Start-up Costs Definition and Meaning
Determine start-up costs. If a company – regardless of whether it is a partnership or a corporation – is founded, there are always costs associated with it. The costs involved in starting a business are known as the start-up costs. These start-up costs are diverse. The start-up costs are incurred before the company is able to act. These costs must be taken into account, especially when setting up a business. Start-ups face a number of costs before becoming self-employed. Because, depending on the type of company, different requirements must be met so that the company can actually start properly.
Definition of start-up costs
The cost of setting up a business is the sum total of the expenses required to establish a legal existence for a business. These costs and fees include, for example
- Founder’s wages
- Government fees
- Notary and court costs.
The company formation costs are deducted from tax law as operating costs. The German Commercial Code (HGB) prohibits the capitalization of business start-up costs as an asset. Expenses for the expansion and the start-up of a business operation as an accounting aid, however, are capitalizable. Start-up costs are not related to the performance process of a company and are not costs in the sense of cost accounting.
Determination of the formation costs
The total start-up costs can be determined with the help of the start-up costs Excel tool. The amount of costs and fees depends on the type of company that is to be set up. Start-up costs are an essential part of the capital requirement that the founder has to finance with equity and borrowed capital . The costs determined are included in the financial plan, which is part of the business plan . The costs are necessary for the start of regular business operations; they result from the cost blocks of administrative costs, product-specific costs, marketing costs, office costs, office equipment and brokerage costs.
Administrative costs include legal fees, costs for business registration, fees for consultants or registration fees for patents . Product-specific costs are costs for material as well as for product development and design. Marketing costs are incurred for the design, for example of the logo and business documents, for flyers, business cards or the creation of the homepage.
Office costs include costs for office equipment or telephone. The cost of office equipment includes the cost of real estate, furnishings, materials, or vehicles.
Brokerage fees are incurred for real estate agents and recruiting. Which costs actually arise in the individual case depends on the type of company to be founded.
Not all cost blocks have to be incurred when starting a company. The individual costs mentioned in the cost blocks are only examples. They are not complete. The Excel tool can be used to determine costs and initial investments. In most cases, the costs of setting up a company are booked as costs in the first financial year. Start-up costs differ from start-up investments, because start-up investments are sometimes written off over several years.
Adoption of the start-up costs in the financial plan
Start-up costs can be included in the finance plan , which is part of the business plan . So you never lose track of the actual costs of setting up a company. It should be noted that some costs flow directly into the income statement. Investments are recorded in current or fixed assets and depreciated over a longer period of time. As a result, they reduce the company’s profit and, directly, the associated tax burden. Start-up costs are an essential part of the capital requirement for starting a business. After all, they have to be worn in advance, long before the company pays off the first euro. The financial requirements for founding a company consist of start-up costs, private expenses and running costs of the company.
Amount of start-up costs
How the various costs for starting a company can be structured will be explained in more detail using two examples.
For the establishment of a corporation , there are usually contract and notary costs of 5,000 euros. The notary’s bill has not yet been paid, it consists of the formation costs of 5,000 euros and input tax of 950 euros. During the start-up phase, travel expenses of 1,000 euros are incurred, which are paid immediately by bank transfer. The transfer amount is 1,190 euros, as input tax of 190 euros is added to the start-up costs of 1,000 euros. The cost of the founding auditor is 8,000 euros and is only due in the next period. Provisions of 8,000 euros must be made. The total costs are therefore 14,000 euros, they go as a loss carryforward in the opening balance sheet they are shown on the liabilities side under equity and profit carryforward / loss carryforward.
The costs are lower in the example of a tanning salon, which can be established more easily as a partnership. For this project, 500 euros in consulting costs and 100 euros in costs for permits are to be paid, the start-up costs are 600 euros.