Everything You Need to Know About Starting a Home Business

Mary Kate Morrow
March 6, 2020

Amazon, Disney, Google and Ford: What do all of these incredibly successful and well established brands have in common? They all started as home businesses! According to the U.S. Small Business Administration (SBA), 50% of U.S. businesses are based in a home.

Home businesses allow you the opportunity to create a business with lower overhead costs and financial risk. Working out of your own home also requires less money to start up your business idea and allows you to work on your own schedule, which is very necessary, because starting a home business is hard work.

It is important to analyze the benefits and consequences of launching a home-based business to decide if doing so is right for you. Using some of the tips below, you can feel more confident in starting your own home business.

What are the Pros and Cons of Starting a Home Business?

There are pros and cons to starting a home business, so you should carefully analyze both to decide if doing so is the right choice for you and your business idea.

One pro is savings. By using a space in your home that you already pay for, you are not incurring the cost of an outside commercial workspace. Chances are that you already have home internet and supplies, such as your computer or cell phone, so you don’t have to pay for duplicate services or products. These provisions not only cut down on the cost of starting your business but also the labor of having to set up and contract separate services such as internet and phone providers.

Home businesses can be incredibly effective for people with great time management skills. Without a commute, you can spend more time working. The average American commutes 27 minutes each way, so you save almost an hour a day that would otherwise be spent in the car. You would also save on gas, car maintenance, and auto insurance!

There are potential challenges to working at home as well. Your work style may not be compatible with working remotely if you require more supervision or structure, which you’d find in an office or corporate setting.

Your home space should be one that you can concentrate in, so take into account your family situation, including babies and pets that may cause distractions. Strict boundaries may need to be put into place with your housemates to ensure that you can create the best work possible from home

You may be comfortable hosting clients or customers in your space, but you also need to make sure your housemates and neighbors are comfortable too. For instance, neighbors may become irritated if you increase foot traffic on the block and take up all the parking spaces. There is a solution to this problem, however. Consider holding meetings outside the home or meeting clients at their offices.

How Should I Insure My Home Business?

Just because your home business operates out of your home does not mean that your home insurance or renters insurance will automatically cover your business losses. In most cases, they will not. You should consult with an insurance agent about purchasing business insurance to make sure you are properly insuring yourself and your business.

Examples of home based business risks include property damage, business interruption, injuries, illness, lawsuits and data breaches. Some of these risks may not be sufficiently covered if you only add on a rider policy to your home insurance. It’s best if you buy business insurance.

You have the option of purchasing general liability insurance or a business owner policy for your home business. A general liability policy can protect against lawsuits incurred in your home office or as a result of your product. A business owner policy can protect against property damages, theft and lawsuits. You can also buy additional coverage for business interruptions or data breaches.

If you have employees you should look into workers’ compensation insurance in case of injury or illness that is work related. Workers compensation is required in most states. Proactively talking to an insurance agent can provide peace of mind about any worse case scenarios and let you focus on developing and launching a successful business.

What About Federal, State, and Local Regulations for My Home Business?

Once you have a business plan, check state and local laws specific to home businesses in your area. You can do this by searching your state and city online to locate the chamber of commerce. Make an appointment to discuss your business in greater detail and pay the necessary fees.

You should also ask about local zoning laws, especially if you live in an area with a homeowners association (HOA). You must verify with your HOA directly that you can run a home based business, because there may be restrictions.

Zoning laws can cover anything from the volume of foot traffic and parking to the type of signage permitted to advertise your businesses. If your business plan violates zoning laws, don’t despair. Special exceptions, called “variances” are sometimes made if you attend a local hearing with the city zoning board and present your case

Do I Need a Business License?

Obtaining the proper business licenses or permits per federal, state, county and city government is a requirement in establishing a home business. Your home business may require a home occupation permit, for instance. The Small Business Administration (SBA) provides a starting point for figuring out exactly what you need to do to move forward. They also provide resources like free business counseling.

There are multiple business structures including: limited liability company (LLC), sole proprietorship, partnership and corporation. Each business structure has its own set of complicated rules, so consulting with an accountant and/or lawyer is advised. Regardless of the structure you choose, you must be familiar with and compliant with your local business license filing and registration process.

Many people choose to become a sole proprietorship because it’s simpler. When registering as a sole proprietor, you can use your social security number but may choose to obtain a Federal Employer Identification Number (EIN) for reporting income to the IRS. Depending on your jurisdiction, you may additionally be required to obtain a State Tax ID number. Sole proprietorships are not exempt from personal liability, which can place your personal assets at risk if you don’t have business insurance.

Partnerships are businesses owned by two or more people. Unless otherwise formally stated, all partners are entitled to equal shares of profits and losses. Similar to sole proprietorships, partnerships leave business owners exposed, which is why you’d need general liability insurance.

Corporations are legal entities owned by shareholders, so there is limited liability protection for the business owner(s), but you can still be sued personally even if you operate as a corporation, so it’s important to get the right business insurance. There may be tax savings with a corporation as well.

Create Your Business Plan

There is a lot to think about when creating a home based business and creating a business plan will help you organize your thoughts and objectives. Furthermore, creating a business plan will help you decide if your home business is worth pursuing.

A standard business plan is a document that includes sales strategies, capital and labor requirements, financial data, market research, and competitive analysis. It is something you can present to financial institutions and investors if you need more capital. For smaller businesses, plans are usually under 30 pages long and may be much shorter, depending on the business model.

If your idea is very concise and non complicated, you can find a one page template here. Within this template you will provide your vision, business mission, pricing strategy, advertising and promotion strategy, objectives and action plans.

Breakdown Cheat Sheet

Vision- What are you building and what are your future goals? How do you plan to grow the business and do you plan to sell or keep it into retirement?

Business Overview/Mission- What product/services will you provide? Will your products/services be provided at your home location, online, or through an alternative location? What is your target market and how will you address their needs?

Pricing Strategy- How much will you charge? Is it both competitive and profitable?

Advertising/Promotion- How will you market your services, through what medium (i.e. business cards, flyers), and will you provide promotional methods/referrals?

Objectives- What are your objectives, success metrics, and time frame? You may also use this section to add potential questions, challenges, obstacles and concerns.

Action Plans- Describe actions that need to be taken to obtain the above listed objectives with milestone dates as well as possible solutions for any potential obstacles listed above.

If your original plan isn’t translating well, it is okay to scrap your idea and start fresh to make sure you are producing the best home based business you can.

How Do I Set Up My Home Office?

To set up your home office space for productivity and qualify for a home office tax deduction, it is important to dedicate a space specifically to your business. Having a room dedicated to your business activities is ideal, because you will have a physical door that you can close to minimize distractions and really create an “office” atmosphere.

Some people find it helpful to decorate their office in a way that reflects the personality of their brand. If you are creating a product, you may want models of the product available for examples during meetings with potential clients. Plus, having your product around can help keep you motivated about why you created a home business in the first place!

Remember that you will need adequate lighting to do your best work and an inviting space if you will have clients and customers visit your home. You may also look into purchasing a generator in case of a blackout. Some tools you may need to purchase include: a home computer, printer, shredder, and scanner. Remember also that you’ll need to back up important files.

Having space to both sit and stand comfortably is essential to your health so invest in a high-quality, ergonomically correct chair. Also, remember to take breaks to stand or walk around. Remember that the most important part of your home business is you, so treat yourself kindly while establishing your new venture!

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