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Written by: Carolyn Young
Carolyn Young is a business writer who focuses on entrepreneurial concepts and the business formation. She has over 25 years of experience in business roles, and has authored several entrepreneurship textbooks.
Edited by: David Lepeska
David has been writing and learning about business, finance and globalization for a quarter-century, starting with a small New York consulting firm in the 1990s.
Published on May 31, 2022
Investment range
$3,550 - $8,100
Revenue potential
$130,000 - $520,000p.a.
Time to build
0 – 3 months
Profit potential
$117,000 - $156,000p.a.
Industry trend
Growing
Commitment
Flexible
Consider these crucial factors when launching your software company:
Starting a software company has pros and cons to consider before deciding if it’s right for you.
Trends in the software industry include:
Challenges in the software industry:
Startup costs for a software company range from $3,500 to $8,000. Costs include a computer, programs for development projects, and a website.
If you’re not already a software developer, you can get an online software engineering degree from a place like SNHU.
| Start-up Costs | Ballpark Range | Average |
|---|---|---|
| Setting up a business name and corporation | $150 - $200 | $175 |
| Business licenses and permits | $100 - $300 | $200 |
| Insurance | $100-$300 | $200 |
| Business cards and brochures | $200 - $300 | $250 |
| Website setup | $1,000 - $3,000 | $2,000 |
| Computer | $1,500 - $3,000 | $2,250 |
| Programs and software | $500 - $1,000 | $750 |
| Total | $3,550 - $8,100 | $5,825 |
Software development companies charge about $250 per hour, sometimes more, for developing software to a company’s specifications. If you’re going to develop software to be sold directly to consumers or businesses, you’ll likely charge a monthly subscription fee. This is the software as a service (SaaS) model, and subscriptions cost anywhere from $10 to $400 per month, or even more.
These calculations assume you’re going to start with the first option, charging $250 per hour. Your profit margin should be about 90%. In your first year or two, you could work from home for 10 hours a week, bringing in $130,000 in annual revenue. This would mean $117,000 in profit, assuming that 90% margin.
As your company gains traction, you could work 40 hours a week. At this stage, you’d rent a commercial space and hire staff, reducing your profit margin to around 30%. With annual revenue of $520,000, you’d make an outstanding profit of $156,000.
If you get to the point where you’re developing software to sell directly to consumers, the sky’s the limit to how much you can make if your products are successful.
There are a few barriers to entry for a software company. Your biggest challenges will be:
Now that you know what’s involved in starting a software company, it’s a good idea to hone your concept in preparation to enter a competitive market.
Market research will give you the upper hand, even if you’re already positive that you have a perfect product or service. Conducting market research is important, because it can help you understand your customers better, who your competitors are, and your business landscape.
Research software companies in your area to examine their products and services, price points, and customer reviews. You’re looking for a market gap to fill. For instance, maybe the market is missing a company that offers a software solution for financial management, or a custom delivery app software company.
You might consider targeting a niche market by specializing in a certain aspect of your industry, such as software for retailers or software products for startup companies.
This could jumpstart your word-of-mouth marketing and attract clients right away.
You’ll probably start out by developing software solutions for businesses and charge an hourly rate for software engineering. For example, if someone wants to start a delivery service similar to DoorDash, you’ll develop the software for them. You can also offer web development and mobile app development.
Later, you may want to develop your own proprietary software that you can sell, such as business management software. When you do so, you might want to start with a minimum viable product (MVP), which is a basic version of your product that you can use to test the market and then determine features to add based on customer feedback.
Hourly rates for a software development company are about $250. Your profit margin when you’re working by yourself should be about 90%.
Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.
Your target market will be businesses or aspiring entrepreneurs. You can connect with both on LinkedIn or find business owners on Google and Yelp and call them directly.
In the early stages, you may want to run your business from home to keep costs low. But as your business grows, you’ll likely need to hire workers for various roles and may need to rent out an office. You can find commercial space to rent in your area on sites such as Craigslist, Crexi, and Instant Offices.
When choosing a commercial space, you may want to follow these rules of thumb:
Here are some ideas for brainstorming your business name:
Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool below. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these.
Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that sets your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.
Here are the key components of a business plan:
If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist to create a top-notch business plan for you.
Registering your business is an absolutely crucial step — it’s the prerequisite to paying taxes, raising capital, opening a bank account, and other guideposts on the road to getting a business up and running.
Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business!
Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you’re planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to software companies.
If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state.
Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your software company will shape your taxes, personal liability, and business registration requirements, so choose wisely.
Here are the main options:
We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using an online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have.
Choose Your State
The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN.
Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.
The IRS website also offers a tax-payers checklist, and taxes can be filed online.
It is important to consult an accountant or other professional to help you with your taxes to ensure you’re completing them correctly.
Securing financing is your next step and there are plenty of ways to raise capital:
Bank and SBA loans are probably the best option, other than friends and family, for funding a software business. You might also try crowdfunding if you have an innovative concept.
If you have a unique idea for a software that you can develop to put on the market, you may be able to attract angel investors or venture capital. Tech startups are considered very investable because they have the potential for huge growth.
Starting a software business requires obtaining a number of licenses and permits from local, state, and federal governments.
Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits.
You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more.
You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.
This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties.
If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.
Before you start making money, you’ll need a place to keep it, and that requires opening a bank account.
Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your software business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.
Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account.
Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.
Here are some types of insurance to consider:
As opening day nears, prepare for launch by reviewing and improving some key elements of your business.
Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks.
You may want to use project management software such as Azure DevOps, Zoho, or FunctionFox, to manage your projects, workflows, and collaboration.
Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism.
You can create your own website using website builders. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.
Your clients are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. Regularly update content with industry insights and success stories to engage visitors and improve search engine rankings.
Here are some powerful marketing strategies for your future business:
Unique selling propositions, or USPs, are the characteristics of a product or service that sets it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your software company meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.
Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your software business could be:
You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a software business, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in software for years and can offer invaluable insight and industry connections.
The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in software. You’ll probably generate new customers or find companies with which you could establish a partnership.
If you’re starting out small from a home office, you may not need any employees. But as your business grows, you will likely need workers to fill various roles. Potential positions for a software business include:
At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need.
Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent.
As a software developer, you know how in demand your services are. The software industry in the US has taken off in the last decade, more than doubling to reach well over $400 billion. Your own software company could open up a world of opportunity for you and allow you to build great software solutions for businesses all over the world. You could even grow your company into the next Microsoft!
You’ve added business knowledge to your resume now, so it’s time to get to work and launch your successful software company.
For software companies, the sky’s the limit in terms of profitability. Software is a massive and growing industry, so if you’re a developer, there’s plenty of opportunity.
Starting a software company can be challenging due to the competitive nature of the industry, the need for technical expertise, and the ever-evolving technology landscape. However, with careful planning, market research, and a solid business strategy, it is possible to overcome these challenges and build a successful software company.
To protect intellectual property and ensure data security in your software company, it is crucial to implement several measures. These include obtaining appropriate patents or copyrights for your software, implementing strict access controls and encryption methods, regularly updating security protocols, conducting thorough employee training on data protection, and employing robust backup and disaster recovery systems.
To differentiate your software company from competitors, you can focus on various strategies. This includes providing a unique and innovative software solution that solves a specific problem or meets an underserved market demand. Additionally, offering exceptional customer support, continuous software updates and improvements, competitive pricing, and cultivating a strong brand identity can help set your company apart in the market.
The future of software is incredibly promising. Advancements in artificial intelligence, machine learning, and automation are expected to play a significant role in shaping the industry. Software will continue to permeate various sectors, from healthcare to finance, with increased focus on cybersecurity, cloud computing, and mobile applications. Additionally, emerging technologies such as blockchain, Internet of Things (IoT), and virtual reality (VR) present new opportunities for software development and integration.
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