Many entrepreneurs start their small businesses in their homes. Without the costs associated with renting or buying office space, it helps keep startup expenses down. Still, business owners running their companies out of their houses must pay attention to many details to position themselves for success. Besides getting office supplies, technology tools, and other necessities, they must make sure they take care of the legal requirements for operating their businesses. Every new company’s needs are unique in some ways, so it’s helpful to talk with an attorney and tax advisor for professional guidance. In the meantime, the following checklist for a home-based business touches on what most entrepreneurs should consider.
1. Home Office Furnishings and Equipment
Every home business needs to be well-equipped to handle its day-in-day-out administrative tasks. It can be helpful to have a dedicated space within your house where you won’t be interrupted and where you’ll have access to all the essentials you need to be productive, feel comfortable, and communicate with customers.
Examples of Comment Home Office Equipment and Furniture
- Ring light (for video calls)
- Office supplies
- Paper shredder
2. Business Software and Technology Tools
Many tools for running a business are cloud-based and available on a subscription basis. Some even offer free versions with basic capabilities that may serve a new business well. The industry you’re in and the products or services you offer will influence the types of software you’ll need. I’ve listed some considerations below.
Popular Home Business Software
- Accounting and bookkeeping software – QuickBooks, FreshBooks, Xero, Zoho Books
- Time-tracking software – Toggl Track, Harvest, My Hours, Timely
- Project management and collaboration software – Trello, Basecamp, Monday.com, Google Workspace, Microsoft Teams
- Proposal generation software – PanaDoc, Proposify, Expedience
- Email marketing software – MailChimp, Constant Contact, HubSpot, SendinBlue
- Cloud data backup solutions – Carbonite, iDrive, Backblaze, MSP360
3. Marketing and Advertising Assets
Raising awareness and establishing a strong brand identity is critical for all new businesses. Some of the marketing assets to accomplish that include business cards, a company website, and social media accounts.
Effective marketing involves understanding your target market’s wants and needs and considering that information as you decide on creative aspects such as brand colors, logo design, and content creation.
4. Business Structure
The business structure you choose for your business will affect your income tax obligations, legal responsibilities, liability, and the complexity involved in operating your business. It’s a vital decision that deserves thought, research, and help from legal and accounting professionals who can offer expertise and guidance.
Many individuals begin with a Sole Proprietorship. States will consider a single-owner (or married couple) business a Sole Proprietorship by default unless the owner files paperwork to register the business as a formal legal entity (e.g., Limited Liability Company or C Corporation). Operating as a Sole Proprietorship offers simplicity. There’s no business registration paperwork or entity-specific ongoing compliance requirements to maintain status as a sole proprietor.
Because the business and its owner are considered the same legal and financial entity, income tax obligations flow through to the owner and are reported on their personal income tax returns. Net earnings (a sole proprietor’s profits) from self-employment are subject to income tax and self-employment (Social Security and Medicare) taxes. With no employer withholding half of those taxes, the sole proprietor pays the full 15.3 percent (12.4 percent for Social Security and 2.9 percent for Medicare). A potential disadvantage of being a sole proprietor is there is no legal separation between the business and the owner. Therefore, if the company is sued or runs into financial hardship (for example, it can’t pay its loans or falls behind on bills), the owner’s personal assets are at risk.
When two or more people launch a business together and work from their homes, they are considered a general partnership — unless they register their company as a legal entity. As with a Sole Proprietorship, there is no legal separation between a partnership and its owners. Therefore, the business’s assets and financial and legal liabilities belong to its owners. If someone brings suit against the company or the business cannot pay its debts, the owners are personally held responsible legally and financially.
A partnership’s profits and losses flow through to its owners’ individual tax returns. Each partner’s net earnings from self-employment are subject to self-employment taxes (the entire 15.3 percent because no employer is withholding a portion of these taxes).
Limited Liability Company (LLC)
A Limited Liability Company may be a single-member LLC (SLLC) (consists of one owner) or a multi-member LLC (two or more owners). The paperwork required to form an LLC is called Articles of Organization.
The Limited Liability Company business structure allows in-home business owners to enjoy personal liability protection and tax flexibility without a lot of complex formation and compliance strings attached. An LLC is considered a legal entity separate from its owner(s). By default, an LLC receives pass-through tax treatment like a Sole Proprietorship or partnership, with the LLC’s income and expenses reported on its owner’s individual tax returns. LLCs can, however, opt to be taxed as an S Corporation.
Most home-based business owners don’t register their companies as a C Corporation, at least not from the start. However, it is one of the options growth-focused entrepreneurs will want to learn about. The C Corporation is a more complicated legal structure with more registration paperwork and ongoing compliance filings. This entity type offers the highest degree of personal liability protection for business owners (known as shareholders) and enables a business to sell stock to raise capital for funding its initiatives. Issuance of stock (held privately or publicly) in the company determines the ownership of the business.
The IRS treats a C Corporation as a taxpayer in its own right. Income and expenses are tied to the business entity’s tax ID (EIN), not the individual owners’ tax returns. A corporation (if eligible) may instead opt for tax treatment as an S Corporation. I’ve provided more details about that below.
Filing Articles of Incorporation with the state is how a business becomes a C Corporation. For a business to maintain its status as a C Corporation, it must follow various internal and external corporate rules. Failing to comply with the requirements can result in losing good standing with the state and jeopardizing the legal liability protection that the C Corporation structure provides.
Examples of C Corporation Compliance Responsibilities
- Holding shareholder and board of director meetings
- Maintaining meeting minutes
- Retaining a Registered Agent
- Adopting bylaws
- Filing annual reports
S Corporation status is a special tax election an LLC or C Corporation can request from the IRS if the company meets the eligibility requirements.
For an LLC, S Corporation election means its owners are on the payroll for the work they do in the business and will only pay Social Security and Medicare taxes on their wages and salaries from the business. Any income paid to them as profit distributions is not subject to Social Security and Medicare taxes.
For a C Corporation, an advantage of having an S Corporation tax treatment is that it eliminates the double taxation that normally occurs with a corporation. Usually, a C Corporation pays income tax on its profits at the corporate level, and then those profits are taxed again at the individual (shareholder) level when dividends are paid. With the S Corporation election, the corporate entity doesn’t pay corporate taxes. Instead, profits flow through to the individual shareholders’ tax returns and are taxed at the tax rates for individuals.
5. Business Name Registration
The name you select for your business will be what customers associate with your products and services. As your business name represents your brand, it’s essential to put time and effort into ensuring it has staying power and that you have the legal right to use it in the first place!
Business owners should check with the state where they will operate their business or use an online name search tool to ensure no other company is using or has reserved the name.
If using a business name that does not include their full name, sole proprietors must file a fictitious name registration to use a name. This is also called filing a DBA (doing business as). When doing so, most states also require the business owner to publish a notice in one or more newspapers to inform the public who owns the business.
A business name automatically becomes registered with the state when forming an LLC or incorporating a business.
6. Federal Tax Identification Number
An EIN (Employer Identification Number) is to a business what a Social Security number is to an individual. It’s a federal tax ID number used for tax filings and other reporting purposes. Companies that want to hire employees must have an EIN. Also, partnerships, multi-member LLCs, and corporations must have an EIN. Many banks will not open a business bank account for a company if it doesn’t have a federal tax ID number.
An EIN helps draw the line of separation between a business and its owners, which can help keep accountability clear and sustain a business owner’s protection against personal liability. Also, by sharing the company’s EIN rather than the owner’s Social Security number with vendors, suppliers, and others, a business owner can minimize the risk of personal identity theft.
7. Registered Agent Representation
LLCs and corporations are required to maintain a registered agent. What is a registered agent? It’s a person or company that has the authority to accept service of process for the business. In plain language, a registered agent is a representative appointed to receive legal documents and government notices on the business’s behalf.
A registered agent must have a physical location within the state where the appointing business is registered to operate. The person or company serving as a registered agent must be available from 8 a.m. to 5 p.m. Monday through Friday to receive documents and notices.
Types of Documents Registered Agents Accept
- Correspondence from the federal and state government
- Tax notices from the IRS and other tax authorities
- Summonses and complaints associated with lawsuits
- Subpoenas for information
- Corporate filing notifications
Where can you find registered agent services for your business? Some states have a list of authorized registered agents on their websites, or you might consider asking your attorney for recommendations. Business owners who wish to grow and expand their companies into multiple states can benefit from appointing a registered agent authorized to work with businesses in all 50 states.
8. Business Licenses and Permits
At-home companies may need business licenses and permits at the federal, state, and local levels to operate legally. The requirements will depend on the industry and the type of products and services offered. Without the correct permits and licenses, home-based business owners might face fines, legal penalties, seizure of assets, or even mandatory closure of the business.
Obtaining licenses and permits isn’t difficult — once the requirements are known. Unfortunately, it’s sometimes tricky to navigate government websites to determine what information is relevant to a business. State and local government websites aren’t always immensely user-friendly. One way to get the information and applications is to contact the state, county, and local jurisdictions directly. Another is to ask CorpNet to research the requirements for you.
Below is a list of some common licenses and permits that home-based businesses may need. Whether these requirements apply to a business depends on what the company does and where it’s located.
Common Home Based Business Licenses and Permits
- Zoning permit – for permission to use a property for commercial purposes
- Building permit – required if any construction or remodeling will occur at the home to accommodate the business
- Health permit – if the company sells foods and beverages that are cooked for or served to the public
- Home occupation permit – to operate a business from a residential property
- Sales tax permit – to collect and remit state and local sales tax on taxable goods and services
- Fire permit – if the business uses flammable materials in making its products or if it will have multiple people congregating at its location
- Sign permit – allowing the company to display signage that meets the local ordinance rules
Obtaining necessary licenses and permits is just the beginning. Some may need to be renewed, and it’s important to take care of that by their renewal dates. Also, any significant changes to a business (such as converting to a different business entity type) must be updated on licenses and permits.
9. Business Contracts
Depending on the type of business you run, you may need agreements or contracts to define responsibilities, set expectations, protect your business’s private information, or accomplish other purposes. Numerous websites provide templates that can serve as a starting point for creating agreements. Keep in mind that all agreements are legal documents with legal consequences, so it’s wise to have an attorney review contracts and offer feedback and suggestions before presenting them to clients, vendors, suppliers, and other stakeholders.
- Partnership Agreement – Owners of general partnerships can benefit from a partnership agreement because it defines what each owner is responsible for, how business profits will be divided, how decisions will be made, how disputes among partners will be resolved, and other critical points of consideration affecting the business.
- Operating Agreement – An LLC operating agreement is especially helpful for multi-member LLCs. Having multiple members can open more room for misunderstandings or disagreements. An operating agreement addresses things like members’ ownership percentages, distribution of profits, roles and responsibilities, decision-making authority, and other details to guide how the business is managed.
- Non-Disclosure Agreement (NDA) – An NDA (or confidentiality agreement) helps protect a business’s private or proprietary information from getting shared with unauthorized individuals, the public, and the competition. Business owners may want to ask vendors, project partners, contractors, or others with whom they share confidential information to sign an NDA before disclosing that information. Generally, an NDA will include a description of the type of information that should be kept confidential, the length of time it should remain confidential, and what happens if there’s a contract breach.
- Independent Contractor Agreement – As your home-based business gains traction, you might consider outsourcing some tasks or functions (such as bookkeeping, marketing, etc.) to contractors or consultants. An independent contractor agreement (sometimes known as work for hire agreement) helps by stating the nature of the relationship between a business and the contractor (identifying that the individual is not an employee); describing the project or work involved (including the scope of that work); payment and billing terms; responsibilities of each party; and term of the agreement or deadlines. Sometimes independent contractor agreements also include non-disclosure or confidentiality language.
- Service Contract – A service contract is a valuable tool to help home-based businesses that provide services to their customers. It can help prevent misunderstandings and unrealistic expectations. Typically, service contracts describe the type of work to be done, rates (including down payment or deposit requirements), billing terms and conditions, and other details pertinent to the project or working relationship.
10. Home Business Insurance
Forming an LLC or incorporating a business provides some legal protections for the company and business owner. However, the liability protection that comes with business registration has limitations. Entrepreneurs can get additional peace of mind by having business insurance policies that will cover costs or lost income in the event of lawsuits or disastrous circumstances. The type and amount of insurance coverage needed will vary depending on the business activities, assets at potential risk, and the state’s business insurance laws.
Types of Business Insurance
- General Liability Insurance
- Professional Liability Insurance
- Data Breach or Cyber Liability Insurance
- Business Interruption Insurance
- Business Income Insurance
- Workers Compensation Insurance (if the company has employees)
- Commercial Auto Insurance
11. Experts You Can Trust
This is arguably one of the most important items on this home-based business checklist! I highly recommend that every entrepreneur seeks licensed legal and tax professionals to help them understand what’s required to operate their business in compliance with the laws and tax requirements in their state and local jurisdiction. And to save time, reduce legal costs, and gain the confidence that business formation and compliance filings are done accurately, I suggest using an online business filing service like CorpNet.
Ready to start a business from home? CorpNet is here to help with all your critical business filings. Schedule a consultation today!