Starting a Home-Based Business

Learn the basics of how to start a home business.

Modern technology makes owning and operating a home business easier than ever before. All you need is a cell phone and a laptop to communicate with customers. But, before you put up your sign and start advertising, there are a few things you should know.

Advantages of a Home Business

Running a home business is convenient and cost effective. Start-up costs are much less than opening a traditional brick and mortar business. You don't have rent, utilities, or commuting expenses. Low overhead means less risk and more opportunities to make a profit.

Home businesses also offer owners freedom and flexibility. You can work on your business in your free time and in your pajamas. And there are tax advantages to running a home business.

Choosing the Right Business

The options for a home business are endless. Photography, dog walking, house painting, or home décor are a few ideas. You could become a virtual assistant, graphic designer, or social media specialist. Think about your hobbies and interests. What are you good at? What do you do for fun? What do people always ask you for advice on? The answers to these questions can help point you in the right direction.

Many people join an established company as an associate or consultant. This "business in a box" option helps new business owners with marketing and messaging. You also have access to experienced mentors.

Picking a Business Structure

Once you've identified your business, you need to select a business structure. Most home businesses are sole proprietorships, limited liability companies (LLCs), or S corporations. If you have two or more owners, you can form a partnership.

A sole proprietorship is the easiest option for many business owners. However, with a sole proprietorship you don't have personal liability protection from your business's debts and other obligations. If your business has the potential for legal liability, you should consider an LLC instead. Make sure you do research on business entity choices and what's best for you.

Securing a Business License

Licensing and permit requirements vary based on location. For a list of state specific requirements, visit the Small Business Administration. In general, home businesses need a business license from the local municipality. You can get the required license from your city's business or tax offices.

You should also check zoning regulations. Homeowner's associations or zoning ordinances may prohibit operating a business from your home. If this is the case, you may be able to get a variance. Be sure to secure whatever permissions you need before you open.

Health & Safety Permits

Some businesses may need additional licenses. If you invite customers into your home or store flammable inventory, you might need a fire permit.

Businesses that produce or sell food and personal care products are often subject to health inspections. You may need to secure a health or environmental safety permit. Check with your local business office for more information.

Professional and Sales Tax Licenses

Businesses like salons, legal and financial advisors, and home daycares centers also require professional certification. Visit your state business website for a complete list of businesses subject to professional licensing requirements.

If you sell products or services, you may need a sales tax license. Sometimes this is part of the business license; sometimes it is a separate document.

Insurance Considerations

Your homeowner's insurance will not protect your business. Running a business from your home may even nullify your policy. It's a good idea to let your homeowner's insurance company know about your business venture.

You should secure business insurance to protect against business losses. All businesses need general liability insurance. You can also buy coverage for property damage, inventory and product damage, and personal injuries. Any businesses that store sensitive information digitally will also need insurance for data breaches. Business interruption insurance replaces income in case of a disaster. Be sure to read the fine print, so you know what the policy excludes.

Bookkeeping and Accounting

Keep track of your business's income and expenses. You can use a simple Excel spreadsheet or accounting software, but you need to document all the money flowing in and out of your business.

Open a separate banking account for your business so you can keep your personal and business finances separate. It is also helpful to use a different credit card for your business.

Make copies of all receipts and income statements so that you have a record of your finances. Keep up with your paperwork. Set aside one day a week to work on invoicing, paying bills, and updating your records.

Taxes

When you run a home business, you are self-employed. You are responsible for your own taxes, including Social Security and Medicare. You usually must make estimated quarterly payments to the IRS.

Tax Deductions

All home business owners may deduct ordinary and necessary business expenses. These include:

  • capital expenses, including start-up costs, business assets, and improvements
  • costs associated with the production of goods
  • payments made to employees and retirement plans
  • costs associated with the business use of your car
  • rent, interest payments, and business taxes
  • business supplies and materials
  • marketing and business development expense
  • professional services fees
  • travel expenses, and
  • meals (deductible at 50%).

Keep track of when you use personal items--like laptops, cell phones, and your vehicle--for business so you can calculate the correct percentage to deduct.

The Home Office Deduction

You may qualify for the home office deduction. This deduction only applies to spaces used exclusively for business purposes. If you work out of your bedroom or kitchen, you cannot claim the deduction. There are limited exceptions for the storage of inventory and samples and home daycares.

Under the home office deduction, you can deduct a percentage of your homeowner's insurance, homeowners' association fees, cleaning fees, mortgage and interest, and utilities. You can also deduct home repair costs, although the amount varies depending on whether the repairs are direct or indirect.

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