Although a home-based business can offer you a great deal of flexibility, you're still subject to certain state and federal requirements and regulations. You must deal with certain things before you can officially start operating a business from your home. You must comply with all registration, licensing, permit and insurance requirements to avoid fines and penalties.
Registering Your Business
Register your business name with your state's filing office. If you're operating under a fictitious or "doing business as" name, you may be required to take extra steps to register it based on your state's laws. For example, you may need to register the fictitious or DBA with the county instead of the state. To protect your business name and ensure that no one else uses it, consider filing for trademark protection.
Licensing and Permits
You must comply with your state's laws regarding licensing and permits. The rules and regulations vary not only by state, but also based on the type of business you're starting. Although it may seem like you don't need a license for certain businesses like selling items on eBay, your state may actually require it. If you start a business selling other people's items online for them, your state may require that you obtain an auctioneer's license. If you plan to operate a daycare out of your home, most states require that you be a licensed child care provider. You might also have to file a home child care license and undergo fingerprinting and background checks. Real estate agents operating from home must pass state licensing requirements. According to the U.S. Small Business Association, your county or city may require different permits based on the type of your business. Some examples of common permits include:
- Health and safety permits
- Sign permits
- Construction permits
- Home occupation permits
- Sales tax permit
Zoning and Homeowners' Association Rules
In some cases, your home may not even be zoned for the type of business you want to conduct. Check with your city's zoning office. Request to see copies of ordinances that apply to home-based occupations. Even if your city says you're zoned for operating out of the home, there may be restrictions if you live in a planned residential neighborhood or complex with a Homeowners' Association. The Homeowners' Association Covenants, Conditions, and Restrictions can't necessarily ban you from operating a home business, but the rules can limit activities that affect your neighbors, such as customer parking, added traffic, noise and signs.
Certain home-based businesses require insurance. For example, if you're running a daycare service out of your home, you'll have to carry insurance to protect your liability. Even if your business doesn't necessarily require insurance, consider the possible risk of an incident occurring on your property. If you have merchandise or products you store in your home, you may want to ensure that they're listed as contents and covered in case of theft or a disaster. You can add additional coverage or a rider on to your existing homeowners insurance policy or purchase separate insurance for the business. Check with your homeowners' insurance company.
The amount of money you'll need to start your home-based business can vary significantly depending on the type of business you want to start and the equipment, supplies or merchandise you'll need. According to Business News Daily, the average cost of starting a home-based business can be more than $25,000, but 39 percent of owners spend about $5,000 to get their businesses up and running. The most common sources of start-up funding include:
- Personal savings
- Credit cards
- Small business loans
- Home equity loans
Not every home-based businesses needs a federal employer identification number for tax reporting, but some home businesses can't operate without one. If your business is a corporation or partnership, you'll need to apply for an EIN with the Internal Revenue Service. If you're a sole proprietorship or independent contractor, you can use your Social Security number. You can still apply for an EIN, but it's not mandatory.
You may qualify for special tax deductions for running the business from your home, such as the home office deduction. Your home office doesn't have to be an entire room. You can calculate the percentage of your home that qualifies by measuring your work space and dividing it by your home's total square footage. The percentage is the amount of your annual rent, mortgage, homeowners' insurance and utilities that you can deduct because the space is used for your business, but it must be dedicated solely to your business -- your family can't hang out there.