Locating Your Sole Proprietorship at Home

Learn about some of the issues to consider when you're running your business from home.

As a budding entrepreneur, you may be thinking about locating your sole proprietorship at home. Nearly half of all new U.S. businesses are started from home. Some of the most successful companies today, such as Apple Computer, Mary Kay Cosmetics, and Hershey’s, began as home-based operations. Running your sole proprietorship from home offers many clear benefits, such as sparing you from the time and costs of commuting, increasing your flexibility in balancing professional and household duties, and offering independence and convenience in structuring your hours and workplace. Even if your home is your castle, important legal issues will still impact key aspects of your home-based business, including whether or not you may even run a business from your residence.

Review your local zoning laws and deed or lease restrictions

Although you may be excited about starting your home-based business, your neighbors and local zoning officials may be concerned about increased traffic and noise, parking problems, distracting signage and lighting, and other activities associated with your new venture. Before starting your business, it is important to examine local zoning laws to see if there are any restrictions on the kinds of businesses that you can run in your neighborhood. For example, a catering service or a car wash may not be allowed to operate in a residential area under local zoning laws. It is important to review these zoning laws and determine whether or not you might be able to request a variance for your business from your local zoning board. Similarly your condo, co-operative, or homeowners’ association may have placed deed restrictions on your property that limit your ability to operate a business from your home. In some instances, there may be an opportunity to seek permission from your association to start your home-based business. Renters may also want to review their lease and speak with the landowner about limits on any apartment-based business. It may be helpful to consult with an attorney to review these zoning laws and deed or lease restrictions and to explore your legal options before commencing your home-based business.

Apply for relevant business licenses and permits

If you are permitted to operate from home, look into whether or not you may need an additional business license or permit. Certain industries or professions will require appropriate permits or licenses from government agencies or professional organizations and appropriate compliance with relevant laws and regulations in order to legally run your business. If you plan to sell goods or services from your home, you may be required to register and obtain a reseller’s certificate. If you plan on locating a sign to your business on your property, you may also need a permit and be required to comply with other signage limitations. Let’s say you want to run a hair stylist salon from your home. At minimum, you may need not only a professional stylist’s license but a reseller’s certificate to sell hair care products to your clients, and a city permit for any sign or lighting allowed on your property. So recognize that you may need more than one permit or license to carry out your planned business endeavors at home.

Evaluate your insurance needs

Most homeowners and many renters have obtained insurance to safeguard their property as well as to protect them from liability if individuals should injure themselves at your home. However, this insurance is intended for residential purposes and not your business property or liability concerns. For example, you may have purchased an office computer for your sole proprietorship. It is unlikely that the loss, damage, or theft of this business property will be covered under your homeowners’ or renters’ policy. In some instances, you may be able to add a rider or endorsement to your policy to cover your business property. Similarly, a client or employee visiting your home for business purposes may slip and hurt themselves. Typically standard home liability insurance will not cover your employees’ or customers’ personal injury or property damage at your residence. In addition, although you are working from home, your property and liability insurance will generally not cover any professional liability for mistakes or omissions in carrying out your business duties. Contact your insurance agent to identify appropriate insurance to meet your sole proprietorship’s property, standard liability, and professional liability needs.

Assess your potential for business use tax deductions

Many sole proprietors use a home office to handle their business activities or use part of their home to run a day care facility or to store inventory. If you qualify, you may be able to take tax deductions for your expenses for business use of your home. The IRS is quite stringent about these deductions and will generally mandate that you make regular and exclusive use of the space for business purposes and that part of your home be your principal place of business. IRS Publication 587, Business Use of Your Home (Including Use by Day Care Providers), is a good starting point. It is important to discuss these potential tax issues with your accountant or tax professional to see if you qualify and what records you must keep to take advantage of these deductions.

Consider increased legal mandates when hiring employees

If your business is successful, you may determine that you need to hire part-time or full-time employees. As you expand and consider taking on employees, be aware that a variety of employment laws and regulations will now apply to your home-based business. Depending on your business and applicable laws, you will need to think about legal compliance in such areas as wage and hour laws, occupational health and safety standards, unemployment insurance, workers compensation, taxes, and child labor laws, even if you hire your own teen to help out. Bringing on employees can present a number of thorny legal issues that you may want to discuss with an attorney before adding staff.

If you’re thinking about starting a home-based business, visit the U.S. Small Business Administration’s site for its assessment tools on evaluating whether a home business may be right for you.

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