Home-Based Businesses: Overview

For many people, starting a business based in the home is the ideal small business start-up opportunity, and thanks to modern technology it has never been easier for home-based businesses to stay in touch with customers, consultants, and anyone else crucial to day-to-day operations and business success.

Home-based businesses offer certain freedoms and economic benefits to the small business owner, but there are a number of legal issues that should be kept in mind before starting a business from your home.

Form your LLC with confidence. Our trusted partner LegalZoom has packages starting at $0 + filing fees.

Setting Up a Home-Based Business

While there are many advantages to working from a home office such as work-life balance, there are many steps to creating a home-based business.

Come Up With a Business Idea

There are many types of businesses you can start from home such as selling digital products, dropshipping, freelance writing, bookkeeping, etc. If you have an internet connection, the possibilities are endless. You should first develop a business plan and determine the market demand for your product or service. In your plan, you should identify your target customers, what business resources you need, and how you will fund the startup costs.

Determine If You Need a Business Entity for Legal Protection

Many entrepreneurs start a business as a side hustle and a sole proprietorship. That means they are personally responsible for any debts or liabilities for their own business. If someone were to sue their business, the business owners’ personal assets are at risk. By forming a legal business entity, such as a corporation or limited liability company (LLC), the business assets and liabilities are separate from the business owners’ personal assets. The business entity would set up a business bank account and transact the business in the business name. Business owners should not commingle their business finances with their personal finances.

Check Property Use and Zoning

Although some city or county zoning laws specifically prohibit operation of a business from a home or residence, many localities do allow their citizens to operate businesses out of their homes, with certain limitations (such as signage and number of employees). In some cities or counties you may be in violation of local zoning laws if the extent of your home-based business operations is such that the “primary use” of your home can no longer be considered “residential.” Before starting a home-based business, be sure to contact your city or county planning or zoning department/commission to make sure you are in compliance with all local zoning laws.

If you live in an apartment, condominium, or co-operative housing, your opportunity to operate a business out of your home may be more limited. Leases, condominium use restrictions, and other private housing agreements may explicitly prohibit you from running any kind of business in your home. Before starting a home-based business, speak with your landlord, condominium association, or other private housing authority to learn whether you may operate a business based in your home.

Apply for a Business License

Depending on your business, you may need to apply for a business license. For example, if you sell items on Etsy, you may need a business license if it is a commercial enterprise and not merely a hobby. Check your local governments for any licensing requirements.

Determine If You Need Home-Based Business Insurance

Contrary to popular belief, homeowners insurance policies do not generally cover home-based business losses. Some commonly needed types of insurance coverage for home-based businesses include:

• Business property

• Professional liability

• Personal and advertising injury

• Loss of business data

• Crime and theft

• Disability

Understand Taxes for Home-Based Businesses

If you operate a business from your home, you will most likely be entitled to a small-business tax deduction. Some key things to remember in connection with the small business tax deduction:

• To qualify, you must use part of your home exclusively for your business.

• Your home must be your “principal” place of business, or you must frequently meet with customers and/or clients in your home.

• If you qualify for the tax deduction, you can deduct costs such as rent, public utilities, insurance, and property repairs.

In order to take advantage of the small business tax deduction, it is very important that you keep detailed proof and records of your home-based business operation. Be prepared to prove that you intend to make a profitable business out of your home-based activity, and that it is more than just a hobby. The Internal Revenue Service (IRS) will allow you to deduct the expenses of running a legitimate business from your home, but will not permit deductions for the costs of a favorite hobby or activity.

Navigate the Small Business Start-Up Process 

When you are ready to start your small business, consider using a trusted online business formation service. 

If you’ve begun the process of starting a home-based business, speak to a qualified business law attorney in your area to help you take advantage of certain tax benefits that may be available to you. You can also have your attorney walk you through zoning law compliance and other crucial areas of law.