Ins. Gen.
7365 • Auto Ins
7370 • Ins-Hlth
7410 • Legal Fees
7420 • Licenses & Permits
7440 • Comp. Maint
7460 • Office Supplies
7500 • Payroll Taxes
7510 • Company Specific Exp.
7565 • Postage
7600 • Rent
7650 • Salary Staff
7700 • Supp. Gen.
7750 • Taxes - general
7751 • Corporate Taxes
7770 • Telephone
7790 • Travel
7820 • Utilities

My office is at home, so much of the office related stuff is included in personal expenses. I'll have independent contractors instead of "employees" per se; my lawyer says that under California law contractors are responsible for their taxes. If one doesn't pay, I can shift blame and send the IRS/Franchise Tax Board after him. I'm not sure what my fed taxes will be; California charges $800 a year for an LLC plus a profits tax which schedule I don't have handy right now. City of Sacramento charges a flat profits tax (not necessarily income, but profit) of $30 plus $.0004 per dollar up to $5,000. I hope to avoid many lower level taxes via a move to a more business friendly state-eventually. Federal can't be escaped, of course, but CA is unusually punitive when it comes to taxes, unlike the rest of the Western US. I'm not sure why you would pay both Maryland and DC tax unless you have stores or something in both areas.

[mbolton2181]

Interesting to see how your expenses broke down. Though I really think it sounds like you are overestimating the effectiveness of "tell-a-friend" links. I would have made some serious allocations for Marketing.

Marketing and Sales are the most vital piece of your business because without revenue coming in, it dosen't matter how much paper, cd's you have or if you have a lawyer or accountant.

[rogercbryan]

Sorry, I'm not arrogant

You come across as very arrogant in your post... just try to tone it down a bit

1. Covered. I have a landline, a cell phone line, and a fax line. I've been paying for them for so long out of my personal budget that I don't count them as business expenses.
2. Same thing with internet service. I pay for it out of my personal income. $100 a month, I believe.

If you are going to use it for your business you need to put it in the budget. First off there are tax benefits and second if you ever try to sell your business or if you try to get financing to grow your business you are going to need these expenses to show up on your accounting reports to be taken serious.

3. Accountant charges $250/hr. I mainly need him around tax time. Some people suck at record keeping; I don't. I agree that if you suck at financial stuff, you need to sit down with your accountant every few weeks. I can keep track of all that with Quickbooks. I also will contract for the lawyer in case of litigation. I've structured this so that the chances of revenge litigation or suits from people who sue for a living is small, but it is still there.

This is a very common (and unfortunate) mistake that people make when starting a business. A CPA does not just do your taxes. This is a person you need to work closely with all the time (especially in your first year). You can usually get a CPA on retainer to answer questions for $1000-$2000 a year.

4. Office supplies shouldn't cost too much. I spent $40 on a box of paper. I have a crapload of blank CDs too.

When I started my company I thought the same thing. Wait till you hire your first employee and then watch you expenses start to climb. I spend about $1500 a month on office supplies. You need to work this into the budget. Don't write your expenses only for today. You need to create a system that you can grow in to which will include budgeting for office supplies.

5. Marketing for this will be word of mouth mostly. To get myself out there, I will use Craigslist and posting on forums. The site will encourage customers to tell their friends.

You are the second person this week who thinks they are going to grow a business solely on word of mouth. While this can get you some business it is not going to get you all your business. It makes me real nervous when I see a person starting a business without having alloted a significant part of their resources to marketing. I'll tell you the same thing I told the other person. In six months when you are flat broke let me know and I'll show you how a strong marketing plan could have saved you. The best of luck on this one.

6. Included in the web design package deal I bought. I get once a month update chances. Network Solutions is the best in the business, and when your business relies on the Internet, you want to pay for the best.

That's not going to include major coding changes or user interaction changes. Just budget a few dollars for this and you'll be safe. This has been one of my biggest shortcomings in business. I've spent over $5K on my site now and most of that has been wasted because I was doing my designing for today and not properly planning for what I would need in 6 months.

I wish I could tell you exactly what this is, but for now I can't. I will reveal it soon.

Ahhh the myth of the original idea. We can help you more if you are more realistic about what you are doing. I don't need to know what your business is for the above statements to be accurate.

My office is at home, so much of the office related stuff is included in personal expenses. I'll have independent contractors instead of "employees" per se; my lawyer says that under California law contractors are responsible for their taxes. If one doesn't pay, I can shift blame and send the IRS/Franchise Tax Board after him. I'm not sure what my fed taxes will be; California charges $800 a year for an LLC plus a profits tax which schedule I don't have handy right now. City of Sacramento charges a flat profits tax (not necessarily income, but profit) of $30 plus $.0004 per dollar up to $5,000. I hope to avoid many lower level taxes via a move to a more business friendly state-eventually. Federal can't be escaped, of course, but CA is unusually punitive when it comes to taxes, unlike the rest of the Western US. I'm not sure why you would pay both Maryland and DC tax unless you have stores or something in both areas.

There will come a day when you have a full time secretary or a assistant and while CA taxes will be different then DC/MD/VA taxes you should be prepared to collect them at some point. Don't plan your business just for today... you want to grow don't you? I left those in there just to give you a full feel for what it takes to run a company. I'll do well over $1M USD in sales this year so I hope you will at least consider what I've posted.

Again I commend you on what you are doing, but you are still being a little short sighted. An extra few expense allocations will make your life a lot easier in the future. Also, look at it this way if you allot the money the way I said and then don't use it... in essence you will make more then you originally planned (which is great). If you don't allot extra and then you do not have the money to pay your bills... well then... you are out of business my friend.

Best of luck!

[mbolton2181]

nice post roger

[TravelGuy]

Very informative thread, thanks for the post.

[forextrader]

I am new here. But I can already see that this site is really helpful. Roger you have very good points.

[brownbob06]

wow, really good and informative post roger!

But byzantium, I may not know A LOT about running a business...but I do realize how "Moronic" it is to spend about 9k on a startup and not have money set aside for advertising. Good luck with the site, I hope you succeed so you don't end up "Flipping burgers with mexicans" the rest of your life.

[Allurre]

lol wow, seems like you must've had some resentment with starting up bro.

[Gaulkin]

A company is defined by the quality work it does and not by how much stuff it has bought. Im not saying you were wrong in buying all that stuff right off the bat but for me its alittle much. You could of used that 9k to get customers and get the ball rolling, instead you spent 9k and dont have one customer to show for it.

[byzantium]

You come across as very arrogant in your post... just try to tone it down a bit

That wasn't my intention.

If you are going to use it for your business you need to put it in the budget. First off there are tax benefits and second if you ever try to sell your business or if you try to get financing to grow your business you are going to need these expenses to show up on your accounting reports to be taken serious.

I thought you were gonna say that.

This is a very common (and unfortunate) mistake that people make when starting a business. A CPA does not just do your taxes. This is a person you need to work closely with all the time (especially in your first year). You can usually get a CPA on retainer to answer questions for $1000-$2000 a year.

I'll need to learn more about this. What kind of stuff do I need to work that closely with a CPA about anyway?

When I started my company I thought the same thing. Wait till you hire your first employee and then watch you expenses start to climb. I spend about $1500 a month on office supplies. You need to work this into the budget. Don't write your expenses only for today. You need to create a system that you can grow in to which will include budgeting for office supplies.

Got it.

You are the second person this week who thinks they are going to grow a business solely on word of mouth. While this can get you some business it is not going to get you all your business. It makes me real nervous when I see a person starting a business without having alloted a significant part of their resources to marketing. I'll tell you the same thing I told the other person. In six months when you are flat broke let me know and I'll show you how a strong marketing plan could have saved you. The best of luck on this one.

Be my guest. What marketing plan do you recommend? I can't think of anything beyond the usual SEO and flier stuff. If you have a unique marketing plan, please share it. PM me for my email if you don't want to post it.

That's not going to include major coding changes or user interaction changes. Just budget a few dollars for this and you'll be safe. This has been one of my biggest shortcomings in business. I've spent over $5K on my site now and most of that has been wasted because I was doing my designing for today and not properly planning for what I would need in 6 months.

That's part of the reason I hired a professional designer. A business owner who designs his own site has a fool for a site designer-especially if he's new. A freelance designer isn't too much better.

There will come a day when you have a full time secretary or a assistant and while CA taxes will be different then DC/MD/VA taxes you should be prepared to collect them at some point. Don't plan your business just for today... you want to grow don't you? I left those in there just to give you a full feel for what it takes to run a company. I'll do well over $1M USD in sales this year so I hope you will at least consider what I've posted.

Again I commend you on what you are doing, but you are still being a little short sighted. An extra few expense allocations will make your life a lot easier in the future. Also, look at it this way if you allot the money the way I said and then don't use it... in essence you will make more then you originally planned (which is great). If you don't allot extra and then you do not have the money to pay your bills... well then... you are out of business my friend.

Best of luck!

Marketing plans have never been my strong suit. If you have somebody you use, I can use the reference. Or if you want to just PM your marketing strategy to me, I will at least have a template to follow. It seems that I've made some common mistakes. I'm not arrogant, at least not to the point of being unwilling to learn. Frustrated, yes, especially at newbies who want money for nothing and scammers who are willing to promise it to them, but not arrogant.

I have no outside support for this, and my family wants me to go to Department of Rehabilitation and get a job making boxes (I have high functioning autism) so they're not supportive. My parents were government bureaucrats all their lives. For those of you who have been frustrated dealing with the bureaucracy, imagine LIVING with the bureaucracy. I don't think like they do. My grandfather recently went into a nursing home and we were going through his stuff, and my mom said "he worked for himself most of his life and look at this, he ended up with nothing but junk! You don't want to be like that, do you?" I've had to do this all by myself with no help. No mentors, no support, no positive feedback. I've had to hire an accountant via a recommendation, and a lawyer from the phone book.

[capforge]

Ok, I'm nearing the completion stage of my internet business

Not true. You don't have a business yet. You have a collection of expenses. Make a sale- then you have a money losing business. Make enough sales to make a profit- and now you are getting somewhere.

For all you morons who think that you can start a business with $8 for your domain name, and then make millions

I must only be an idiot then, since I spent $100 to start my first online business (domain + hosting) and the first year I made $70K, the second year I made $250K, with 90% profit margins- the beauty of being a one man software business. Too bad I got it so wrong!!

Note that I had to form a California LLC because California wants to make SURE that they extract as much money from you as they can, therefore it is a felony to incorporate in another state. I am moving to Nevada soon hopefully.

Not true at all- you have to register as a foreign corporation in California if you are registered as a corporation in another state and doing business in California.

Don't think that you can make millions without at least a LITTLE money spent.

Actually, you can. I would argue that most of what you spent money on could have and should have waited until you proved your business concept. Spending money up front does NOT increase the likelihood of your succeeding in business.

In fact, from my blog, "according to this Inc Magazine article, "companies that were started with less than $1,000 were about as likely to be profitable as those that were started with more than $100,000."

It also shows that companies started with a small amount of money faired no differently in reaching and sustaining profitability than ones started with much more money.

So, yeah, you do have to spend a little money, but it turns out to be a lot less than you thought.

pay for Spanish classes so you can talk with your co-workers.

Throwing a little racism in for flavor, too, huh?

Roger was nice to you and gave you some great advice and wished you luck but to me you sound like an arrogant jerk so I prefer to hope you learn some humility the hard way.

[byzantium]

OK people, I need to do a BIG mea culpa here. My point was not well expressed (since I have autism, social interaction is not a strong suit with me) but here it is: There is no reward without risk of some kind, and anybody who tells you otherwise is a LIAR who wants your cash in his pocket while you get all the risk. Yes, it is blunt, and yes, I am angry.

I see loads of schemes where some slick talking con man promises massive wealth with zero risk. Even worse, I see people buying into these schemes, then savaging people who point out that they've fallen victim to what should be an obvious scam (thus the moron comment). I see threads on scams like AGLOCO get dozens of posts gushing over how much money the posters are making, and the people who point out the emperor's lack of clothes get driven off to the point where the thread is just posters congratulating each other on how great they all are for "getting in on the ground floor of this once-in-a-lifetime opportunity". Look, if it was REALLY unique, it wouldn't be sold like detergent to the world as a ground floor yada yada. The TRULY unique opportunities are hard to find, usually. Not always, but usually.

If you put $100 into a business and make $50k, great, you understand what I mean. You had RISK (the $100) and you reaped the REWARD. In get rich quick schemes, you put your money from your pocket into some guru's pocket, with no possibility of reward. My figures and methods are NOT the point. What IS the point is that REWARD REQUIRES RISK!

Look, I've been hanging around the wealth creation/entrepreneur culture for nearly a decade. I've seen people buy into the idea that endless rewards can be had with no risk. Sometimes, they never wise up that they've been had. They just keep chasing the ghost carrot. "How can I get this scam to pump out the millions that I was promised?" "Well, you can't, you've been had, cut your losses and get on with your life." "Well screw you, now about my question..." ARGH!

Here's one from the Rich Dad forums: this guy bought some cheap franchise and kept losing money. He kept asking over and over how to get his investment out of it, rather than confess that he'd been suckered into a dying business field. He whined ENDLESSLY that his phone wouldn't ring, nobody was calling him, he was starving, and so on. Well, cut your losses. "I can't, I've got too much invested!" I have zero patience with this sort of thing. From my perspective, it IS moronic. THAT is my point. Ok, unless somebody wants to make a productive comment, I'm done with this discussion.

[Jerod]

Here's my take:

You started out calling everyone a moron, bad idea. That aside, here are my thoughts.

The best money you spend was on developing your website. Everything else was a waste. How many transactions do you have in Quickbooks related to income? I would bet zero at this point. However, you might have a whole bunch of neatly organized expenses that have nothing to do with gaining customers.

Incorporating, franchise fees, etc. all a waste of time and money. Start with a Sole Prop, try to get your first customer then worry about all the government compliance. When are you are succeeding then you can worry about all that stuff.

You should be deducting phone/fax/internet etc. from pre-tax business earnings, instead of after-tax personal income. There is a big difference. Write off everything you can get away with.

There have been plenty of successful businesses, especially internet businesses started with almost nothing. There might have been a lot of blood, sweat, tears, and endless hours but they did not take a lot of money.

I'm guessing you could have started the business without buying a new PC. A cheap one would have done fine.

You have spent all your time and money on administrative busy-bee work. Most of this had nothing to do with acquiring customers. I have no idea what kind of business you are in, but I'm thinking 50% development and 50% marketing costs would have served you better than 30% development and 70% useless admin costs.

I think you are afraid to see if your business will work, and are delaying with all this other stuff. Read the Art of the Start, and get your ass in gear.

I will agree that if someone thinks they can put in no money or time and get rich they are mistaken. However usually hard work can overcome lack of money.