Deciding to turn your home, or a portion of your home, into a money-making enterprise may seem like a great idea – who doesn’t like to work in his or her pajamas? But there are some legal considerations, permits and financial implications you must consider before moving forward. Let’s review the most critical things you’ll need to know before starting your home business.
Critical Things to Know Before Starting a Home Business
Get licenses and permits
The first thing to do is ensure that it is legal for you to conduct business from your home. Many local governments have restrictions regarding if and where business is conducted, as they want to preserve the integrity of the residential neighborhood. In most cases, you will need a Home Occupation Permit to use your home as a place of business.
It is best to check with your local government or city hall to determine if your home is in a business-friendly zone. In some cities, like New York and Los Angeles, a home business permit is not required. In other cities, you will not be able to conduct business from your home no matter what.
After determining if you can indeed use your home for business, conduct an online search using such sites as License123 to determine what types of business permits or licenses you’ll need. In addition to a business license, some of the other general licenses to be on the lookout for include:
1. General Business License – Check with your state or local government to find out what types of local licenses you might need. There is typically a nominal filing or administrative fee associated.
2. Professional or Trade License – Depending on the type of work you do, there might be a requirement for a local or national organization to be licensed, such as real estate.
3. Sales Tax Permits – If you intend to sell taxable goods, on- or off-line, you will need to obtain a sales tax permit. Remember that sales tax permits not only refer to where your business is located, but where you conduct business. Even if your state doesn’t require sales tax, if you transact business in a state that does, you can still be liable for having a permit. Small business sales tax laws can be complicated, so do your best to understand the intricacies before beginning your business.
4. Health and Safety Permits – Similar to professional and trade organizations that require licenses, you may also need health or safety permits in order to legally operate your business. Checking with your state’s environmental protection agency is a good place to start.
5. Construction Permits – If you intend to make any structural changes to your home, you will need construction permits, normally issued by your local government.
6. Seller’s Permit – Also called a resale tax number, this allows you to avoid paying taxes on merchandise and supplies for your business. Sales tax is only charged to the final user of a product within the state, so there is no need to pay it twice. When dealing with vendors and suppliers make sure to get their seller permit numbers as well.
7. Fictitious Business Name (DBA) Registration – Some states, not all, require businesses to file a “Doing Business As.” This name is the actual name your business operates under, not the name of you or your partners or LLC or corporation. This is not technically the legal name of your business, but the more common name you may choose to conduct business under.
And don’t forget to check with your Homeowner’s Association. If you live within the confines of an HOA, it is a good idea to become familiar with its bylaws to ensure you do not incur any fines for non-compliance.
Plan for Success
If you want your home-based business to succeed you’ll need to plan for success. Some of the key ingredients to success include:
1. Create Your Business Plan: Include your goals, marketing plan and financial goals as well as funding resources.
2. Develop Financial Projections: Many financial institutions will want financial projections to review before granting any type of loan.
3. Get Educated: There are many online and local resources that provide educational opportunities to entrepreneurs and business owners. It’s a good idea to attend these classes, not only for the information but to also network with other local business owners.
4. Put Your Taxes Together: Life will be much easier come spring if you have your tax information well organized from the start. Home-based businesses don’t have very many different tax requirements than other businesses, but there are a few intricacies to keep in mind:
Home-Office Deduction: Just like it sounds, this deduction allows you to take into account all of the operating expenses for your home office, including the square footage of your home office space and deduct it from your taxes. The IRS has a terrific, easy-to-understand chart that outlines the different parts of this tax deduction and how best to calculate it.