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Operating a Home-Based Business

One of the first decisions to make when deciding to start a small home-based business is choosing the business location. You could operate out of a co-working space, rent an office/studio/workshop, rent a building, or work from home. Each location has its advantages and disadvantages.

For a sole proprietorship, one of the greatest advantages of working from home is that you are already paying for that space. The additional cost of working from home may be minimal. Depending on how you use your home, the IRS may let you write off home office expenses on your income taxes (Schedule C for self-employed persons). And of course, there is the added benefit of no travel time to work!

This article talks to entrepreneurs and small business owners about the issues to consider before deciding to start a home-based business. An honest assessment of the questions below should help you answer the big question: “Should I operate a small business out of my home?"

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Questions About Starting a Business at Home

If you just look at the dollars, the decision to house your start-up business at home may seem obvious. You want to save money. But unless you have the right type of home, the right kind of business, and the right temperament, the cost to your personal and family life could be considerable.

Start your decision-making process by taking an honest look at the reality of working from home.

  1. Are you disciplined enough to be self-employed and work from home? Your business plan should account for distractions that could arise in a home setting.

  2. Will you be able to separate your work life from your private life? To maximize your federal tax returns, you need to separate your workspace from your home space.

  3. How much space does your business need? Do you have that much free space? Will taking that much space disrupt your family's life?

  4. Do you need a space for customers/clients?
    • Can that space be adequately separated from the noise and mess of family life?
    • If it can't, can you keep some public areas clean enough for customers to drop in?
  5. How much storage space does your business need? Does storage space need to be in your home or could it be in a rental unit? Are there rental units nearby?

What Constitutes Running a Business From Home?

Think through your workday and your workweek. Exactly how will you spend your time?

  • When will you start work?
  • What exactly will you do during the workday?
  • Will customers stop in? How will they get to your home? Where will they park? How will they get to your office? Will you offer them refreshments? Will they need to use a restroom?
  • How will you receive mail and deliveries?
  • Will you be receiving and storing cash at your home? How will you secure it? Is there a nearby bank where you can open a business bank account?
  • How does the workday end? (Does it end?) Will children be present in the work premises, or will they be at a daycare center or at school until the workday ends?

Visioning your workday in this way should help you identify potential problems or needs of your new home-based business.

Questions About Operating a Home-Based Business

If your answers to the questions above provide a green light for starting a home-based business structure, let's move on to the practical questions about operating your business. Answer as honestly as possible. These are issues over which you may have little control, and which can cause your business to fail quickly.

  1. If you rent your home or apartment, will your business activities conflict with your lease? Even if there are no specific lease conflicts, is it likely to create a problem with your neighbors or landlord that could impact your lease renewal?

  2. If you live in a condo or have a homeowners' association, will any of your business activities conflict with condo rules and regulations, or with HOA covenants? (See more on this below)

  3. Is your type of business well suited to being operated out of a home? You may want to meet with an advisor from the local office of the U.S. Small Business Administration (SBA) office for help with some of these questions.

  4. Licenses and permits: Will your new business need a general business license or environmental permits? Contact your Secretary of State's office, or for permits at the local level, call your municipality. You can also check with your state's bureau of business licenses if you are unsure what licenses or permits you may need.

    Local governments may require that certain kinds of business activities be permitted. You may need a variance. Contact your municipality and ask them.

  5. If your business produces a product, does the production process produce anything hazardous? How will that be handled? Are there regulatory requirements?

  6. How much waste will the business produce? Can it be disposed of with regular household waste or does it need to be handled separately?

  7. Should the business name have exterior signage? If so, is that allowed by the property owner, HOA, municipality? (Check your municipal zoning code for rules about signage.)

  8. Hours of operation: If the business will have customers and deliveries, will these take place during daytime business hours, or at other times.

  9. Home business insurance: Check with your insurance agent. Can you get business liability insurance for your particular home-based business? Also, check with a landlord to see if any additional insurance is required.

  10. Will you be subject to local tax or sales taxes for your products and/or services? Will you file taxes with a personal social security number, or will you obtain an employer identification number for a corporation or limited liability company? This may affect how your business tax is filed.

  11. Will suppliers deliver to a home address? Can they physically deliver to a home? Is the home accessible for that type of delivery?

  12. Is there adequate parking for clients/customers? For employees?

  13. Will you need employees to help run the business? Is there adequate workspace for an employee?

  14. Will your home-based business run afoul of zoning restrictions?

Zoning Ordinances and Other Land Use Restrictions

Let's look more closely at zoning restrictions that could affect a home-based business. While some municipal zoning laws prohibit operating a business from home, most jurisdictions allow home-based businesses. There may be some limitations.

For example, there may be a limit on the number of parking spots that can be used, or on exterior signage for the business. There may be a requirement for handicapped parking spots. It's important to check with your county or city's zoning department to make sure you are following your local zoning laws.

If your home is part of a "common interest" development (like a condominium or HOA community), there are rules and regulations in place to preserve a peaceful neighborhood and prevent conflicts among the neighbors. Covenants, conditions, and restrictions (CC&Rs) dictate the types of activities that are permitted and prohibited.

While neighbors may have a concern about increased noise and traffic from a business operating in a residential area, covenants that try to restrict unobtrusive home-based businesses can be legally challenged as unjustified restrictions on the right to be gainfully employed.

Related Resources

Getting Legal Advice for Your Own Business Startup

When You own a business, it's important to comply will all the relevant laws and regulations. If you would like help to start your business, talk to an experienced business organizations attorney.

Looking to start your own business? Use FindLaw's DIY forms to get a legal business entity set up in minutes.

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