How much does it cost to start an online business?

Setting up an online business has never been easier, more accessible, or less expensive. Many existing businesses with physical locations are expanding their online operations or establishing an online presence for the first time. More and more businesses are moving their operations entirely online, finding that brick-and-mortar locations are no longer necessary. Huge numbers of new businesses are going virtual from the very beginning.

eCommerce has grown steadily in recent years, with its share of the market growing at an even faster rate during the COVID-19 pandemic. At its peak in 2020, eCommerce accounted for 17% of total retail sales, according to the U.S. Census Bureau.

Setting up an eCommerce business requires both physical and virtual assets, possibly including computers, physical and virtual storage space, domain name registration, and website hosting. Many tools and resources are available to help you create your own eCommerce business. The following offers an overview of the expenses commonly associated with creating an eCommerce business, along with estimates of what you can expect to pay.

Company registration

You can operate your new business as a sole proprietorship or if you have business partners, a general partnership. While this is the easiest company formation, doing business this way leaves you at risk of being personally liable for business debts. Another option is to create a business entity, such as a limited liability company (LLC), which will protect you from personal liability and provide a framework for your business operations.

There are several rules and regulations to be aware of if you choose to go down that road, so you might want to consider the cost of an attorney to help you form your LLC. Attorneys will typically charge between $1000-$3000 to help you through the process. You can also try an online LLC formation service. It’s typically an easy set-up, and the cost starts from $49. In addition to the formation service cost, each state has its own filing fees, ranging from around $50 to more than $700.

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Business licenses

You might need certain licenses or permits from the government in order to operate your eCommerce business. Local ordinances might regulate the kinds of businesses you may operate from your home. State law might require you to collect sales tax from your customers. The federal government regulates some industries, such as agriculture, so you might need a permit or license from a federal agency in order to sell certain goods online.

The cost of these permits and licenses can vary widely and is almost impossible to predict. You could be responsible for a fairly small amount, such as $25-50, or several thousand dollars.

Web hosting

You will need a service to host your website. Many services charge an initial setup fee of around $50 to $100, followed by a hosting fee that you pay monthly, semi-annually, or annually. The hosting fee could average anywhere from $10 to $300 per month.

The web hosting service includes two major components:

Storing the code, media files, and other elements that comprise your website; and
Handling the web traffic that your site generates.

A web hosting company might offer plans with various levels of both storage and bandwidth. An inexpensive plan might not get you enough bandwidth to handle a large amount of traffic. Plan accordingly.

Domain name

Your web hosting service could include domain name registration, or you may need to register the name through another company. You must register the domain name you want to ensure that you have exclusive use of that name. The cost of registering a name depends, in part, on how in demand the name is. It could range from around $10 to many thousands of dollars per year.

The Internet Corporation for Assigned Names and Numbers (ICANN) oversees the registration of domain names. It provides a lookup tool that you can use to see if the name you want is available.

E-commerce website

An eCommerce business’ website is usually its most important asset. Your website is the main representative of your brand. It can generate leads for you and build customer loyalty. A visually-appealing, functional website will keep people coming back.

Many low-cost tools are available to get your eCommerce website started, but this is one area where you want to make a good investment. A professionally-built website can include customizations specific to your business. You can probably expect to pay around $5,000 to $10,000 for a well-designed website that has everything you need to start. The low-cost option will range between $29 to $299. Investing in a professionally built website tailored to your business ensures a strong online presence. Additionally, with high-speed internet, your website can deliver a seamless browsing experience for customers, fostering trust and engagement

Products/Inventory

The costs associated with inventory will be unique for each business. It is typically the retailers’ largest cost, and the cost of buying the inventory itself is only part of the picture. You must consider the cost of keeping up with ordering and storing inventory and supplies, as well as costs associated with shortages.

Other factors may come into play with certain types of goods. If you sell crafted products, for example, your materials might be cheap, but each item you sell requires hours of work on your part. If you sell perishable items, you must consider what the spoilage of unsold goods will cost you.

Payment processing

Thanks to digital payment systems, a well-designed eCommerce website will do a substantial amount of the work for you. Once users arrive at your site, the software can guide them through every step of the process from finding a product to paying for it. It can handle many of the steps in the shipping process, such as determining the amount of postage needed and generating mailing labels. All you have to do is package the product and drop it in the mail.

Payment processing services may charge you an application fee and a setup fee. They may also charge a minimum monthly fee if your total sales using that service are below a certain amount. Transaction fees are often based partly on a percentage of sales. A common transaction fee is 2.9% of the sale amount plus a $0.30 fee. These costs can add up, especially if you make many sales for small amounts of money:

If you sell one $100 item, a payment processing service charging the fee described above would charge $3.20, leaving $96.80.
If you sell twenty items to twenty customers at $5 each, the payment processor would charge a $0.445 fee for each transaction. It would take a total of $8.90 from $100 in sales, leaving you with $91.10.

Shipping

Any eCommerce business that sells physical goods is going to have to deal with shipping costs. Even if you pass the costs on to your customers, you are responsible for making sure the goods get to the customers.

Shipping costs cover the cost of getting a product from its location in a store, warehouse, shed, garage, or closet to the customer’s mailbox or doorstep. It includes at least four components, some of which must be paid upfront:

Packing materials, including boxes, envelopes, protective materials, tape, and labels
Labor associated with packaging sold items
Postage or other shipping or courier fees may depend on the weight and size of the package, the distance to its destination, and external factors like gas prices
Import/export fees for international sales

An eCommerce business has several options for how it can handle shipping costs:

You can calculate the actual cost of postage or other shipping fees and charge that to the customer.
You can charge the customer a flat rate for shipping, regardless of the actual cost.
You can offer free shipping, in which case you pay for it yourself.

Accounting

Accounting might be one of the most difficult functions for eCommerce businesses, but it is also among the most important. An eCommerce business that sells to a national customer base may have sales tax obligations in multiple jurisdictions. Failure to charge and remit the correct amounts of tax, and to file the required returns, can result in significant fines.

Considering the complexity of such tasks, some eCommerce entrepreneurs opt for outsourced accounting for small business services to ensure accurate tax compliance and financial management. This can alleviate the stress and burden of managing complex financial tasks, allowing entrepreneurs to focus on other aspects of their business.

A bookkeeper and an accountant with experience in eCommerce can be indispensable. Regular services from these professionals could cost several hundred to several thousand dollars per month, but the cost could be worth the risk of fines for noncompliance. Operating an eCommerce business can allow you to avoid many of the expenses commonly associated with retail, particularly overhead costs like rent. You will still have to invest some money to get started, and you will have expenses to keep the business running smoothly. Tailor Brands can help you on your way.