House Rules Smart steps to get your homebased business off the ground

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 doanything you want in it. Many municipalities have ordinances thatlimit the nature and amount of commercial activities in residentialareas. Some prohibit homebased businesses altogether. Others allowhomebased businesses but restrict signage, traffic, employees,commercial vehicles and noise.

"Cities are just starting to recognize homebased businessesas legitimate business entities," says Sean Fitzgerald,managing director of Destination Irvine, a public/private economicdevelopment program in Irvine, California. Fitzgerald recommendsfinding out what, if any, ordinances are in place regardinghomebased businesses before applying for your business license; youmay need to adjust your plan to be sure it complies with theselaws. Call your local city hall's general information numberand ask to be referred to the appropriate department--usually theplanning and zoning department, or perhaps the business andoccupational licensing office.

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

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

Once you've confirmed that you can indeed start the businessof your dreams in your home, check with your insurance agent to besure you either have or can get the insurance you need. Manyhomebased entrepreneurs learn the hard way that traditionalhomeowners policies cover their businesses inadequately or not atall. Fortunately, the insurance industry has recognized theopportunity in insuring homebased businesses, and many companiesare creating new plans targeted to homebased entrepreneurs.

Sit down with your insurance agent to analyze exactly what yourpotential risks and liabilities are, as well as the cost and typeof coverage available, before you begin investing inbusiness-related furnishings and equipment. (For more on insurance,see "How To: Insure Your Homebased Business" in the May1998 issue of Business Start-Ups.)

Setting Up Shop

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

When choosing a location, examine your needs and availablespace, then try to blend the two. If clients visit your office,it's best to have an office with a separate entrance socustomers don't have to traipse through your home. Ideally,your home office should be a separate room with a door you can shutto concentrate in privacy. If this isn't possible, be creative.Many furniture makers sell armoire-like home-office units thatunfold during the day and close up at night so your work is out ofsight. The goal is to arrange a work area that's functional anddoesn'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 thedining room. But as her business--which designs and manufacturesart stamps--grew, so did the space it took. "It was takingover the whole house," Taliadoros recalls. "I was alwaysworking, so it was always there." Eventually, she moved into abigger house, where she could use a basement as an office. It'scomfortably decorated, completely equipped and situated in a waythat allows her to close the door and leave her businessbehind.

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

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

• Computer and printer. Even if your actual workdoesn'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 powersupply (UPS) is essential, too, to protect your work-in-progressfrom unexpected power outages. Laser printers provide the mostprofessional-looking output; they cost more, but your businessimage is worth the investment.

• Separate phone line. Have a separate phone linededicated to the business. Always answer it with the company name;make sure it's off-limits to children and other householdmembers not involved with the business.

• Answering machine/voice mail system. Your businessshould have its own answering system for times when you can'ttake calls. Whether you use a machine or voice mail (most phonecompanies offer this service for a nominal monthly charge) is amatter of preference. Make your announcement professional, conciseand complete; this is not the place to be cute or clever.

• Telecommunications features. Analyze your communicationneeds and the appropriate equipment and services to meet them. Askyour local phone company what services it offers. Add-ons such ascall waiting, three-way calling and caller ID can enhance yourproductivity.

• Fax machine. Sending and receiving faxes through yourcomputer is slow and interrupts your work. Invest in a stand-alonemachine with its own phone line so you can send and receive faxes24 hours a day, whether your computer is on or not.

• Postage meter. Although it's not essential for allbusinesses, metered mail gives your company a "bigbusiness" look. If you mail more than 10 or 15 pieces per day,and especially if sizes and weights vary, a meter with anelectronic 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 faxmachine may be adequate, but an actual photocopy machine will giveyou better quality at a much lower cost per copy.

• Furniture. It doesn't have to be fancy, but it mustbe adequate. Be sure your desk and chair are comfortable andergonomically sound. You also need sufficient and convenientstorage space for files and records.

• Cellular phone. Unless you rarely leave the office, acellular phone is an important communication tool. Cellular serviceis becoming more affordable by the day, so shop around for the bestdeal.

• Pager. If your customers need to reach you in a hurry, apager is usually the best tool. Don't want to give out yourcell-phone number and incur the cost of unwanted calls? Give outyour pager number instead; that way, you can decide which calls toreturn and when.

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

Tax Facts

Because expenses related to running your business are generallytax-deductible--and the IRS has relaxed the rules on what is anallowable home-office deduction--the tax advantage of beinghomebased is more attractive than ever. "If your home is yourprincipal place of business, or if you use a home office to meetwith customers in the normal course of your business, you candeduct certain expenses related to maintaining your homeoffice," says Charles L. Norman, a senior manager specializingin entrepreneurial services with Ernst & Young LLP in Toledo,Ohio.

In the past, the IRS disallowed the home-office deduction if youperformed your actual work at other locations, such as clientoffices, and used your home office simply for administrativefunctions. But that changed in 1999, says Norman, when a homeoffice will be considered a principal place of business if you useit for administrative or management activities and there's noother fixed location where you conduct similar activities. In otherwords, 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, suchas the cost of carpeting an office, are deductible. You can alsodeduct a portion of indirect expenses--the costs involved inmaintaining your entire home, such as utilities (electricity, trashcollection and the like). Deductions are based on the percentage ofspace you use for business purposes, so if your office takes up 10percent of your home's square footage, you can deduct 10percent of your utility costs. Other indirect expenses include realestate taxes, deductible mortgage interest, casualty losses, rent,insurance, repairs, security systems and depreciation.

Many taxpayers worry that taking the home-office deduction willtrigger an IRS audit, but if your deductions are legitimate andyou've kept good records, that shouldn't be an issue, saysNorman. To maintain complete and accurate records, he advises usingany of the popular bookkeeping and accounting software programs totrack income and expenses. Set up a filing system for receipts, anddiscipline yourself to stay current with your record-keeping."Keep your records for at least three years from the date thereturn 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 notonly helps document your financial details for tax purposes, but ithelps you establish yourself with your banker and other potentiallenders, as well as creating a professional image with vendors.

Head Room

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

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

When you're homebased, it's easy for the distinctionbetween work and home to blur. Business projects tend to spill overinto personal times and spaces. To stay sane, Eftink recommendsdrawing a clear line between your personal and business lives."Start the day as if you're heading to a traditionaloffice," she says. "Keep your home work separate fromyour home life."

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

Remember, too, that being a homebased sole operator doesn'tnecessarily mean you have to do everything yourself. Look for tasksyou can outsource--often to other homebased businesses. Theseinclude administrative chores (accounting, record-keeping, wordprocessing); sales and marketing; and even production. WhenTaliadoros started Main Street Stamps, she did everythingherself . . . at first. "I wanted mybusiness to grow, but I couldn't do it alone," she says.Taliadoros contracted with independent representatives to handlesales and hired contract laborers to help with production.

The most important ingredient in success? Take your business asseriously as you want others to. Go through the basic steps thatare essential to any successful business--have a plan, know yourmarket and secure adequate funding before you start. Insist thatfriends and family give your homebased business the same respectthey would give it in a commercial location. And why shouldn'tthey? As a homebased business owner, you're on the leading edgeof an exciting wave that's changing the way America works.