Expenses You Don’t Think of When Starting a Business

I ruffled a few feathers with my recent post The Software Product Myth. The unrest surrounded my statement that making $2500/month from your software product wouldn’t allow you to quit your day job.

The comments here and on a few social bookmarking sites mentioned that you could quit your day job if you wanted to, and that you could live on $2500/month just fine in many cities in the world (although in my hypothetical situation I was speaking about a developer based in the hypothetical U.S.).

We could get into a discussion about how much developers make, and how many costs you will take on by quitting your day job, but it’s completely irrelevant.

The Point
The point of The Software Product Myth is that at some point you are going to have too few sales to support yourself monetarily, yet too much work to fit comfortably into your evenings and weekends. Whether your number is $1000/month, $1500/month, or $5000/month has zero bearing on that point…what matters is that building a product is a lot more difficult than most people make it out to be.

With that said, one of the helpful points that came out of the discussion is how many expenses you encounter when starting a company that you never knew existed.

Remember that line item on your paycheck that said something about retirement matching?

Or the disability insurance your company offers that you never knew they paid for?

Yeah, those are going to hurt.

You can go without these expenses for a short time while in startup mode, but if you plan to build a company that’s sustainable in the long-run you’re going to need to cover these expenses before you think about collecting a salary.

The Expenses
In putting together this list I looked through some of my old posts and also scanned my recent bank and credit card statements. I’m amazed at how many business costs I pay throughout the course of a year.

Depending on your country of residency these may not apply to you (people with national health care – consider yourself lucky!), but most of them apply in one form or another throughout the world. In addition, it is unlikely you will need every one of these expenses, but the intent is to be as close to an all-encompassing list as possible.

Core Business Expenses

  • Business Filing Fees – This includes your business license, fictitious name statement, and reseller license fees (if applicable). They tend be paid annually and vary widely, but for a sole proprietorship (in the U.S.) you’re looking at around $100/year. L.L.C.s and Corporations range from a few hundred dollars into the thousands.
  • Accountant – Business taxes, especially if you have a home office, are easy to get wrong. As I said in The Five Minute Guide to Becoming a Freelance Software Developer, an accountant is not an optional expense. Costs range from $300-$1000 per year.
  • Lawyer – Lawyers I’ve worked with run $150/hour and up. If you want contracts that will hold up in court you’re going to drop serious coin with our friends in the legal profession.
  • Liability/ E & O Insurance – Varies widely, typically from $1500-$2500/year.
  • Health Insurance – In the U.S., decent insurance for a family of three is now hovering around $800/month. It’s less if you’re single.
  • Disability Insurance – It varies, but typically runs $250-500/month in the U.S. You may think this is optional, but consider that during any given year you are 4x more likely to become disabled than to die.
  • Life Insurance – While you probably don’t need it if you don’t have a family, it’s a good idea to have if you’re married (and I would argue a requirement if you have children). If you’re young and go with term life insurance you’ll pay $10-20/month, but as you age that will increase dramatically into the hundreds.
  • The “Employer” portion of Social Security (FICA) and Medicare – Often called the “self-employment tax,” it eats up an additional 7.65% of your gross income if you’re self-employed (since your employer usually picks up this portion).
  • Retirement – Save for a rainy day. No one’s matching your 401(k) anymore, and you should be putting away at least 10% of what you make.

Technical Expenses
A few of these apply only to companies that build software, but most apply across the board.

  • Windows Hosting – You can go cheap, but you’ll pay in other ways (don’t say I didn’t warn you). Decent hosting with decent support will run $20/month. I recommend DiscountASP.NET (even though they have a terrible website). They are responsive to support issues and very  developer-centric. They roll out new .NET frameworks and while they are still in beta, and they are inexpensive considering the service and uptime.
  • Linux Hosting – The same sentiment as Windows Hosting, but $10/month will serve you pretty well. As always, I recommend DreamHost, even with my recent blog issues. Did I mention the issue turned out to be a WordPress plug-in?
  • Bug Tracking – You can go open source and save money, but you may lose it eventually in the time you spend maintaining and upgrading it. This one’s your call. I’ve chosen to outsource my bug tracking to FogBugz, and it runs me $25/user per month. Pricey, but based on my hourly rate it’s cheaper than the open source solution I used previously when you factor in upgrades, crashes, and manual workarounds for missing functionality.
  • Source Control – This is one place where you can probably get away without spending any money, but I wanted to mention it anyway. As I discussed in Source Control for Micro-ISVs, I use DreamHost for hosting my Subversion repository, as it comes free with their base hosting account.
  • Advertising – This will vary widely, but a decent Adwords budget will run $100-600/month (though it should be paying for itself).
  • Graphic Design – Here’s another danger zone where developers cost themselves money by trying to design their own graphics. Please, I beg you, pay someone to design your web site.
  • Phone – $20/month for a land line. $50-100/month for a cell phone with a decent chunk of minutes.
  • Internet – $20-60/month.
  • Fax Service or Fax Machine – It seems like it should be brought into the back yard and shot, but I still send a couple faxes each month. eFax will run you $14/month (annual plan) or if you have a land line you can fork over $50 for a fax machine (or buy a multi-function printer).
  • Printer – A color laser will run you $300-600 these days (I love my new Samsung Clx-3175fn). If you’re fine going old-school you can get a B&W laser for around $80. Either way, the toner is what kills you. Set aside $50-150/year for toner and paper.
  • Computer – If you’re writing software you’re probably upgrading your PC every 2-3 years. Figure $1,500 for a new laptop, $700 for a desktop, give or take a few hundred.
  • Software – If you’re one of those lucky Ruby or PHP developers then most of your tools are free. If you work with .NET be prepared to pay $1000-2000 for an MSDN subscription (or if you’re developing a product talk to Bob Walsh, get signed up with Microsoft BizSpark and get the same thing for a few hundred bucks).

Based on the above, you can probably see how $2500/month isn’t going to keep you in the lifestyle you’re accustomed to…it’ll barely keep the doors open.

Of course, this is far from an exhaustive list. If you have additional items that have caught you by surprise as you’ve started your business, please post them in the comments.

Update:I’ve received a lot of email with information about using $1 Linux hosting, $1200 laptops, $100 printers, etc… I already know about these options, but saving $9 per month doesn’t change the point of this post, and as I said above, if you go with cheap hosting/laptops/printers “you will pay for it in other ways.”

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#1 Dave @ FixmyPCHelp on 02.17.10 at 1:20 am

Nice post.

How about professional insurance, for the industry you’re in? Often the same as Liability but sometimes different.

I’ve also found a hidden costs of aesthetic and environmental arrangment. In other words, I used to focus on functionality in my office, but spending more and more time there, I find it necessary (for my own sanity) to spruce up the desk, ie. keep it organized and clean, and make the office environment mentally soothing.