Top 5 Hidden Costs of Operating a Small Business

For the entrepreneurial mindset, the idea of starting your own business and all the freedoms and potential for growth that come with that venture are very exciting. Too often, however, small business owners wind up miscalculating the actual, daily costs of running a company. In order to succeed, you’ll need to budget for expenses—both the expected and the unexpected.

Here are the top 5 hidden costs of operating a small business that you need to be aware of:

1. Employees

Whether you have 5 or 500 people on your staff, there are several employee expenses that must be taken into account when running a small business. You’ve probably already factored in the big things such as salaries, payroll taxes, benefits, and retirement plans. What you may not realize is that there are many more smaller expenses that quickly add up, such as:

Paid vacation time, sick leave and maternity leave
Certifications, classes, conferences and training
Office perks like ergonomic seating or Friday afternoon pizza parties
Employee turnover costs including hiring and training new employees

While most of these expenses might seem optional, they usually aren’t. For instance, if you don’t invest in a clean, comfortable and enjoyable environment, you may end up paying for it later with a higher employee turnover.

How much does an employee actually cost you? It will vary depending on the state in which your business is located and the specific needs of your staff, like uniforms or conferences, but as an example, an employee that you hire for $14 per hour will probably cost you closer to $20 per hour.

And according to Inc.com, when you include such things lower productivity, lost knowledge, training costs, hiring costs and anemic morale due to an overworked staff, replacing an employee can cost 150% of his or her yearly salary.

2. Taxes — Key among overhead costs for small businesses

Taxes are nightmarish for everyone, and that’s doubly true for small businesses. The first, and smartest, expense should be the help of an experienced accountant or tax professional (either on-staff or outsourced) to guide you through city, state and federal tax guidelines.

After that expense, the amount you pay in taxes will vary based on a number of different factors. If your business is registered as a limited liability company (LLC), for example, then you’ll need to pay an LLC fee each year, which varies greatly by state. You’ll also need to pay taxes on your company’s profits and, if you manufacture a product, the company’s inventory.

Other taxes may include:

Payroll tax
Property tax
Sales tax

You may also run across other related expenses. If your company hires independent contractors, for instance, you won’t need to pay a portion of their taxes, but you will need to pay to maintain W-9 forms and file 1099 forms.

3. Legal Expenses

As a small business owner, you can expect a variety of legal expenses. At the very least, you’ll pay to set up a corporation or an LLC. Depending on your trade, you may also need to shell out the cash for local, state and federal licenses, permits and certifications. Many businesses will also need to pay a lawyer to draft contracts and legal disclaimers.

By far the largest hidden legal cost is that of litigation. It’s easy to assume that you’ll never be the target of a lawsuit, but the National Federation of Independent Business says otherwise. According to them, small businesses are the biggest targets for lawsuits because attorneys know that they’re more likely to settle out of court than pursue legal action. The NFIB goes on to say that those settlements cost small businesses $35.6 billion each year.

Worse, the costs go beyond settlements and attorney fees. The time that you’ll spend dealing with a lawsuit instead of working is a loss for your business, and even if you win your case, you’ll probably face higher premiums on your business insurance.

4. Overhead Costs of Joining Business Associations and Trade Conferences

Business associations and conferences are an invaluable way to connect with others in your industry and with potential customers. However, these two things come with costs that are rarely factored into a company’s overhead. Most reputable business associations come with annual membership fees that can cost you hundreds of dollars, so even if you only join one or two, that can add up.

Trade conferences are another great way to network and show off your product or service, but they come with several costs, too, including tickets to the conferences, travel costs, lodging, meals, and lost time at work for the days that you and your employees are out of town.

5. Shrinkage — an overhead expense

When people think of shrinkage, theft (by customers or employees) is usually the first thing that comes to mind. And the cost of theft is huge—about 43.9% of total losses, according to the National Retail Federation. The other 56.1% of lost goods is a result of other, more benign factors like damage during transit or simple clerical errors. Compared to the other costs of doing business, shrinkage is relatively minor, but combined with any number of other hidden costs, and your business could easily face financial trouble.

Successful small businesses are built on innovative new ideas, but success also depends on your ability to accurately predict the unexpected. When you’re starting a new business, you can avoid these nasty surprises down the line by designating 20% of your budget to these hidden costs.