BUSINESS BASICS: IS A HOME-BASED BUSINESS RIGHT FOR YOU?

Apr. 16, 2020 • by Jeffrey Pote

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If you’ve got a great idea for a business, now just might be the best time to start a business out of your home. Running a home-based business can have some big benefits from flexible hours and no commute, to reduced costs and overhead, to tax advantages from operating a business or having a home office. Moreover, many hope by working from home to create a better schedule or arrangement to balance employment and care-giving or other family responsibilities.

Whether you’ve imaged starting a home-based business for a long time or whether you only recently wondered whether operating a business out of your home would work well for you, this article will guide you through key considerations you should think about before launching your home-based business.

1. What You're "Good At"

Not everyone should run a home-based business, so it is important to begin with some self-examination. Some of this examination will have to do with your home and future business. But before asking any questions about that, it is important that you’ve thought a little bit about your strengths, your personality, and what you can offer or contribute. Your experience, talents, skills, and even your emotional responses will affect your success as a business owner.

People often say that you should “focus on your passions.” But passion often follows success and accomplishment. And a successful business is better built on talent, skill, and experience instead of just passion. Thus, a better starting point is to make a list of the things that you are “good at.” Once you have this inventory, you can use it to determine the sorts of products or services that you could offer and begin to evaluate whether any of them would be profitable.

Warm sunlight shines through the blinds onto a wooden desk that holds a silver laptop, several books, a couple plants, reading glasses, and a coffee mug.

But no matter what sort of business you’re thinking about starting, nearly any small business owner needs to possess certain qualities to be successful. Are you self-motivated and persistent? Are you comfortable learning new things and juggling multiple roles? Part of having what it takes to succeed as a small business owner is having a growth mindset instead of a fixed mindset. Since few business owners start with all of the tools they will need to successfully run a business, you must be willing and able to develop these skills as you go.

"Having a growth mindset also means seeing yourself as someone capable of developing your talents and acquiring new skills... and viewing potential problems as opportunities."

Having a growth mindset also means seeing yourself as someone capable of developing your talents and acquiring new skills. In this way, you will be better able to overcome or adapt to the challenges you face in your business. This includes learning to be persistent and viewing potential problems as opportunities.

If you are running the business with others, you may not need to wear every single hat in your business. Sometimes partners have complementary strengths. For example, maybe you are creative and adept at web design or marketing, while your partner is analytical and capable of handling tax and accounting matters.

Alternatively, maybe you can afford to hire contractors and service providers to fill gaps and provide services you can’t or prefer not to provide personally. If you aren’t knowledgeable about accounting or web design, there are contractors, services, and even small firms that you can hire to help you out. Generally, it is a good idea to perform those tasks yourself that you enjoy and can competently perform, and look to hire others to handle those things that are beyond your expertise or your willingness to learn.

Even software may be able to help you take care of important business functions from bookkeeping and accounting to inventory tracking and invoicing. Hiring the right contractor or purchasing the right service or software may considerably ease your burdens and free up valuable time that you can devote elsewhere.

Part of what’s enjoyable about running your own business is working on a variety of tasks, which can help break up the monotony in your day. For many it is one of the most liberating aspects of running their own business.

However, time management is an important part of successfully running a business, and sometimes this is a matter of understanding when a particular task is not worth your time. In this situation, you should look around for affordable professional solutions to help out by taking a task or two off of your plate.

Finally, you should carefully gauge your risk tolerance. Operating any business, home-based or otherwise, involves risk. Some of these risks have to do with the uncertainty and unpredictability of your income. Others involve the possible liabilities associated with operating the type of business you’ve chosen. Insurance may be able to help with certain liabilities, but you may want to consider the risks of not having a guaranteed income or employer-provided health and retirement benefits.

"Time management is an important part of successfully running a business, and sometimes this is a matter of understanding when a particular task is not worth your time...."

2. The Practicalities of Your Home and Situation

The next thing to consider is whether your home is appropriate for running the sort of business you have in mind. Not every business will work well as a home-based business and not every home can provide the space or facilities required. As a result, you should think about how your home environment fits with the sort of business you’re envisioning.

Home Office Requirements: A home office is often an important part of a home-based business. As a result, it is important to consider whether you need a dedicated home office and whether you would need to meet with your clients or customers there. If so, you need to ask yourself whether you have an available room or space within your home that could function for your office needs. Having a dedicated space can help increase your productivity and avoid needless distractions. There are also potential tax advantages for office space that is used “regularly and exclusively” for business.FN1

Keep in mind that if customers or clients visit your home office, they will expect it to appear like any similar business, whether or not operated out of a home. Depending on your industry and clientele, it may be advisable to have a nicely furnished and decorated waiting or conference room in addition to your personal office space.

Looking up at skyscrapers in downtown Denver, Colorado as the sun goes down giving a beautiful orange glow to the sky.

Production or Other Facilities: Some businesses will require additional space or facilities for production or other essential functions. Depending on the business, a studio, kitchen space, or even facilities for manufacturing may be required. However, it is important to carefully consider whether any of these business functions really need to be performed at home or whether contractors or service providers may be able to help.

Location - Accessibility and Privacy: Not everything that matters about your home is on the inside. You should also consider where your home is located and whether your customers and clients will be able to easily find and access your home.

Generally, with a home-based business in a residential area, you will be limited to at most a small sign at your doorway in order to help people locate your business. So, it is important that even without signage your clients or customers will be able to get to your property without difficulty. Otherwise you run the risk of losing significant business to competitors who are easier to find.

Keep in mind too that there may be privacy concerns if you are promoting or disclosing your home address to the general public. If privacy is important to you, you might want to think about whether you publicly advertise your home address, even on your website, or whether you only disclose your address to trusted clients and customers with whom you need to meet in person.

Zoning and Neighborhood Suitability: Some business will not be able to operate in some areas due to zoning laws, and other businesses may be unsuitable for your neighborhood, even if it is legally permitted to operate there. As a result, you should evaluate the fit between your neighborhood and your business.

Will customers or clients be coming to your home? If so, you should consider the appearance of your neighborhood streets and the impression that will create for your clients or customers. Is your neighborhood welcoming and inviting? Will people feel safe and comfortable when they arrive at your home? Is there available parking on your property or somewhere close by?

Moreover, the types of businesses that may be able to operate in your area may be limited or restricted by zoning laws, municipal regulations, or home owners’ association (HOA) rules. Be sure to check out your local requirements before starting any type of business. Otherwise, you may find yourself with hefty fines or a cease and desist letter, requiring you to shut down your operations. You may even want to look over your residential lease if you rent your property.

Finally, you should consider the effect your business will have on your neighbors. Unhappy neighbors make for bad business and this is especially true if your new business seems like a potential nuisance – because, for example, you are manufacturing products onsite or operating heavy machinery on your property. These activities may not be an issue in every neighborhood, but this is why it is important to consider the fit between your neighborhood and your business at the beginning.

"Be sure to check out your local requirements before starting any type of business. Otherwise, you may find yourself with hefty fines or a cease and desist letter, requiring you to shut down your operations..."

3. Get a New (Business) Plan, Stan

Once you’ve taken a good look at the products or services you can profitably offer and evaluated the fit between your business and your home and neighborhood, you should develop a solid plan for your proposed business venture. Unless you’re trying to secure funding from an investor or lender, it does not need to be fancy or elaborate. But creating a business plan will require you to be concrete about how much it will cost to form and operate your business, what the competition in your market looks like, what your niche and ideal customer are, and to start to project what your future earnings will look like.

You may have all the needed skills and talents, but if you do not intelligently plan for your business and its needs, you may find that you’ll have to make costly adjustments down the road to deal with circumstances that were likely both predictable and preventable. The importance of having a solid business plan is underscored by the fact that too many startups and new businesses fail – and fail within their first year.

"If you do not intelligently plan for your business and its needs, you may find that you’ll have to make costly adjustments down the road to deal with circumstances that were likely both predictable and preventable... too many startups and new businesses fail - and fail within their first year."

Critical areas that any business plan should include are (i) how the business will be financed, (ii) how your business will attract customers and market its products or services, and (iii) financial projects, particularly if you are looking to attract partners, lenders, or investors. None of these areas should be neglected, but ensuring adequate funding is absolutely essential.FN2

In the beginning, many small business owners have to rely on personal or family income and savings to finance the start-up and early operations of a new business.FN3 Even if you are seeking outside funding from lenders or investors, they will usually want to see that you have also contributed financially to your business and have some “skin in the game.” If you are trying to secure funds from investors or lenders, it’s doubly important to have a solid and well thought-out business plan.

Of course, how much funding your business will need will depend on the type of business you’ve chosen to run. While some businesses are quite expensive to start up, others can be established for virtually nothing – at least if you’re willing to wear all of the hats. It’s fine not to know the exact cost of everything you’ll need right now, but it is important to use reasonable estimates – and perhaps even overestimate your costs a bit. You can always update your business plan as you gain a clearer understanding of your formation and operating expenses.

Your marketing strategy is another important part of a business plan. It answers the questions of how you will find potential customers, how you will convert potential customers into sales, and how you will keep them coming back or at least referring new business to you. A company website will likely be a critical part of any marketing strategy and it is essential that it looks professional particularly if combined with search engine optimization (SEO) or pay-per-click (PPC) advertising as a method of attracting new business.

Including financial projections in your business plan will help you determine the prices you should set for your goods or services, how long you anticipate needing to operate the business before its revenue is sufficient to cover your ongoing expenses, and when you can expect to take profits out of the business to compensate you for your time and effort.

There are lots of resources available on the internet if you are looking for examples, samples, or guidance when it comes to developing a business plan. Look at as many as may seem helpful, but keep in mind that the plan you are developing is for your business – and it must be developed not only for the kind of business you intend to start, but also must reflect your particular talents, skills, resources, and circumstances.

Finally, if the first business plan you develop does not seem viable, you may want to consider starting fresh with a new idea. It is much better to go through the process of developing a business plan again than it is to go through the process of trying to establish a business that was not viable from the start.

A young woman works on starting her business plan with a cup of coffee in the morning as her dog monitors the situation.

4. The Legalities of Setting up Your Business

Just like any other business, a home-based business too must meet and observe certain legal requirements related to its formation and operation. (As requirements that apply to any business, these matters have already been discussed elsewhere on this site – particularly, on the Business Formation page.)

Naming: This may be a surprising place to start a discussion of legalities, but there are some important legal and practical consequences for the name that you choose for your business. In addition to making sure that it is even available in your state, you should also consider whether there are registered trademarks that are similar to your chosen name and whether a related domain name is available. For a fuller discussion, please see the Naming section on the Business Formation page.

"What sort of entity should you choose? ...By registering any entity with the Secretary of State, you can form various sorts of entities that protect your personal assets..."

Choice of Entity: When you finally make it to the Secretary of State’s website to form your entity, you’ll find that there are quite a few options to choose from, but what sort of entity should you choose? The choice you make here will touch nearly every important aspect of your business from who will oversee day-to-day decision making and how it will be managed, to its ability to raise capital and whether its owners (and investors) are protected from business debts and obligations, to even how and what your business pays as taxes.

By registering any entity with the Secretary of State, you can form various sorts of entities that protect your personal assets, including Limited Liability Companies, Limited Liability Partnerships, and Corporations. If you simply begin operating your entity without filing anything with the Secretary of State, you are operating a Sole Proprietorship (if you’re the sole owner) or a General Partnership (if you own the business with others) – and in either case, the most significant risk is that you have potentially unlimited liability for the debts and obligations of your business.

For a more complete discussion of the importance of choosing the right entity for asset protection and raising funding as well as management and tax implications, see the section on Choice of Entity on the Business Formation page.

Tradenames and DBAs: A tradename or “doing business as” (“DBA”) is a name other than your registered entity name that your business is legally allowed to operate under in your state. Tradenames and DBAs can be important if you intend to offer various products and services that you want to market and brand separately. They can also be a way to advertise or brand your business with a name that is unavailable to register as the name of your entity.

If you think you may want to register a tradename or DBA, please see the section on Tradenames on the Business Formation page.

EINs and Bank Accounts: Businesses need their own accounts not simply for the practicalities related to bookkeeping, accounting and taxes, but also in order to avoid commingling personal and business funds and thereby jeopardizing the liability protection of your registered business entity. As a result, you need at least a business checking account and probably more – like a savings account and line of credit or credit card.

"Tradenames and DBAs can be important if you intend to offer various products and services that you want to market and brand separately... or to brand your business with a name that is unavailable..."

However, before opening any such accounts, it is generally a good idea to get an Employer Identification Number (EIN) for your business. Doing so will allow you to avoid using your personal Social Security Number on business accounts and tax filings – like W9s and 1099s that are provided to contractors and businesses who you’ve worked with. Getting an EIN is free and easy – more information can be found in the Getting Tax IDs and Bank Accounts section of the Business Formation page.

Permits and Tax and Other Licenses: Whether you register an entity with the state or simply begin operating a Sole Proprietorship or General Partnership, you will still have to comply with any applicable local, state, or federal laws. The laws that apply to your business will depend upon a range of factors from where you are located, to the type of business you’re running, to even whether you have employees (or employees of a certain number).

For a fuller discussion see the Getting Licenses and Permits section of the Business Formation page. But if you want to make sure your business is in compliance with all applicable laws and regulations, it is best to consult with an experienced attorney.

5. Consider Your I.P. and Contract Needs

Unlike the legalities discussed in the previous section, it is not strictly required that you protect your intellectual property (IP) or have a lawyer prepare your business contracts. However, it is generally advisable. Here, an ounce of prevention is truly worth a pound of cure.

The majestic maroon bells at sunrise, the sky lit up with pinks and blues.

Intellectual Property (IP): If you have created anything of value through your intellectual labor, you should consider whether you can protect it through copyright, trademark, trade secret, or patent protections. Generally, these protections are more affordable than most new business owners realize and they can help preserve and protect important business assets. For more information on copyrights, trademarks, and trade secrets, please see the Protecting Your Intellectual Property section of the Business Formation page or the page on Trademarks & Copyrights.

Contracts: Businesses of any type also need to enter into various transactions with third parties and it is generally a good move to reduce these agreements and understandings to writing. Having a written document not only makes sure you’ve thought through important details at the outset, but also provides important evidence in the event of a disagreement down the road.

A fuller discussion of business agreements can be found in the Making Contracts and Policies section of the Business Formation page or the page on Contracts, Terms, & Policies.

Insurance: Whatever sort of business you’re thinking about operating, there are almost certainly risks involved. Some might be small and manageable. But others may require you to purchase insurance that can cover associated costs should they arise. If the risks are significant enough, you may want to consider purchasing general liability or professional liability insurance as needed.

You might also want to look at any home or renter’s policy as well as your auto insurance to make sure you understand the coverage they provide – or fail to provide – for business-related risks and needs. Not all home or auto policies cover accidents or incidents that occur when a home or vehicle is used for business as opposed to personal purposes.

Finally, depending on your situation, you may also want to consider whether to purchase health insurance, particularly if you were previously relying on your employer’s plan. If your business is taxed as a corporation, you might even be able to deduct these health insurance costs in order to reduce your overall tax liability.

This may seem like a lot to cover, but success in business requires a significant amount of time and commitment. If you truly want to start a business – home-based or otherwise – you’ll need to be willing to put your heart and soul into that business. Often this requires long hours and important sacrifices. If you don’t want to be working on your business outside of the hours of a normal workday, your home-based business may be more of a side-hustle. And that’s okay too. Either way, we’re here to help!

If you would like to discuss the particulars of your situation and whether a home-based business is a good fit for you, please Reach out, Today!

This article provides only general information and is not intended to be a substitute for legal advice.


Click Here to Toggle End Notes:

FN1: In order to qualify for a home office deduction, your home office must be used "regularly and exclusively" for your business and your home must be your "principal place of business" for your company. For more information about the home office deduction, please see the IRS's page titled Home Office Deduction: https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction - Accessed Apr. 16, 2020.

FN2: According to the U.S. Small Business Administration (SBA), a lack of funds is the top reason that businesses fail. (From U.S. SBA. "Why Do Businesses Close?" https://advocacy.sba.gov/2018/05/01/why-do-businesses-close/ - Accessed Apr. 16, 2020.)

FN3: If you are looking for more information on funding options and opportunities, please see the U.S. SBA's page titled Fund Your Business: https://www.sba.gov/business-guide/plan-your-business/fund-your-business Accessed Apr. 16, 2020.



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