Starting a business isn't cheap. One of the biggest challenges for most entrepreneurs is raising capital to fund the early stages of their company, before it has the customers and revenue to support itself. For this reason, founders often take out a small business loan or seek seed investments from angel investors to get things under way.
Indeed, one of the easiest ways for a startup to fail is for it to exhaust its early-stage funds before it has a chance to build up enough momentum to keep going. Even the most promising ideas and well-conceived business plans need time to work.
For this reason, it's essential for early-stage businesses to keep their costs to a minimum. A sparkling new multi-billion dollar office may make sense for the Apple of today, but we shouldn't forget that Steve Jobs started the company in a garage.
To find the cities with the lowest startup costs, SmartAsset collected data on the typical costs of starting and running a business in 81 of the largest cities in the country. We calculated the total expected startup costs over the first year of operation for a company in each of these cities, factoring in the following expenses:
- Office space. We assumed the startup would lease a 1,000 square foot office. Using data from Reis, Inc., a company that analyzes the commercial real estate market, we calculated the cost of leasing an office of that size in every city.
- Utilities. Using data from the Energy Information Administration, we calculated the cost of gas and electricity for a 1,000 square foot office based on state energy prices and regional commercial usage rates.
- Filing fees. With data from bizfilings.com, we incorporated the cost of filing fees for either incorporation or filing as an LLC. (We took the average of these two types of filing fees.)
- Legal and accounting. We assumed that a typical business would face average first-year legal and accounting costs of $3,500 and $1,000 respectively. Using data from the Bureau of Labor Statistics, we adjusted those amounts upwards or downwards based on local average rates for attorneys and accountants.
- Payroll. To calculate the typical first-year payroll of a startup in each city, we assumed the business would have five full-time employees, earning the city's median annual salary according to the BLS.
Because every new business will face its own set of circumstances and its own unique expenses, we made a number of assumptions in our study that may not apply to all startups. The total costs that we calculated for each city are not an average. Rather, they are a point of comparison, looking at how an identical, generic startup would fare in each of the 81 cities in our study.
- Low costs in the south. Nine of the top ten cities with the lowest startup costs are located in the south. Southern cities have low commercial office rates and relatively low labor costs.
- The Bay Area is (surprise!) not cheap. While Silicon Valley and San Francisco have produced some of this century's most well-known startups, those successes may be difficult for most entrepreneurs to replicate without substantial funding at the outset. Startup costs in San Jose and San Francisco are over 50 percent higher than the average for the cities in our study. California also has some of the highest taxes in the U.S.
Click ahead for a look at the 10 U.S. cities with the lowest start-up costs.