Back in 1977, when John Travolta discoed his way through Saturday Night Fever, a homebased business was about as common as a unicorn. Having a home office was code for admitting you were between jobs, desperately stuffing resumes into envelopes and combing the classifieds.
What a difference a millennium makes.
Now 24 million people work from home, according to the American Association of Home-Based Businesses. Unfortunately, many of those millions started out intoxicated by their flight from Dilbertland but ignorant of the legal and regulatory details needed to stay in business, from business licensing and zoning to buying insurance and finding a good attorney.
Facing this mountain of issues is enough to make you fantasize about returning to the cubicle farm. But remember: Launching a homebased business doesn't have to be nightmarish. There's a boatload of resources out there, from Web sites and books to other entrepreneurs willing to share what they've learned. To help you get started, we've compiled a brief introductory course on the red tape you'll have to weave through to create a legal and safe homebased business.
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Joan E. Lisante, Entrepreneur.com's Legal Expert, is an attorney and freelance writer who lives in the Washington, DC, area. She writes consumer-related legal features for The Washington Post, the Plain Dealer (Cleveland), the Spokane Spokesman-Review and the Toledo Blade (Ohio). She is also a contributing editor to LawStreet.com and ConsumerAffairs.com.
There are two types of business licenses. The first is a permit, allowing you to run a certain business at home. The second is a "skills" license issued by the state for such fields as accounting, architecture or photography. For the latter, check with your state's secretary of state office to find out if your profession requires a skills license.
As for business permits, your city's business license office probably licenses everyone from independent paralegals to muffin bakers. Occupations are grouped with similar ones in categories, and each category has a set of hoops to jump through.
A home occupation permit can cost anywhere from $50 to $250 and is usually valid for one to two years. Chances are you'll have to declare your gross sales for the period, which your locality may use as a tax basis.
Businesses involving cooking or baking, day care, high noise levels or environmental pollution are usually regulated more strictly. If you want to be the next Mrs. Fields, you may have to convert your kitchen to "commercial" quality or rent a commercial kitchen. Other local departments may also have a say in your business, including social services, health, fire and sanitation. Your city or county business license or business tax division can help you sort out the regulations you need to be aware of.
If you decide to call your business "Roadrunner Resumes," for example, rather than just using your name, you may also have to file a "fictitious business name certificate" with the county or city clerk. This gets published in a newspaper as a public notice.
Bankrate.com: The State and Local Resource Guide lists laws, regulations and tax demands on new business owners by state.
Start, Run and Profit From Your Own Home-Based Business by Gregory F. Kishel and Patricia Gunter Kishel
The Home Business Bible by David R. Eyler
Although the "z word" makes people's eyes roll back in their sockets, the basic idea is simple: What type of business is allowed where? Zoning regions are labeled industrial, residential, commercial or farming/agriculture.
The more your business alters the character of a residential area, the greater the possibility for problems. Will you need extra parking or signs? Will employees or customers come and go during the day? Will you be open at night?
Lisa Martin of Fairfax County, Virginia, found out about nosy neighbors the hard way. Martin's creative marketing firm, LeapFrog Solutions, started out quietly in her four-bedroom colonial home. Her marketing campaigns and trade show plans went well until a neighbor, observing the in-and-out parade of her two employees and occasional visitors, called the "zoning police." Martin was forced to move the company to commercial space.
Visit your local zoning office to obtain a copy of the area map, which shows what your area is zoned for. If you need something outside the ordinance, you can apply for what's called a "variance" or "special use" permit. This isn't a change of zoning but an exception to enforcing limits on the books. Before a variance is given, there will be a public hearing before your board of zoning appeal. The board considers the impact of the change on the rest of the neighborhood; whether others have gotten this approval in the past; and whether current regulations pose an undue hardship on doing business in that area.
As the work force spawns more entrepreneurs and telecommuters, ordinances prohibiting homebased businesses are slowly changing. "Quiet" homebased industries-especially information-based businesses-have the greatest chance of approval. Retail or manufacturing businesses have a tougher go of it in residential neighborhoods.
Fortunately, few municipalities have the bodies to go around checking for zoning violations, but if you are caught violating a zoning ordinance, enforcement can range from nothing to a fine to an order to move elsewhere.
One final tip: If you live in a rental apartment, condo, townhouse or any "high density" housing, check your lease or deed for restrictions on homebased businesses.
e-CityHall.com: Submit zoning questions, or look up information on inspections, variances and ordinance enforcement at this "virtual city hall."
CCH Business Owner's Toolkit: This site features sections on zoning information and the consequences of zoning violations.
Introduction to Zoning by David W. Owens
You know the basic choices: sole proprietorship, partnership or corporation. Your choice will affect your personal liability, the amount of paperwork you'll have to deal with and the taxes you'll pay.
Here's a brief overview:
Sole proprietorship. This is truly Business-R-You: You and your business are one and the same. Pros: easy to start, less paperwork than other structures, no separate business tax return, full control, and no pesky partners or shareholders. Cons: full liability for business goofs. Your personal assets are at stake should a disgruntled customer or creditors sue you.
Partnership. Share the burden and the glory with someone else. Pros: a second brain, shared risk and a second business nurturer and manager. Cons: more paperwork, including an annual information return and obtaining a federal employee ID number; each partner is personally liable for partnership debts; the possibility of disputes and disagreements; and the difficulty of finding someone who shares your vision and style and has complementary skills.
If you do go the partnership route, draft a partnership agreement spelling out the essentials: the partnership's name, the place of business, what each partner is putting into the business, how disputes will be resolved, how profits and losses will be shared, and how each can buy the other out. This is crucial.
Also get partnership insurance so one partner can buy the other out in case of death. When one partner dies, the business must either liquidate or reorganize, so future planning is key. A typical buy-sell agreement is funded by life insurance, and you must state the price the survivor will pay for the other partner's portion of the business.
Corporation. This is the most popular choice, especially if you have investors. Pros: separate legal entity which shields your personal assets in the event of a lawsuit; ease in bringing in shareholders or transferring ownership; perpetual existence, which means the corporation stays in existence until it's dissolved by directors or by operation of law. Cons: even more paperwork, including articles of incorporation, bylaws and a separate annual tax return; and double taxation, meaning the corporation as well as the salaries and dividends of the officers are taxed.
A standard incorporation is known as a "C" corporation. Variations on the corporate structure include the subchapter S corporation and the LLC, or limited liability corporation. A sub S corporation avoids double taxation by assigning profits or losses directly to the shareholders, who report them on their individual tax forms. Limitations of the sub S structure: There only one class of stock (no "preferred" vs. "common" stock or "voting" vs. "nonvoting" distinctions allowed), and you can't have more than 35 shareholders.
The LLC combines features of a corporation and a partnership. It shields against personal liability while allowing greater freedom in dividing profits and losses. Members get a membership interest (defined in the LLC membership agreement) rather than shares. Rules for an LLC are contained in state law; some states allow one-person LLCs, while others require a minimum of two partners.
The form you choose for your business depends on the business itself-what stage you're in and how many others are actively involved. Consult with a knowledgeable professional such as an attorney or accountant, weigh the pros and cons of each form of business, and then judge for yourself what will work best in your situation.
Association of Limited Liability Corporations: Click on Resources for an extensive list of links.
FreeAdvice.com: Offers free legal advice on tons of topics
Legal Guide for Starting & Running a Small Business, Volume I by Fred S. Steingold
The Small Business Legal Guide, 2nd Edition by Lynne Anne Frasier
As a homebased business owner, two types of insurance cry out for your checkbook: liability and property damage. Liability protects you against someone getting injured on your premises or by one of your products. Property damage protects against damage to a host of things, from computers to carpets.
Let's start with the most inclusive type of insurance and work our way down:
A business owner's policy (BOP) includes both liability and property damage coverage. Typical hazards covered include loss of data, software or income; theft; and general business liability. The structure housing your business is also covered, so this might duplicate your homeowners' coverage. A BOP also provides some off-premises coverage, including liability coverage for products you sell or parts you install. Things like flood protection or insurance for outdoor signs may be optional.
A home office policy is a step down from a BOP. This policy combines homeowners and business insurance, eliminating duplicate coverage or gaps. This is a good choice for a company with no more than a handful of business visitors each week and quality computer equipment. It covers general business liability, lost income and ongoing expenses like payroll for up to one year if the business can't operate because of damage to your home. Also covered are loss of records, accounts receivable, some off-site business property, fire, theft and personal liability. Many policies don't cover "options" such as floods or earthquakes.
A "business pursuits" endorsement to your homeowner's policy provides the least protection, and isn't recommended for most homebased businesses that have customers on site or costly equipment.
Examine your business and your assets to determine your net worth, likelihood of business interruption, and liability "red flags." When you've found a policy that's within your budget and covers possible losses, review it yearly to make sure it's still adequate.
One final note: If your business has employees, you need workers' compensation insurance, which covers employees' injuries on the job. Requirements vary from state to state-check with your state's employment office to see what's required.
Insure.com: This is a good general source for any business insurance question you may have.
Quicken Insurance: You can find information, get quotes, connect with agents and buy policies on this site
If You're Clueless About Insurance and Want To Know More by Seth Godin
The Complete Book of Insurance by Ben G. Baldwin
Questions To Ask A Business Attorney
Few things make a cash-poor entrepreneur quake more than hiring a lawyer. Here are some questions to ask a prospective attorney before you hire them:
Do you have time for me? Ideally, your attorney is neither juggling 312 clients nor playing computer solitaire.
Have you represented small or homebased businesses before? What did you do for them?
How much is what I want you do likely to cost me? (You should have prepared a list of what you want your attorney to do.) Do you charge by the hour, or on a flat-fee basis?
Will you work on retainer? This means you pay the lawyer a certain sum each month and in return, he or she handles routine legal matters and is available by phone.
Can you provide me with references?
Finally, listen to your gut feeling as to whether or not you could work with this person.
Whether you need to hire a lawyer depends on your form of business; the issues you're facing; your level of knowledge; and your ability to extract information from free resources (Web sites, community organizations, trade associations, etc.). If you're buying a business or a property on which to run a business, you'll definitely need to consult a lawyer.
But don't just dump your problems on your attorney. As Washington, D.C., attorney Linda Ravdin says, "The best clients ask intelligent questions about strategy and help make decisions." Ravdin contrasts this type of client with "shopping bag people" who bring in reams of unsorted information for the attorney. "This type of client," says Ravdin, "wants you to do everything for them, even things they could do themselves."
Findlaw.com's SOHO Guidebook: This is a great site for all the simple questions you'd rather not pay your attorney to answer.
The American Bar Association: The General Public Resources section includes public education and legal referral services.
Lawyers.com: his is a Martindale-Hubbell site that lists lawyers by location and specialty.
The Entrepreneur's Business Law Handbook by Sean P. Melvin
The Law (in Plain English) for Small Businesses by Leonard Du Boff
For reprints and licensing questions, click here.