From the June 1998 issue of Startups

You could call it a hot business trend or a natural evolution. Either way, you'd be right. Advancing technology, dissatisfaction with corporate life and the ever-increasing collective strength of small business are all contributing to the explosive growth in homebased businesses.

According to research and consulting firm Find/SVP, approximately 18.3 million self-employed Americans work at home--and those numbers are projected to continue growing.

"Whether it's operating a full-time or part-time business, there's been a steady growth in homebased business," confirms Cheryl Eftink, deputy district director of the SBA in Des Moines, Iowa. "Homebased entrepreneurship fits the lifestyles and the work styles of more and more people each year." Technology has made it much easier to operate a variety of businesses from home, where overhead is lower, tax advantages are greater and the commute is nil.

Sounds great, doesn't it? Before starting any homebased business, however, you must be able to answer two critical questions: Are you personally suited to working in a homebased environment? Can your business idea succeed without a commercial location?

Successful homebased business owners are disciplined but flexible self-starters who thrive on challenges. To make sure you're the kind of person who will enjoy working from home, Pam Meyers suggests taking a personality or aptitude test before moving forward with your business. Meyers owns Independent Business Solutions in Oklahoma City, a homebased service that provides independent administrative assistance to other businesses. She says such tests are administered through temporary employment agencies or by local colleges and universities. The fee is usually modest--typically, $50 to $75--and what you discover about your abilities can be invaluable in ensuring your success. For example: "You may find that you're not cut out to handle a homebased business solo, but that you could develop a business with another person," Meyers says.

Once you have an idea of the type of business you want to start, consider what you need in the way of space, equipment and location. Then evaluate your home to see if it meets those needs.


Jacquelyn Lynn is a freelance writer in Winter Park, Florida.

Make It Legal

Your home may be your castle, but don't assume you can do anything you want in it. Many municipalities have ordinances that limit the nature and amount of commercial activities in residential areas. Some prohibit homebased businesses altogether. Others allow homebased businesses but restrict signage, traffic, employees, commercial vehicles and noise.

"Cities are just starting to recognize homebased businesses as legitimate business entities," says Sean Fitzgerald, managing director of Destination Irvine, a public/private economic development program in Irvine, California. Fitzgerald recommends finding out what, if any, ordinances are in place regarding homebased businesses before applying for your business license; you may need to adjust your plan to be sure it complies with these laws. Call your local city hall's general information number and ask to be referred to the appropriate department--usually the planning and zoning department, or perhaps the business and occupational licensing office.

If you're unhappy with local regulations, Fitzgerald says, get involved in the local political process and work to change the rules. In the meantime, you may be able to get around the restrictions by applying for a variance with your zoning commission. The key is to be flexible and use common sense. It's only fair to run your business in a manner that won't negatively affect the neighborhood. "Be aware you're in a `Do unto others' situation," Fitzgerald says. "Don't do things you wouldn't want others to do."

In rural areas, there may be no restrictions at all. When Givhans, South Carolina, residents David Campbell and Glenn Turner started C&T Small Engine Repair LLC in Campbell's garage, they were far enough out in the country that there were no ordinances restricting the type of business they could run.

Once you've confirmed that you can indeed start the business of your dreams in your home, check with your insurance agent to be sure you either have or can get the insurance you need. Many homebased entrepreneurs learn the hard way that traditional homeowners policies cover their businesses inadequately or not at all. Fortunately, the insurance industry has recognized the opportunity in insuring homebased businesses, and many companies are creating new plans targeted to homebased entrepreneurs.

Sit down with your insurance agent to analyze exactly what your potential risks and liabilities are, as well as the cost and type of coverage available, before you begin investing in business-related furnishings and equipment. (For more on insurance, see "How To: Insure Your Homebased Business" in the May 1998 issue of Business Start-Ups.)

Setting Up Shop

Where in your house should your office be? For Meyers, the decision was easy. "I have the corner office with windows, of course," she says, poking fun at that traditional trapping of corporate success. Her office is in a spare bedroom with windows in two walls.

When choosing a location, examine your needs and available space, then try to blend the two. If clients visit your office, it's best to have an office with a separate entrance so customers don't have to traipse through your home. Ideally, your home office should be a separate room with a door you can shut to concentrate in privacy. If this isn't possible, be creative. Many furniture makers sell armoire-like home-office units that unfold during the day and close up at night so your work is out of sight. The goal is to arrange a work area that's functional and doesn't overtake your personal space.

When Jenny Taliadoros started Main Street Stamps in Kingfield, Maine, she was living in a small house and set up her office in the dining room. But as her business--which designs and manufactures art stamps--grew, so did the space it took. "It was taking over the whole house," Taliadoros recalls. "I was always working, so it was always there." Eventually, she moved into a bigger house, where she could use a basement as an office. It's comfortably decorated, completely equipped and situated in a way that allows her to close the door and leave her business behind.

When furnishing and equipping your office, figure out what you must have (and can afford) and what you can do without for now. When Turner and Campbell set up their business, their initial focus was on buying the tools and equipment they needed to provide mobile and on-site small-engine repair service. To keep costs down, they bought the bare minimum of furnishings: two desks, a file cabinet and a microfiche machine, which they needed to read parts lists. They expect to computerize their record-keeping later this year.

Here's the basic equipment you'll want to consider:

  • Computer and printer. Even if your actual work doesn't require a computer, you need one for correspondence, record-keeping and e-mail capabilities. Include a backup system, and use it to avoid losing critical data. An uninterruptible power supply (UPS) is essential, too, to protect your work-in-progress from unexpected power outages. Laser printers provide the most professional-looking output; they cost more, but your business image is worth the investment.
  • Separate phone line. Have a separate phone line dedicated to the business. Always answer it with the company name; make sure it's off-limits to children and other household members not involved with the business.
  • Answering machine/voice mail system. Your business should have its own answering system for times when you can't take calls. Whether you use a machine or voice mail (most phone companies offer this service for a nominal monthly charge) is a matter of preference. Make your announcement professional, concise and complete; this is not the place to be cute or clever.
  • Telecommunications features. Analyze your communication needs and the appropriate equipment and services to meet them. Ask your local phone company what services it offers. Add-ons such as call waiting, three-way calling and caller ID can enhance your productivity.
  • Fax machine. Sending and receiving faxes through your computer is slow and interrupts your work. Invest in a stand-alone machine with its own phone line so you can send and receive faxes 24 hours a day, whether your computer is on or not.
  • Postage meter. Although it's not essential for all businesses, metered mail gives your company a "big business" look. If you mail more than 10 or 15 pieces per day, and especially if sizes and weights vary, a meter with an electronic scale can save you time and money.
  • Copier. Consider what your copy volume is likely to be, and do a cost/benefit analysis. For very small quantities, your fax machine may be adequate, but an actual photocopy machine will give you better quality at a much lower cost per copy.
  • Furniture. It doesn't have to be fancy, but it must be adequate. Be sure your desk and chair are comfortable and ergonomically sound. You also need sufficient and convenient storage space for files and records.
  • Cellular phone. Unless you rarely leave the office, a cellular phone is an important communication tool. Cellular service is becoming more affordable by the day, so shop around for the best deal.
  • Pager. If your customers need to reach you in a hurry, a pager is usually the best tool. Don't want to give out your cell-phone number and incur the cost of unwanted calls? Give out your pager number instead; that way, you can decide which calls to return and when.

For many homebased business owners, the car is an extension of the office. Be sure it's appropriately stocked with supplies. Meyers, for example, keeps a notebook in her car with an information and time sheet for each client so she can respond to their needs when she's out of the office.

Tax Facts

Because expenses related to running your business are generally tax-deductible--and the IRS has relaxed the rules on what is an allowable home-office deduction--the tax advantage of being homebased is more attractive than ever. "If your home is your principal place of business, or if you use a home office to meet with customers in the normal course of your business, you can deduct certain expenses related to maintaining your home office," says Charles L. Norman, a senior manager specializing in entrepreneurial services with Ernst & Young LLP in Toledo, Ohio.

In the past, the IRS disallowed the home-office deduction if you performed your actual work at other locations, such as client offices, and used your home office simply for administrative functions. But that changed in 1999, says Norman, when a home office will be considered a principal place of business if you use it for administrative or management activities and there's no other fixed location where you conduct similar activities. In other words, even if you perform much of your work outside your home, your home office will be deductible.

Expenses that benefit only the business area of your home, such as the cost of carpeting an office, are deductible. You can also deduct a portion of indirect expenses--the costs involved in maintaining your entire home, such as utilities (electricity, trash collection and the like). Deductions are based on the percentage of space you use for business purposes, so if your office takes up 10 percent of your home's square footage, you can deduct 10 percent of your utility costs. Other indirect expenses include real estate taxes, deductible mortgage interest, casualty losses, rent, insurance, repairs, security systems and depreciation.

Many taxpayers worry that taking the home-office deduction will trigger an IRS audit, but if your deductions are legitimate and you've kept good records, that shouldn't be an issue, says Norman. To maintain complete and accurate records, he advises using any of the popular bookkeeping and accounting software programs to track income and expenses. Set up a filing system for receipts, and discipline yourself to stay current with your record-keeping. "Keep your records for at least three years from the date the return was filed or two years from the date the tax was paid, whichever is later," says Norman.

Also set up a separate bank account for your business. This not only helps document your financial details for tax purposes, but it helps you establish yourself with your banker and other potential lenders, as well as creating a professional image with vendors.

Head Room

"The rules for running a homebased business are the same as for running any business," says Eftink at the SBA. Even so, there are some psychological differences you'll need to deal with.

Isolation can be a major problem for homebased business owners. If you thrive on solitude, you're likely to love working from home--but if, like most people, you need human interaction, you must either choose a business that puts you in regular contact with customers or find another way to meet that need. For example, joining networking organizations or leads exchange groups can give you a welcome opportunity to socialize and promote your business at the same time.

When you're homebased, it's easy for the distinction between work and home to blur. Business projects tend to spill over into personal times and spaces. To stay sane, Eftink recommends drawing a clear line between your personal and business lives. "Start the day as if you're heading to a traditional office," she says. "Keep your home work separate from your home life."

Some homebased business owners say exercising the discipline to work hard enough is a challenge, but for many more, the problem is just the opposite: They don't know when to stop working. Every start-up business requires long hours, but when your business is always at hand, the temptation to work all the time is harder to resist. Schedule breaks and downtime to stay healthier and more productive in the long run. Remember, the goal is to work at home--not to feel like you live at work.

Remember, too, that being a homebased sole operator doesn't necessarily mean you have to do everything yourself. Look for tasks you can outsource--often to other homebased businesses. These include administrative chores (accounting, record-keeping, word processing); sales and marketing; and even production. When Taliadoros started Main Street Stamps, she did everything herself . . . at first. "I wanted my business to grow, but I couldn't do it alone," she says. Taliadoros contracted with independent representatives to handle sales and hired contract laborers to help with production.

The most important ingredient in success? Take your business as seriously as you want others to. Go through the basic steps that are essential to any successful business--have a plan, know your market and secure adequate funding before you start. Insist that friends and family give your homebased business the same respect they would give it in a commercial location. And why shouldn't they? As a homebased business owner, you're on the leading edge of an exciting wave that's changing the way America works.