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How To Start a Home-Based Business

By Catherine Hodder, Esq. | Last updated on

Many successful business startups began at home. Did you know that Jeff Bezos started Amazon as an online bookseller from his garage? Sarah Blakely started her shapewear brand, SPANX, out of her apartment. And Kevin Plank started his sportswear company, Under Armour, from his basement. If you have an idea for a new business and can operate from your own home, this step-by-step guide is for you!

Develop Your Business Idea

First, you must decide what kind of business you want to start. There are so many home-based business ideas that you can find on the internet. For example, you can:

  • Start a home daycare, catering business, or bookkeeping business.
  • Offer your services as a freelance writer, graphic designer, website or app designer, virtual assistant, or consultant.
  • Become a social media influencer, blogger, podcast host, and generate revenue with brand sponsorships.
  • Create a product to sell online through an e-commerce website, Etsy, or eBay.

Additionally, you can create an original product or service. Many entrepreneurs started with a small unique idea that translated into a big company.

Make a Business Plan

detailed business plan is a great way to identify your unique talents and how you can compete in the marketplace. Within your business plan, you want to answer the following questions:

  • What service are you providing or product you are selling?
  • Who is your target customer?
  • How much money do you need to start and maintain your business?
  • What will you charge for your product or service?
  • What space, equipment, and tools do you need to start?
  • What other startup costs do you have (i.e., supplies)?
  • Who is your competition, and how can you distinguish yourself from them?

Successful business owners know that extensive research and planning help avoid the pitfalls of running a small business.

Set Up Your Business

There are several steps to starting your own business. First, you choose a name for your business and a business entity. Then apply for a taxpayer identification number and any necessary business licenses and permits. Finally, open a business bank account and determine what funding you may need.

Your business name is part of your brand. Spend some time considering what to name your business. When choosing a business name, avoid selecting a name that could be confused with another company, or sounds like you are a government entity.

  • Conduct a Business Name Search. Research the name on the internet, the USPTO trademark database, and with the Secretary of State's office to make sure no one else has rights to that name or is using it as a domain name. If the name is already in use, choose another name.
  • Register Your Business Name. If you find that your business name is available, you'll want to reserve it. A sole proprietor can register a business name by filing a fictitious name or “doing business as" (DBA) with their local government. Otherwise, you can register a name with the Secretary of State's Office when filing articles of incorporation (for a corporation) or articles of organization (for an LLC).

And if you want to use your business name on a website, you must register your business name as a domain name.

How are you going to operate your business? A crucial step for a home-based business is determining the best legal entity for it.

Many small business owners are sole proprietorships, meaning a one-person business. Any profits or losses of your business go on your personal tax return. While sole proprietorships are simple to manage, there is no protection for your personal assets if you are sued, and you may be personally liable for losses.

For example, if you make a product that injures someone, a court may hold you personally responsible for those injuries as a sole proprietor. However, if you are a corporation or LLC, that person can only sue the business entity.

And if you purchase equipment as a sole proprietor, you must personally pay for that equipment. If you buy equipment as a corporation or LLC, the vendor can only go after what assets remain in the business. They can't go after you personally.

Operating a business as a corporation or limited liability company (LLC) protects your personal assets from any business losses or lawsuits.

When deciding between a corporation or an LLC, consider how you want to pay taxes. With a corporation, you may have to pay a corporate tax and then pay personal income taxes. An LLC, however, allows you to include your business income or losses on your personal income tax return in the same way as a sole proprietor.

Once you decide on your business structure, you register it by filing articles of incorporation for a corporation or articles of organization for an LLC with the Secretary of State's office in your state.

Apply for an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a nine-digit identification number the IRS assigns to your business. You use this number to open a business bank account, apply for business licenses, or file business taxes.

To apply for an EIN, complete the IRS SS-4 application, and you will receive a number for your business.

Apply for Business License and Permits

To operate a business, even a home-based one, you need a business license. And there may be other licenses and permits you need or zoning laws that may affect your business. Some states use your corporate status as your business license. You may also need a local business license, so check the requirements with your county and city.

  • Determine if You Need a Seller's License. If you sell goods to customers, you need a seller's license. A seller's license may also be known as a sales and use license or a sales tax ID. The Supreme Court ruled in South Dakota v. Wayfair, that all sellers must collect and remit sales tax in states requiring it. Therefore, if you are in California and sell to someone in Texas, you must collect a sales tax. But check your state's requirements for a seller's license. You may only need it if you make over a certain amount of sales annually or sell over a specific dollar amount.
  • Check for Home Occupancy Permits and HOA Approval. Your city or state may have specific permits or ordinances for running a home-based business. Check your area's licensing or zoning requirements with your city, county, and state. Your homeowner's associations may have rules about home offices or running a business out of your home. Check your HOA regulations for operating home-based businesses and get any necessary permissions.

Open Business Bank Accounts and Secure Funding

You will want to open a business bank account to run your business transactions through. Pay any business expenses from your business account so it is easier to take tax deductions at tax time. Keep your personal finances separate from your business operations, or you'll risk losing your personal liability protection. You use your business EIN to open a bank account. The bank may also want to see your articles of incorporation or articles of organization.

Depending on your business needs, you may want to apply for a credit card or merchant account, bank loan, or financing. A sound business plan and legal entity will help you secure business financing.

Consider Insurance Needs

While your homeowner's policy may cover property losses for your home-based business, you may need extra coverage for your type of business.

For example, if you run a daycare, you may need a daycare insurance policy as it may be required for your business license. Determine what business insurance you need to comply with local laws and to protect your business from lawsuits.

Set Up Your Home-Based Business Correctly - Today!

To be a successful home-based business, you'll want to determine your business's best legal, financial, and tax structure. Consider using our trusted, simple-to-use online business formation tool. We'll help you establish your business to meet the legal requirements.

Business Formation Made Simple (FindLaw Legal Forms and Services)

Operating a Home-Based Business (Learn About the Law)

How To Start an eBay Business (Learn About the Law)

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