Many people assume that because owning a home-based business allows you to work from home, starting a successful business is simple. Sure, there are several benefits to owning a home-based business — lower operating costs, the ability to work in your pajamas, and a flexible schedule. However, this doesn't mean that one can think of a business idea today and have a successful home-based business tomorrow. There are several steps that you need to take to get your home-based business up and running.
Choose a Business Form
There are several different business structures — sole proprietorships, corporations, partnerships, and limited liability corporations (LLCs). The business form that you choose depends on the number of people who own your business and the type of business you want to start.
If you are the sole owner of your home-based business, you can establish either a sole proprietorship or an LLC. Sole proprietorships are free to establish and fairly easy to maintain. As a sole proprietor, your business and personal assets aren't considered separately. This makes things such as accounting and tax preparation simple. However, as a sole proprietor, you are personally liable for business obligations, including debts and judgements. This means, creditors can go after your personal assets in order to satisfy outstanding debts. To separate your personal and business liability, you can establish an LLC. However, setting up an LLC costs money. Also, when you operate a LLC, you have to track your business and personal finances separately, file business taxes separate from your personal taxes, and keep your business adequately capitalized. You can't simply establish separate bank accounts and siphon money from your business accounts to your personal ones.
Some people decide to start a home-based business with a close friend or family member. If multiple people own your business, you can form a partnership, LLC, or corporation. A general partnership operates like a sole proprietorship. The only difference is that the business is owned by multiple people — who are all equally liable for business obligations. Corporation designations are typically used by large businesses, not small, home-based operations, because they don't offer as much flexibility as an LLC.
Obtain Any Necessary Business Licenses and Permits
To determine what type of business licenses and/or permits you need, visit your state, city, and county websites. If you're selling a tangible product or a service that your state deems taxable, you'll need a vendor's license so that you can collect sales tax. This is typically obtained through your city or county. Most businesses also require a general business license, which you get when you register your business with your state. Additionally, if your business has employees, you'll need to register with your state's unemployment and worker's compensation departments.
Depending on the type of home business you own, you may also need a professional license. For example, if you're running an independent insurance agency from your home, you'll need to be a licensed insurance agent.
Get Business Insurance
Business insurance is something that is commonly overlooked by home-based business owners. Many people assume that any equipment they have will be covered by their home or renters insurance policy. However, that isn't the case. Depending on your insurance company, you might need to purchase a separate business insurance policy that covers your business liability and business property. Some insurance companies allow policy holders who operate home-based businesses to add a property damage rider to their home insurance policy that covers any business equipment used at home. If your insurance agent advises you to add a property damage rider to your policy, you should also consider purchasing additional liability coverage, known as an umbrella or blanket liability policy, for your business.
Starting a home-based business does require a lot of planning, but the process isn't overly difficult. Take the time to determine what type of licenses and/or permits you need, choose the correct business form, and get business insurance before doing anything else so that you don't need to worry about the small details once your business is up and running.