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.
Patrick A. Walters
Walters Associates
Walters-Associates@writeme.com
All Rights Reserved Walters Associates 2001-
