Definition: Startup costs are all expenses incurred to plan, register, organize and launch a new business or social venture. It is the aggregated cost to bring any new business idea to the open market.
What Does Startup Cost Mean?
A business is born with an idea, but a business has to be built around that idea. An individual with the desire to start a business has to pay for many previous expenses long before it starts producing any money. These expenses come from things like legal fees, market research reports, hiring staff, insurance, advertisement, training expenses and other operating costs that come from organizing the business before it goes live.
From an accounting perspective, startup costs are either charged as expenses the first year or amortized during the next five to ten years depending on the amount. It is difficult to set a business with zero funds, since these expenses are usual and it is not possible to waive most of them. Essentially, these costs can be divided in two broad categories: structural costs and productive costs. The first ones are those incurred to set up the business and the second class is for those that will actually produce the goods or services intended, like is the case for fixed assets and inventory.
Example
Matthew is the son of two lawyers and as he grew up with his parents he identified that lawyers didn’t like math. He thought about this issue and designed a mobile app to calculate fees, percentages and taxes. He called the app LawMath. After he released the app he started to get a lot of downloads and since he charged $1 for each he started to make money on it.
His parents advised him to register a business so he could grow it into other apps and start making a living from it. To set up this new venture he paid $300 for an app design training, another $50 to post the app on different mobile marketplaces and he also spent $1,500 to advertise it online. Finally, the legal fees were $400. All of this resulted in $2,250 spent to set up a business he called Professional Mobile Solutions LLC.
