Definition and Meaning
Start-up costs are basically non-recurring costs,which are associated, with setting up a business such as fees of an accountant, registration charges, legal fees, promotional and advertising activities, as well as employee training. It is also called as start-up, preliminary or pre-opening expenses. In other words, start-up cost means a variety of different costs,which a new business owner should incur so that the business gets established. These are typically one-time costs, and they are often allowed to be amortized. Start-up cost also includes the acquiring equipment, fees, paying for a place for conducting the business, living expensesand so forth.
Types of start-up costs
There are two types of start-up costs:
1. Investigatory costs - These types of costs are incurred in researching the need for the potential trade or business. These costs relate to the decision whetherto open and acquire the business or not and also to decide which particular business to start with. Examples of these types of costs are an analysis of the products, transportation, labor supply, consultant fees, and travel costs to secure the customers, distributors and suppliers.
2. Pre-opening costs - These costs are incurred the decision has been made to open the business or trade, but before the business is actually started. Examples of these types of costs are advertising the business opening, promotional items for grand business opening, salaries for employee training, building and equipment repairing.
Startup costs do not include the costs that can be deducted in the taxes such as interest, taxes, research,as well as experimental costs. These types of costs are not necessarily organizational costs. These are incurred in, investing the acquisition or in the creation and setting up of an active business. Start-up costs are basically the expenditures which are incurred after a decision is made for the institution of a particular business. A taxpayer who enters a business may elect to amortize these expenses for a period of minimum 5 years.
Understanding the types of overheads a start-up will incur
The startup cost includes two types of spending:
1. Expenses - These are the costs for the operations which occur during the starting phase. It includes deductible items such as travel, payroll, office supplies, marketing materials etc. Expenses also includeorganizational costs like legal fees etc.
Assets - It is also known as capital expenses or expenditures. These are also called one-time costs of the buying assets such as property, vehicles as well as making upfront payments for the security deposits.