In most cases, making your home business legal is a fairly easy process. Sometimes all you need is a license. Sometimes you don’t even need that. But before you hang up your home business shingle, you need to check to make sure you have needed permits and meet other legal requirements.
Business Structure
Before you get your licenses, you will need to determine how you are going to structure your business. In a sole proprietorship, the business is just you. You retain all the glory and risk. It also means that your personal assets (home) can be at risk if you’re sued. Other options are partnerships, LLC’s and incorporating. These have advantages in that they limit your risk should the business fail or you get sued. They also have some tax advantages. But they require paperwork that should be created or at least reviewed by an attorney. You will also need to apply for an Employer Identification Number (EIN) as the business will be a separate entity and can’t use your social security for taxes. Because I’m not an attorney or a tax advisor, I recommend talking to a lawyer or tax expert if you have questions about this.
Business License
In most areas you will need to get a business license or permit (although my county doesn’t have them). For small home based businesses this runs about $35 to $50 per year depending on how much money you make. You should check with your city or county business office to find out about fees in your area.
The application for a business permit is usually short and straightforward. Your locality will issue a business certificate or license that you are required to display. It’s very exciting to have a business license…it makes you feel legit! So frame it and display it in your office.
To find out about business licenses in your community, look in the local government pages of your phonebook usually under licenses and permits although this differs depending on how your phone book is indexed. There should be an entry indicating business licenses. If you can’t find a business-related number, try calling another local government office, the Chamber of Commerce or your local Small Business Administration.
Sales Tax Permits
If you are selling tangible goods and your state collects sales tax, you may also need a sales tax permit. The sales tax permit allows you to collect sales tax (and pay it to the state). It can also allow you to buy the wholesale items you resale or materials needed to create your product without paying sales tax. Contact your state’s sales tax office for information on applying for a permit. Its possible you can apply and file your monthly report online.
Property/Business Tax
If you’re state has personal property or business tax, you may need to register your business to pay tax on your business equipment. Your local personal property tax office should be able to help you with this.
Fictitious Name Statement
If your business name is something other than your given name, you will likely need to fill out a fictitious name statement also known as DBA, Doing Business As. This statement is to notify the public that you are the person doing business under the business name. It is usually printed in the local paper. Your city or county business office should be able to tell you how this is done and may have the paperwork available.
Zoning
Did you know that it could be illegal to operate a business from your home? Many communities have laws against running a business in a residential area. These laws were usually developed to maintain the safety and aesthetics of the neighborhood. People didn’t want more traffic on the street, a chemical lab next door, and other potentially disruptive businesses ruining the neighborhood. Many communities have changed the laws or developed waivers that allow home-based businesses, but you should check with your community before beginning any home business. In most cases, if you don’t plan to see customers at home, offer toxic or dangerous products, or need a sign in your yard to advertise your business, your community will grant you the ability to start your own home business.
To check on the zoning laws in your neighborhood, check your phone book’s local government pages. Usually there is a listing under the community government that says “Zoning”. Call the zoning office and let it know the type of business you are considering. Usually it will tell you on the phone if your business is okay and what you’d need to do if anything.
If you are renting your residence, check your rental agreement or lease for any restrictions on home businesses as well. The same is true of condominiums, co-ops and communities with home owners associations, which often have covenants and restrictions. If there is a restriction, but your business idea wouldn’t negatively impact the community contact your landlord or the homeowners association about getting permission to run your business from your home.
Additional Permits
You may need other permits or licenses depending on what you plan to offer. Therapists, contractors, and other types of industries require special licenses before you can open for business. Be sure to check on this before starting your business.
As a home business owner my advice would be to be very careful with tax. It can be very confusing and I would say even if your business is very small hire an accountant to advise you.
I agree that professional help can be helpful and reduce stress. Thank you for posting.
Great post on teh legalities of a home business.. most people should probably start out as a sole proprietorship, then consider an LLC… and ALWAYS remember to pay your taxes, this is REAL income :]
Thanks for posting Johnny. Sole proprietorship is fast and easy, but some businesses may benefit from going straight to an LLC or other form depending on what it is. And yes, don’t forget to pay your taxes. Fortunately, in many cases, that tax advantages make paying taxes less painful.