Organizational costs

From CEOpedia | Management online

An organizational cost is the amount that the founder of a new company or company must issue at the very beginning. These are the first money spent for the company. Includes legal and promotional fees related to the establishment of a company with the federal and state government. In summary, it is an expense to create an organization or incorporate a company[1].

The organizational cost is incurred before the company or organization starts functioning. At the beginning, the partners or the founder of the future organization go to prawinka in order to make a partnership agreement for partnerships or the company's statute and the corporate statute for larger organizations, in this case for corporations. This certificate in the form of a legal document establishes rules between partners and shareholders in the new organization. The lawyer's agreement covers key issues such as [2]:

  • percentage share in profits,
  • stock options,
  • percent of ownership

After the lawyer develops and prepares the documents, the attorney enrolls the contracts in the appropriate government organization. Then he tries to obtain a state license, which authorizes him to conduct activities. The next step is applying for an identification number. Next, we will compile the fender number after granting the license for running a business. Examples of organizational costs that must be incurred to establish a company [3]:

  • Research cost - a review of potential markets
  • Staff training
  • Legal costs, including preparation and preparation of statutes in the case of a corporation or partnership agreement
  • Costs of board meetings in order to determine the company's operations
  • Fees for submitting an application to establish a company to the appropriate state government

Examples of Organizational costs

  • Legal fees associated with forming a corporation, such as filing fees and attorney fees
  • Costs associated with registering the business with state and federal agencies
  • Fees for obtaining any necessary business licenses
  • Costs associated with setting up the business entity, such as obtaining corporate seals, hiring a registered agent, obtaining an Employer Identification Number (EIN)
  • Fees for any accounting or legal advice obtained to help in setting up the business
  • Costs associated with setting up office space and equipping it with the necessary furniture, computers, and other equipment
  • Any costs associated with hiring employees or subcontractors
  • Any costs associated with advertising, marketing, and promotions
  • Any costs associated with setting up a website or other online presence
  • Any costs associated with obtaining business insurance
  • Travel expenses associated with setting up the business
  • Any other miscellaneous expenses associated with setting up the business.

Advantages of Organizational costs

Organizational costs can be an important part of creating a business and ensuring its success. These costs can provide the following advantages:

  • Legitimacy: Incurring organizational costs gives the new business legitimacy and credibility in the eyes of customers and partners, as it shows the business is committed to abiding by applicable regulations and laws.
  • Efficiency: Organizational costs can help businesses become more efficient by helping them understand the regulations and laws applicable to them and allowing them to focus on the areas of their business that are most important.
  • Access to resources: Organizational costs can help businesses access resources such as start-up grants and tax incentives.
  • Professional advice: Organizational costs can give business access to professional advice from legal and financial experts who can help them make the best decisions when setting up their business.

Limitations of Organizational costs

Organizational costs come with several limitations. These include:

  • The inability to use the funds for any other purpose than the organization. The funds are specifically directed towards setting up the organization and cannot be used for any other project or purpose.
  • The cost of the organization can be high and difficult to manage. Depending on the type of organization and its size, the cost can range from a few hundred dollars to thousands of dollars.
  • There is also a risk of mismanagement of funds. If the funds are not managed properly, there is a risk of not achieving the desired outcome.
  • The cost of the organization is also subject to change over time, depending on the laws and regulations of the country or state in which it is located.
  • The cost of the organization can also be affected by the market conditions and the economic environment.

Other approaches related to Organizational costs

Organizational costs consist of more than just the legal and promotional fees associated with the incorporation of a company. Other costs include:

  • Recruiting and hiring employees: This includes the cost of advertising for positions, interviewing and background checks, and the cost of training new employees.
  • Purchasing equipment: Companies need to buy equipment and supplies to get their operations started, such as computers, printers, desks, and other supplies.
  • Renting or leasing space: Depending on the type of business, you may need to rent or lease a facility to operate out of. This could include a physical shop or office space, or even online hosting or storage solutions.
  • Obtaining licenses and permits: Depending on the industry and location, a business may need to obtain licenses and permits to operate. These may include a business license, health permits, and any other necessary paperwork.
  • Insurance: All businesses should have insurance to protect them from potential lawsuits or damages caused by their operations.

In summary, organizational costs consist of a variety of expenses including recruiting and hiring employees, purchasing equipment, renting or leasing space, obtaining licenses and permits, and insurance. These costs are necessary to get a business up and running.


  1. Cludius. J, (2018), pp. 93-110
  2. Garaffa. R, Szklo. A, Lucena. A, Feres. J. G, (2019), pp. 171-88
  3. Keegan. C, Teljeur. C, Turner. B, Thomas. S, (2019), pp. 15-32

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Author: Klaudia Rodak