HOME BASED BUSINESS START-UP
Author:
Patrick
A. Walters
by Patrick A. Walters, President and CEO, Walters
Associates
INTRODUCTION
America is coming home to work.
Home-based offices are becoming the wave of the future. Tens of thousands of
workers are opting for this way of life, a life in which they can make their own
hours, commute to work in seconds, make their own choices and become their own
boss.
For many the home office is becoming
the location for a full-time job and the primary source of income. For others,
it is a part-time venture. Many start on a part-time basis and grow their
business into a full-time operation.
Current figures available indicate
that during 1999, the percentage of self-employed people working from home
jumped by almost 16% to approximately 37 million. While working at home has an
almost irresistible appeal to many, there are some big misconceptions of what it
is like. This article will provide some very useful information that can help
you get started successfully.
LEGALITIES OF WORKING AT HOME
1) ZONING
Before setting up your new business
it would be advisable to check on the legal status of your business. You need to
check zoning laws for your community since they may dictate if you can legally
operate a business from home. We realize that many businesses never check on
zoning for their home-based business and the chances that they ever get into
difficulties with the law are probably pretty slim. If there are no changes in
structure and you do not have customers and/or employees enter your home,
regulations will tend to be far easier. Laws and regulations change from
community to community, but the following 6 factors will generally be regulated
items:
1. Separation of business and
private entrances
2. Square footage of the home taken
up by commercial space
3. Employees working in the home
4. Certain occupations such as
manufacturing and food sales/service
5. Storage of commercial goods,
especially any hazardous materials
6. Use of business signage anywhere
on your property
Here is an important suggestion:
keep relations with your neighbors on a friendly basis. Your neighbors will soon
become aware that you are working at home. Some may even be envious.
Unfortunately zoning authorities will generally become aware of home office
zoning infractions through a "friendly neighbor".
2) BUSINESS LICENSE
Most cities or counties require
businesses to be licensed. Some home-operated businesses, however, are not
required to have a business license. Check with your local City or County Clerk’s
Office to obtain regulations for your locality.
3) D.B.A. REGISTRATION
If you are using your own name as
your business name, it will normally not need to be registered, but if you use
any other name, or even your abbreviated name, almost all localities require
that you register the name. This is called a “fictitious name” registration
or D.B.A. (Doing Business As) registration. If your name is Randy M Jones and
you name your business Randy Jones or Randy M Jones Enterprises, you will
probably not have to register it, but if you call it RMJ Enterprises, you will
generally have to register the name.
Most states have a name search
bureau, which is a part of the state government. You will generally be able to
call this office to see if a given name has already been registered to someone
else in the state. This is important to do, or it could be costly later. If you
give your business a name that is already registered to another company, the
other company may demand – and even take legal action – to make sure cease
to use the name.
4) YOUR COMPANY AS A LEGAL ENTITY
Businesses are most commonly set up
as one of the following entities:
The Sole Proprietorship
Incorporation
Partnership
Most new businesses choose the Sole
Proprietorship. It is the least complicated. It requires no paperwork. The
proprietor – you, or you and your spouse as the owner, or owners – are taxed
for all the net profit from your business. You add the income of the business to
other personal income, or deduct the business loss from other personal income.
Your tax adviser can give you specific information.
The disadvantage of the Sole
Proprietorship is that as the owner you can be held fully liable in a lawsuit.
Incorporation, on the other hand, will give you some protection. In this case
the "INC" – rather than you – is the legal business entity. If you
are starting a business that tends to have liability exposure, the corporation
may be the way to go. In this and other legal questions, only your attorney can
give you competent legal advice.
Partnerships are generally chosen
when unrelated individuals own a business. An attorney should set up a
partnership to avoid all kinds of problems that can develop later.
For more information and resources
about the legalities of working from home and other small business issues, go
to:
Nolo
Com
DESIGNING YOUR WORK-SPACE
First, you must determine how much
space you need. The chances are that what you may initially think is quite large
may soon seem crowded. While many businesses are started from a corner of the
bedroom or kitchen, if the space is available it would be a far better idea to
take a spare area of the house and convert it into your office. There may be
space in the basement, garage, or a spare bedroom. Having a separate space is
more efficient and is also psychologically important. You do not want home
activities to interfere with your business, or vice versa.
Friends and family will need to be
told politely but firmly that business hours mean business and that dropping in,
or calling to chitchat, are not acceptable. Psychologists suggest that you work
"from" home not just in your home. There is a danger of becoming
isolated. Inasmuch as time allows, participate in seminars and local business
activities and organizations.
FINANCIAL PLANNING
It is said – and my own personal
experience confirms it – that owners of new businesses never have enough time
or money. The majority of small businesses which do not succeed will fail
because they are not properly financed. Do your financial planning. Carefully
review all required start-up expenses as well as expected operating expenses
before revenue will be generated. Estimate your profit margins and all fixed and
controlled expenses. Almost all entrepreneurs will tend to be much more
optimistic about the anticipated financial performance of a business than what
is necessarily realistic. There are always unforeseen expenses.
It is a good idea to invest only in
absolutely necessary expenses. This applies to furnishings, supplies and all
equipment. Computer equipment becomes outdated within a short period of time, so
just purchase something that will serve you well for 2-3 years. You can upgrade
your equipment later on when you have a better cash flow. Your emphasis should
be on conserving capital. As your business develops, unexpected hurdles and
periods of low revenue will come along. Your capital will make it possible to
keep your business operating during these times.
WHY SHOULD YOU HAVE A BUSINESS
PLAN?
While writing a business plan can be
made into a highly sophisticated undertaking, especially by large corporations,
it’s easy to do when done for a new or small owner operated-business.
Essentially, you will be committing your plan to paper. As you do so, your
thoughts will become more formal and concrete and this will tremendously assist
you in the development of your business. If you are considering obtaining
financing for your new business, either through a bank or the SBA (Small
Business Administration), a formal business plan will be a necessity.
Home-operated businesses will have a much more difficult time in obtaining
financing.
DON'T FORGET UNCLE SAM
As in all undertakings of life from
birth to death and beyond, the IRS will be there to watch over you. Almost all
small, home-based businesses will start out as Sole Proprietorships. This legal
status is best for ease of handling and for tax benefits. Your net business
income or loss becomes an addition or deduction to other income declares at the
end of the year. Careful record-keeping of all business revenue and expenses is
a must! Keep a separate business-checking account for your business and use a
separate credit card. Do not intermingle business and personal expenses. Other
special tax benefits and regulations apply to home-operated businesses. You
should obtain professional advice from your tax adviser.
FREE PUBLICATIONS AVAILABLE FROM
THE IRS:
IRS
FORMS
Or call the IRS 1-800-829-3676
"Record-Keeping For A Small
Business" IRS publication 583
"Business Use Of Your
Home" IRS publication 587
“Expenses for Business Use of Your
Home” IRS publication 8829
"Tax Guide For Small
Business" is an annual IRS publication #334
INSURANCE
One disadvantage of being
self-employed is not having health and disability insurance. This is often
available through trade organizations that serve small businesses or the
industry most closely related to your product or service. Just remember, though,
that if you get insurance this way, you have to maintain your membership in that
organization to keep your insurance valid. The following URL gives you a list of
some of these organizations:
Biz
Country
If you are older than 50, you can
belong to AARP (American Association of Retired Persons - AARP,and
they offer a wide range of insurances.
You may also need liability
insurance. Your homeowner’s insurance covers your belongings in your home, but
it may not cover all business inventory and equipment. Check with you’re the
insurance agent who handles your homeowner’s insurance to make sure you have
the right coverage.
FACTORS THAT WILL DETERMINE YOUR
SUCCESS
1) DO YOUR HOMEWORK
The more you know about your
business, the better your chances of success. Attend seminars and join trade
associations. Read books and trade publications. If you do not have a business
background, a business introductory class at a local college would be advisable.
2) PLANNING IS KEY TO YOUR
SUCCESS
You and your family's future and
livelihood are at stake. So your decision and planning to start a business are a
very serious matter. Establish a long-range plan which encompasses your business
and financial plans. You should obtain legal or financial advice from an
attorney or accountant before committing to any long-range or major financial
transactions. Agreements with suppliers or customers should be put into writing.
3) YOU MUST WEAR MANY HATS
Small business owners over time can
become experts on a variety of subjects. At the start, the most important aspect
is the mind-set. Your communication to the rest of the world through all
available means will determine your success. Here is an abbreviated marketing
checklist:
a. Telephone equipment
b. Promotional Material
c. Advertising (Don't forget the Yellow Pages)
d. Stationery
e. Direct Mail
f. Membership in Organizations
g. Networking
h. Direct Sales
4) INVEST IN GOOD EQUIPMENT
The right equipment will make your
work easier and your business more efficient. To conserve cash used equipment
should also be considered.
SO WHAT ARE YOUR CHANCES?
The better you think they are the
better they generally are, and don't forget that among thousands of others,
Apple Computer, Domino's Pizza, and Walt Disney all started as home-based
businesses.
RESOURCES/ASSOCIATIONS
There is a great deal of expert
advice and resource material available to you. Much of it is free of charge. A
variety of literature is available – excellent books on all business subjects
and various magazines. Your local Chamber of Commerce often sponsors classes.
Banks can give you advice or can be used as a sounding board and your banker
doesn’t charge by the hour. Local schools offer a variety of classes of
interest to business owners. Don't forget the Public Library. Last, but not
least, don't forget the U.S. Government.
The SBA (Small Business
Administration) offers a range of services such as loans, financial consulting,
computer and technical consulting services and a variety of publications.
Check your local telephone pages, or
contact:
Small Business Administration
SBA
1441 L Street NW
Washington, DC 20416
(202) 659-6000
United States Chamber of Commerce
provides literature, telephone referrals and other services to small businesses.
Contact your local Chamber of Commerce or:
United States Chambers of Commerce
United
States Chamber
1615 H Street NW
Washington, DC 20062
(202) 659-6000
Internal Revenue Service offers a
variety of services, which includes workshops, films and publications to clarify
tax matters for small businesses. Contact your local IRS office or:
Education Branch, Taxpayer Service
Division
IRS, Department of the Treasury
IRS-U.S.
Treasury
1111 Constitution Ave., NW
Washington, DC 20274
1-800-424-1040
Better Business Bureau (BBB) The BBB
can be an important ally in checking on potential suppliers and other
businesses. Check for a telephone listing in the city where the company you are
checking on is located or go online to B
B B ORG.
Patrick A. Walters
Walters Associates
Walters
Associates
Walters-Associates@writeme.com
All Rights Reserved Walters Associates 2001.