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Setting Up a Homebased Business Legally This checklist of legal steps and resources is a must-have for any new homebased business owner.

By Paul and Sarah Edwards

Opinions expressed by Entrepreneur contributors are their own.

Setting Up a Homebased Business LegallyEven though most homebased businesses don't face all the laws and complicated regulations larger businesses must deal with, there are still legal steps that must be taken. Luckily the internet makes it easier to do them, so no matter where you live there's information easily available.

To help you get started, use this checklist of legal matters every homebusiness needs to consider, including the online resources to help you.

Choose Your Form of Business
Because they're the easiest to start and cost the least to maintain, most people choose to operate as sole proprietors. For example, as a sole proprietor you simply file a Schedule C with your Form 1040, but if you've set yourself up as a corporation, partnership or limited liability company (LLC), you must file a separate business tax return. If you use a professional tax preparer, the additional tax return means spending hundreds of dollars more a year. If you live in one of the 41 states that have income taxes, you'll have double the number of returns to file each year.

There are good reasons to consider other forms of business though. If you want to limit your potential liability, consider incorporating or forming a limited liability company. Some states allow a one-person business to operate as an LLC; other states require two or more members. Corporations usually cost more to form and to maintain, but if you're planning to grow a large business, incorporate from the beginning. If your business involves another person in an ownership position, you need to consider incorporating, forming an LLC, or making a partnership agreement.

Sites like,,, and enable you to incorporate or form an LLC, as well as do other legal processes online. For in-depth information about the various forms of business, Nolo Press publishes individual titles on incorporating, forming an LLC, and partnerships.

Get Your Business License
Virtually every city and county raises money by requiring business licenses. They don't regulate your business. As a rule of thumb, consider that if you're required to file a Schedule C or other tax form for reporting your business income, chances are you'll be required to have a business license. Go to your city or county's website for information and the form you need to file. If your city or county is keeping up with technology, you can apply and pay for your license online.

Obtain an Occupation License if Needed
Some businesses and careers are more regulated than others and require an occupational or professional license. One such business is providing child care. (If you plan to do childcare, you can get the information about your state's requirements from the National Resource Center for Health and Safety in Child Care by clicking here.)

What needs to be licensed in one state may not need to be licensed in another. Here are two sites where you can find out whether or not you're required to obtain an occupational license in your state. You'll be able to search licensing requirements by state, occupation or agency. Because some local governments also regulate certain fields, like professional investigation, check your city and/or county's website as well.

Get Set Up with Sales Tax Agencies
If you're selling a retail product or providing a service subject to sales tax by your state, city or county, you'll need to collect this money and report and pay it to the appropriate government entity. All states except Alaska, Delaware, Montana, New Hampshire and Oregon have a sales tax; however, many local governments in Alaska have their own local sales taxes, and the other four states impose sales-type taxes on specific transactions.

If what you offer is taxable, you'll need what's variously called a "seller's permit," "certificate of authority," or "resale license" issued by the agency handling sales tax in your state or community. With this permit, you'll be able to buy items you resell from wholesalers without paying sales tax.

You can locate state and local governments that might affect you from Lexis provides a comparable directory here

Protect Your Business Name
Unless you're going to use anything other than your own name--even just by adding "And Associates" to your business name--you'll need to find out if the name you want to use is already in use or is protected by a trademark or service mark. Mistakes involving business names can be expensive. You may be forced to change your name and have to rebuild your identity. But whether there would be legal consequences or not, using the same name as someone else can be confusing and your marketing efforts may provide prospective customers for a competitor.

To find out whether the name you want is already in use, start by picking up your local phone book. Also use online directories like,, and a portal like Check your state's website to see if it provides the secretary of state's database of corporate names that have been reserved. You can do a free trademark search here. To search both state and federal trademarkes, you can use databases like Better yet is to use an attorney specializing in trademarks and patents or an information professional who specializes in this service.

Zoning And Homeowner and Condominium Association Restrictions
You need to find out if you can operate your kind of business from your home. Cities and counties have zoning restrictions, and homeowner and condominium (CC&R) association typically have restrictions on using property for income-producing activity. If you run into a problem, you may be able to get a variance or conditional use permit with unfavorable zoning. This is particularly true if you can convince your neighbors that your business won't detract from the value of their property or interfere with their quality of life.

Other legal matters you'll want to consider are developing written contracts for clients and written agreements if you work with partners or subcontractors. Nolo Press publishes small business books covering virtually every legal topic.

As you've seen above, there are many free and low-cost resources on the web. Even with these free resources, using an attorney to help you set up your business can be a good investment, particularly if you run into any uncertainties about what you need to do or encounter legal roadblocks.

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