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Articles - Working at home

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.

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.


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