Common expenses and hidden costs of running a business

Holly Grant, Advisor, LTSE

Do you know the real cost of running a business? Let’s take personnel, for example. You might think personnel costs are limited to salary and bonuses, but the reality is that there are a number of ancillary costs that can increase this expense by up to 35% per hire. If you plan for these costs in advance, you won’t be caught by surprise, and more importantly, you’ll have the runway to execute on your vision. We’ll go over these common expenses one by one below.

Salary Load

A “load” is a markup to employee salaries to account for ordinary expenses such as payroll taxes and benefits. The first two are typically 7–8% of an employee’s salary, and benefits add another 12–13%. The best rule of thumb is to add at least 20% to an employee’s base salary (salary*1.2). If you’re hoping to attract key talent by offering a “rich” benefits package (e.g. by providing highest tier of medical coverage or making significant contributions to your employees’ dependent costs), you should plan for a 22% to 30% load (salary*1.22 or 1.3). (Note that if your salaries are artificially low, meaning that your salaries are well below market, you’ll need to build in an even more aggressive load.) When in doubt, add a cushion (in other words, increase the load!).

Distributed team

If your team is distributed, you’ll need to establish payroll in multiple states. This comes with a price tag of approximately $1,000 per state. However, Finance veterans will tell you that the real cost is incurred when you decide to cancel payroll in a particular state (usually to the tune of $3,000 plus the cost of the administrator’s time). Then you need to consider additional state tax filings (approximately $1,000 per year) and, in certain cities and states, business licenses. For example, San Francisco’s business license is $750 per year; we pay this for simply having an office in San Francisco.

Recruiters

Recruiting is another multi-dimensional expense. This entails everything from engaging professional recruiters/search firms (exec hires: $125,000; IC hires: $30,000) to attending relevant hackathons/conferences ($1–2K in travel plus the conference fee) to treating candidates to coffee/meals in the interview process ($20 per meeting), to sponsoring H-1B visa transfers ($5,000 to $6,000 per candidate). Schwag can even be considered a recruiting expense if you’re distributing t-shirts at a campus recruiting event for interns ($1,000 per event).

Laptops, etc.

Equipment costs come into play once you make a hire. Most employees will need a laptop ($1,250k-$2,500k) and a monitor ($200-$400) at the very least. We also need to factor in incremental user costs for tools like Google Apps ($10/month per user), Slack ($12 per user), and Zoom. So, we’re looking at roughly $3,000 per new hire. These costs may seem obvious until you’re going through the bottoms-up process of building a budget for x number of months. Make sure these match these expenses to your hiring plan (both in timing and amount)!

That sums up employee-related costs. Let’s move on to general corporate matters.

Taxes

Taxes are something every company needs to plan for, even pre-revenue companies. Filings should be made at the federal, state, and, city levels, if applicable. (e.g. Manhattan requires a separate filing from New York state.) If your company is incorporated in Delaware, you’ll be on the hook for the Delaware Franchise Tax and for returns in states where you have employees on payroll. The key is to allocate resources to tax preparation (typically handled by a firm) and to taxes owed. Tax preparation is roughly $1,500 per filing, and taxes owed vary significantly based on geography and the financial profile of your business. On a separate but related note, you may be required to have a business license in the cities where you have office space.

Insurance

Insurance is another prerequisite. It comes in many flavors and varying tiers, but Workers’ Compensation, Directors and Officers (D&O) insurance, and General Liability are the most common policies in the early phases of a company’s life. You may also be required to have policies for co-working spaces (Liability Insurance). The cost of insurance can range from hundreds to tens of thousands of dollars in the earliest stages depending on coverage and the nature of your business.

Intellectual Property

Patents and trademarks are the last general corporate bucket. Here it’s important to plan for legal counsel and filing fees ($5–15K per matter). The examiner often comes back with questions about your applications, so make sure to account for some back and forth in the budgeted process. Quality of counsel matters here, especially if intellectual property is essential to your competitive advantage!

Here’s a quick checklist of the common business expenses we’ve covered:

Personnel Costs

  • Cash compensation (salary & bonus)
  • Salary load (at least 20%)
  • New payroll setup
  • Recruiting
  • Professional searches
  • Meals/coffees
  • Events/conferences
  • Schwag
  • Equipment

General Corporate Expenses

  • Taxes
  • Tax prep
  • Tax filings
  • Insurance
  • Worker’s comp
  • D&O
  • General liability
  • Business Licenses
  • City and state business licenses
  • Trademarks and patents
  • Legal counsel
  • Filing fees

We built Runway to simplify the resource allocation process. Armed with this information, we hope you’ll use these common expenses as a starting point, and then tailor your forecast to your business.

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Disclaimer
The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Information about the company is provided by the company, or comes from the companies’ public filings and is not independently verified by LTSE. Neither LTSE nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding LTSE-listed companies are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. Advice from a securities professional is strongly advised.
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