Have you been thinking about starting a home-based business? Perhaps you’re looking to supplement your current income with a second job, or maybe you’ve decided its time to stop being someone else’s employee and you’re finally going to be your own boss. Whatever the reason, you’re definitely not alone.
More than 52% of all small businesses in the United States are home-based. That’s pretty impressive, and speaks to just how common it’s become for burgeoning entrepreneurs to begin their small-business journey out of their own homes. Still, starting a home-based business is not without its challenges and there’s much to consider before you hang up your shingle.
So, if you’re considering starting a home-based small business let’s look at a few tips that should help make the launch of your new enterprise a little bit easier and lot a less stressful.
Choosing a Business Structure
Before you register your business with the state you will need to decide on a business structure for your enterprise. Your choice of business structure will impact your accounting requirements, taxes, personal liability, and ability to raise capital.
When it comes to home-based businesses most owners choose to operate as one of the following:
- Sole Proprietor – A sole proprietorship is the most common business structure for home-based businesses. It’s easy to form and gives owners complete control over their businesses.
However, as sole proprietor you will not be creating a separate business identity. This means that your business assets and liabilities are inextricably linked to your personal assets and liabilities. In short, you will be held personally responsible for any debts or other obligations incurred by the business.
- Limited Liability Company (L.L.C.) – This is the next most common choice for small business owners. Forming an LLC helps protect your personal assets (homes, vehicles, savings) in the event your business is faced with lawsuits or bankruptcy.
Permits and Business Licenses
If you are operating a business out of your home you will most likely need to apply for business and occupational licenses, tax registrations, and operating permits from state and local governments. Every state and local municipality has their own rules regarding the permitting and licensing of home-based businesses. Check with local authorities to see what paperwork you’ll need to complete before opening for business.
Add a Business Rider to Your Insurance
This is something that tends to get overlooked when people start thinking about starting a home-based business, but it needs to be addressed. As your home will be operating, at least partially, as a business environment you will be liable for any accidents that may befall employees, clients or delivery people. Homeowners insurance will not provide sufficient coverage to protect you in the event of an accident or emergency.
Speak with your current insurance provider about adding a business rider to your current homeowner or renter’s insurance policy. If necessary, consider taking out a dedicated business owner’s policy to protect your interests.
Be Aware of Your Tax Obligations
This is an area where first-time business owners often get into trouble. As a self-employed business owner you’ll need to pay your estimated federal income taxes every quarter of the fiscal year as opposed to simply filing in April. If you don’t have an accountant you’ll need to stay on top of your quarterly tax obligations, or answer to the Internal Revenue Service. You should also look into any local or state income and business taxes you may be required to pay.
Open a Dedicated Bank Account for Your Business
This is one of the first things you should do when starting a home-based business. It is important to keep your personal and business finances separate, and having a dedicated account for your business does just that. It will also allow you to keep more accurate financial records, which will definitely help come tax time.
Set Up a Designated Work Space
This isn’t only about convenience and productivity, thought that is certainly an important consideration. Setting aside a designated workspace in your home (a spare bedroom or den) not only helps you manage your time and work schedule more efficiently, it’s also a financial necessity.
As a small business owner working out of your home you are eligible for certain business related tax deductions. For example, you should be able to deduct a large portion of the costs of setting up your home office, including the purchasing of a computer, printer, and dedicated phone line. Also, depending on your business and how it is structured, you may qualify for deductions related to your mortgage and utility costs. However, to qualify for these deductions you must first set up a dedicated workspace where you conduct all of your business (i.e. meetings with clients, preparing proposals, and completing related paperwork such as billing and paying invoices).
Decide on a Work Schedule
Part of what makes starting a home business so attractive is the thought of being your own boss. You work when you want, how you want, and you answer to no one but yourself. That is only partially true.
Yes, you are your own boss but you need to be a fairly stern taskmaster. Particularly when it comes to your personal work schedule. Because you are working from home it is much easier to become distracted, and that can be a real detriment to running and growing your business. If you want your home-based business to succeed you need to set a definite work schedule and stick to it, just as you would if you were punching a clock for someone else – maybe even more so.
Starting a home-based business offers many challenges, but it also offers some definite rewards. You can begin to supplement your primary income, and if things go well you may even be able to transition out of the workforce to become your own boss and the proprietor of a thriving small business.
But for your home-based business to be truly successful you need to start off on the right foot. The tips we’ve talked about here should hopefully get you set on the right path to become the successful home-based entrepreneur you’ve always dreamed of.