What a small business really costs before it pays you

Quick answer: Budget for three buckets: one-time startup costs, recurring costs that start before your first check, and your own household bills for at least six months. Then set aside a slice of every dollar you collect for taxes. Most first-year failures come from the second and third buckets, not the first.

This is general education, not financial, legal or tax advice. A CPA and a local attorney can price your actual situation.

Start with a made-up business

Real numbers vary by trade and state, so I'm using a hypothetical. You're starting a one-man lawn and landscape service. Every figure below is round and invented to show the arithmetic. Swap in your own.

One-time costs:

• Commercial mower, trimmer, blower, trailer: $6,000 (used saves money, but ask what it costs to fix)
• Business registration and local license: $400
• Logo, magnets for the truck, a simple website: $500
• Accounting software and a business checking account: $300

That's $7,200 before you cut a single blade of grass.

Registration is the cheap part, and it surprises people how cheap. State filing fees run from under a hundred dollars to several hundred depending on where you live. Your Secretary of State's website lists the exact fee, and you never need to pay a third-party service to file on your behalf.

The licenses nobody lists in one place

There's no single "business license." There's a stack, and which layers apply depends on what you sell and where.

• State registration if you form an LLC or corporation. A sole proprietor can skip this, but it gives you no separation between your business debts and your house.
• City or county business license. Often a modest yearly fee. Some towns want one even if you work out of a spare bedroom.
• Trade or professional license. Electricians, plumbers, contractors and many others need one. Some require exams and proof of insurance first.
• Sales tax permit if you sell taxable goods or services.
• Home occupation rules, if customers or deliveries will show up at your address.

Ask your city clerk and your state's small business office what applies to you. Do it before you buy the equipment.

Now, a labeled opinion. Opinion: Some of these requirements protect customers. Plenty of others are just a toll booth between an honest man and his first paying job. A would-be hairbraider or lawn guy shouldn't need a year of paperwork and a few thousand dollars to earn a living. Keep that in mind when your state asks for something that makes no sense, and call your legislator about it. Meanwhile, pay what you owe and stay legal. An unlicensed business gets fined at the worst possible moment.

Insurance is a real line item

Without insurance, one bad afternoon can end the business and take the savings with it. Say the mower throws a rock through a customer's window.

General liability coverage for a small trade is a recurring cost, often hundreds to a couple thousand dollars a year, depending on the work. Get actual quotes. If you use a truck for the business, your personal auto policy may not cover it, so ask your agent directly. If you hire anyone, workers' compensation rules come into play, and they vary by state.

In our example, call it $1,200 a year, or $100 a month.

And you? Your family's income now depends on one person. Look at how much life insurance you need before launch, not after.

The cost nobody puts on the spreadsheet

Here's where the money goes missing.

You earn $4,000 in a month. You don't get to spend $4,000. Take out fuel, repairs, insurance and supplies. Say that's $1,100. That leaves $2,900 of profit.

Now taxes. As an employee, your employer withholds as you go. As a business owner, nobody does. You owe income tax plus self-employment tax, which covers Social Security and Medicare. The self-employment rate is 15.3 percent of net earnings, because you're now paying both the employee and employer halves. The IRS expects estimated payments four times a year, using Form 1040-ES. Miss them and penalties can apply.

A common habit is to move 25 to 30 percent of profit into a separate savings account every time you get paid. Whether that number fits you depends on your income, deductions and state. Your CPA can set it properly. Use the habit now anyway.

On our $2,900: set aside about $800. You're left with roughly $2,100 to live on. That's the real number.

If you've only seen your payslip as a take-home figure, this is the first time you'll feel how much comes off the top.

Month one to month twelve

Customers don't pay on day one. Some pay in 30 days. Some in 60. Some after a second reminder and a slightly awkward phone call.

Suppose your income ramps slowly. Maybe $1,500 in month one and $2,500 in month two. By month six you're at $4,000. Costs run all along, and the early months bring less income than outgo.

To survive that stretch you need a cushion. A decent rule: startup costs plus six months of your household bills, sitting in cash before you leave a paycheck. If your family spends $4,500 a month, that's $27,000. Add the $7,200 and you want about $34,000 to quit cleanly. That figure scares people. Good. Better to meet it on paper than in month five.

Don't have it? Don't give up on the idea.

How to start without betting the house

The old way still works. Keep the job and start on weekends.

Buy the used mower, not the new one. Take the first three customers with cash and use their money to buy the next tool. Pay for equipment as you earn the money for it. Borrowing against the house for a business that has never had a customer is how families get hurt.

If you owe money elsewhere, look at paying off debt in the right order before adding a business loan to the pile. And keep a personal emergency fund separate from the business account. Mixing them is how you lose track of both.

A one-page checklist before you spend a dollar

• Call the city clerk and the state small business office. Write down every license and permit that applies.
• Get two insurance quotes.
• Open a separate business checking account. Never run business spending through the family card.
• Price your startup costs, then your first six months of household bills.
• Open a tax savings account and pick a percentage with your CPA.
• Write down what you'll charge, and check that the math still works after costs and taxes.
• Set a date. If you haven't hit a number by then, you stop or change course.

That last one matters most. A deadline you set while calm beats a decision you make while broke.

Running your own business is one of the most American things a person can do. It's also arithmetic, and the arithmetic doesn't care how hard you work. Do the numbers first. Then work like you meant it.