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The compliance costs of starting a business are easy to miss but risky to overlook
Coming from multiple layers of government and diverse agencies, startup compliance costs vary so much with industry and location that it’s hard to find comprehensive guidance, leaving entrepreneurs without legal counsel at risk of cash flow shortages before they even make their first sale.
A business license ranges from $50 to $400, sometimes more depending on the state and type of business. But that’s only one line on the budget. Estimating a total is impossible without specifics, so the key is knowing what to research and where to find it.
Xero examined how compliance costs are easy to miss but not budgeting for them can prevent new businesses from opening their doors.
Compliance costs, beyond the license
A business license is often the first compliance fee entrepreneurs consider, but it’s not the first they need to pay. Before getting a license at town hall or on a county website, businesses typically have to meet other local, state, and potentially even federal requirements.
- Entity registration: States charge anywhere from $25 to several hundred to register partnerships, LLCs, or corporations or to secure “doing business as” (DBA) names. The state’s secretary of state website generally lays out the costs.
- Sales tax license: They’re often free or available for a nominal fee from the state’s department of revenue, but some businesses face additional registration costs for collecting industry-specific taxes like lodging fees or motor vehicle rental taxes.
- Industry-specific permits: These vary drastically in cost and may come from county, state, or federal agencies. Take a small brewpub that also plans to sell food: They’ll need a federal permit from the Alcohol and Tobacco Tax and Trade Bureau (TTB), a manufacturer license and on-premises liquor sales permit from the state liquor enforcement division, and a health inspection from the county all before applying for a local business license.
These costs disproportionately hit small businesses, with 69% saying they face higher compliance costs per employee than larger competitors and 51% citing these costs as a barrier to growth, according to the MetLife and U.S. Chamber of Commerce Small Business Index.
But it’s not just permits and licenses; compliance costs go beyond government fees.
Insurance: The overlooked compliance cost
State laws and the contractual demands of lessors, lenders, and even certain vendors or clients require new businesses to get multiple insurance policies.
Commercial property lenders require property insurance and potentially flood coverage. Triple net leases are the norm in business rental agreements, putting responsibility for property taxes, insurance, and maintenance on new owners. Even running a business out of a home can drive up homeowner policy rates.
Then, there’s vehicle insurance for delivery vans and company cars. Even partial business use can cost money – insurers often raise premiums when they learn that a vehicle is being split between personal and business use.
Hiring employees means dealing with a host of taxes – federal payroll and unemployment, state withholding and unemployment, shared premium fees for state-required medical leave programs, and potentially even local taxes – and paying for insurance on top. Workers’ compensation coverage is mandatory for businesses with even a single employee in every state, except for South Dakota and Texas, but even in those states, the financial risk of operating without a policy isn’t worth the savings.
Add general liability or professional errors and omissions to the stack, and the costs get even higher. Insureon reports an average general liability cost of $45 per month for small business owners with an annual range of $250 to $3,000.
The time required for research and getting quotes compounds the costs — but knowing what to expect and when can help a lot.
A first-year compliance calendar
Not knowing exactly what’s needed or how much it’ll cost, while also being aware that mistakes can put a business’s financial health at risk, is scary. A compliance calendar helps to get it right.
- Two months prelaunch: Business formation, DBAs, and sales tax certificates. Although instant approval is pretty common, build in a buffer for delays and mailing time when paper certificates are needed.
- Six weeks prelaunch: State, county, and local permits or licenses. Leave ample time for application processing and in-person reviews (for example, if applying for health, safety, or occupancy certificates).
- One month prelaunch: Local business license. Timing varies and most localities require a sales tax certificate plus any required county, state, or federal permits first.
- Two weeks prelaunch: Insurance. Start researching at any time, but to get quotes, owners usually need details about their industry, location and estimated sales which they might not have until a few weeks before opening.
Once that’s all in place, new business owners should set annual reminders to renew licenses and permits. To be on the safe side, start renewals four to six weeks before they’re due. And put first-year tax deadlines in a calendar as well. Here’s how the deadlines typically lay out:
- Monthly sales tax: Most businesses pay and file sales tax monthly, although small sellers can sometimes pay quarterly or annually while large companies may need to pay more frequently. State departments of revenue outline the schedule when sending permits to businesses.
- Monthly payroll deposits: The default due date for federal payroll taxes is the 15th for the previous month’s payroll, but the IRS alerts employers about annual or semiweekly schedules when they send out the employer identification number (EIN). Next-day deposits are required any time an employer hits $100,000 in withholding regardless of their regular schedule.
- Quarterly returns and payments: Federal excise and payroll returns, most state payroll tax payments, and federal estimated income taxes are all due quarterly.
- Annual deadlines: Partnership and S-corp annual returns are due March 15th, while corporate and individual returns are due April 15th. The IRS provides a six-month extension for both deadlines on request.
The trick to compliance? Proactive research, a schedule, and setting aside time to make it happen. A few months before opening, new entrepreneurs should dig into state and federal requirements for their industry, reach out to local government officials to figure out what to expect on the county or city level, and start getting insurance quotes.
Then, they should make a calendar of key dates and costs: registration deadlines, processing times, and so on. And schedule regular time for compliance — a National Small Business Association (NSBA) survey found that the majority of small businesses spend more than 20 hours per year on federal tax compliance alone. Adding state taxes, local permits, and insurance to the mix can bring the needed time up to a full day per month.
Tools can help automate the process: a point-of-sale (POS) system that diverts sales tax to a savings account and pays it automatically, payroll software that files and pays taxes, or accounting software that helps track estimated quarterly tax payments.
Compliance costs aren’t just a startup concern. They’re a recurring cost, and managing them effectively requires building them into the budget like any other operating expense. When they’re predictable, tracked, and under control, compliance costs are a lot easier to manage.
This story was produced by Xero and reviewed and distributed by Stacker.
