Knowing what to include in a home business checklist may sound simple to most people. With no need to rent or buy office space and worry about setting up workstations for employees, how tough can it be, right?
Well, although setting up shop at home offers some degree of simplicity, business owners who work out of their homes still face some of the same legal considerations companies with dedicated places of business do on how to start a business from home.
If you’re contemplating about launching a business and how to start a business from home, it’s wise to discuss all of your legal obligations with an attorney. Doing so will help ensure you’ve covered all the bases and are operating your company legally when you start a business from home.
To help you get a grasp on some of the things you might need to consider on completing your home-based business checklist, I’ve drawn up a list below. What I share is not meant to be legal advice (only an attorney can offer that guidance), but hopefully, it will give you some initial insight to prepare you for your journey into entrepreneurship on how to start a business from home.
1. Choosing a Business Entity Type
The business structure you choose for your business will affect your income tax obligations, legal responsibilities and liability, and the degree of complexity involved in operating your business. It’s an incredibly important decision that deserves thought, research, and help from legal and accounting professionals who can offer expertise and guidance.
Here’s a brief overview of the most common business entity types to consider for your home-based business:
In starting a home-based business, many individuals begin as a sole proprietorship. States will consider a single-owner (or married couple-owned) 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 corporation).
Operating as a sole proprietorship offers simplicity. There’s no business registration paperwork and no entity-specific ongoing compliance requirements to maintain status as a sole proprietor.
Because the business and the owner are considered the same legal and financial entity, income tax obligations flow through to the owner and are reported on the owner’s personal income tax returns. Net earnings (a sole proprietor’s profits) from self-employment are subject self-employment taxes. With no employer withholding half of those taxes, the sole proprietor pays the entire 15.3 percent (12.4 percent for social security and 2.9 percent for Medicare). A potential disadvantage of being a sole proprietor is that there is no legal separation between the business and the owner. Therefore, if the business is sued or if it runs into financial hardship (e.g., 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 its financial and legal liabilities are those of 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 self-employment taxes (the full 15.3 percent because no employer is withholding a portion of these taxes).
A Limited Liability Company (LLC) may be a single-member LLC (SLLC) (when there’s only one owner) or a multi-member LLC (when there are two or more members). 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 (or owners’) individual tax returns. LLCs can, however, opt to be taxed as an S Corporation. (More on that below!)
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 Corp is a more complicated legal structure with more registration paperwork and ongoing compliance filings. The advantage of this entity type is that it offers the highest degree of personal liability protection for the 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 Corp as a taxpayer in its own right. Income and expenses are tied to the business entity’s tax ID, not to 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. To maintain its status as a C Corp, a business 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 Corp structure provides. Some examples of the obligations that corporations must fulfill include:
- Holding shareholder and board of director meetings
- Maintaining meeting minutes
- Adopting bylaws
- Filing annual reports
S Corporation status is a special election an LLC or C Corp can request with the IRS.
For an LLC, S Corp election means its owners will only have to pay self-employment taxes on their wages and salaries from the business. Any income paid to them as dividends will not be subject to social security and Medicare taxes.
For a C Corp, having S Corp tax treatment 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 S Corp 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.
2. 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 important 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 be operating their business to make sure no other company is using or has reserved the name.
Sole proprietors, if using a business name that does not include their full name, 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 that the business owner publish a notice in one or more newspapers to inform the public of who owns the business.
When forming an LLC or incorporating a business, the name automatically becomes registered with the state.
To research whether a business name is available, consider using CorpNet’s free Corporate Name Search tool.
3. Federal Tax Identification Number (EIN)
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 filing and other reporting purposes. Businesses 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 an EIN.
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 EIN rather than a social security number with everyone who works with the company, a business owner can minimize the risk of personal identity theft.
Getting an EIN is easy—and it’s free through the IRS by completing and submitting Form SS-4. Rather than adding the task to your already long list of to-dos, consider asking CorpNet to get it done for you. Just as with your other business filings, you can leave the details to us (for a very affordable rate, I might add!) so that you can tend to other critical aspects of your business.
4. 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” on behalf of the business. In plain language, a registered agent is a representative that a business has appointed to receive legal documents and government notices on its 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. on Monday through Friday to receive documents and notices.
The types of documents registered agents accept for the businesses they represent include:
- 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. To poise your business for growth—after all, home-based businesses can become huge successes (think Apple!)—you might find value in appointing a registered agent (like CorpNet) that is authorized to work with businesses in all 50 states. That way, if your company goes national, you won’t have to worry about finding different registered agents in every state.
5. Business Licenses and Permits
One of the checklist requirements for a home-based business is that at-home businesses may need business licenses and permits to operate legally. The requirements will depend on the industry and the type of products and services offered. It’s critical to find out if any state or local (county and municipality) licensing and permitting must be fulfilled to run your home-based business.
Without the right 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. Alternatively, CorpNet provides a Business License Compliance Package (BLCP)™ through which we identify the license, permit, and tax registrations a business will need. With a Business License Compliance Package, we also provide the applications and can prepare them for you.
Below is a list of some of the common licenses and permits that home-based businesses may need to obtain. Whether these are required depends on what the company does and where it’s located:
- Zoning permit (to get permission to use the property for commercial purposes)
- Building permit (if any construction or remodeling will occur at the home to accommodate the business)
- Health permit (if the business sells foods and beverages that are cooked 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 business to display signage that meets the local ordinance rules)
Obtaining any necessary licenses and permits is just the beginning of a home-based business journey. Some might need to be renewed, and it’s important to take care of that by their renewal dates. Also, any major changes to a business (such as a change in business entity type) must be updated on licenses and permits. To make it easier to keep track of when your business license and permit renewal dates are approaching, consider using CorpNet B.I.Z. (Business Information Zone™). That’s our online tool that automates compliance tasks and monitors filing due dates.
6. 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 putting them into practice.
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 that will affect the business.
An LLC operating agreement is especially helpful for multi-member LLCs. It addresses things like ownership percentage, distribution of profits, members’ roles and responsibilities, decision-making protocol, 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 are sharing 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 in the event there’s a breach of the contract.
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 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; term of the agreement or deadlines. Sometimes independent contractor agreements also include non-disclosure or confidentiality language.
A service contract is a useful 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.
Make Sure You Know How to Start a Business a Home-Based Business
As I mentioned at several points in this article, an attorney’s expertise is essential for fully understanding the legal requirements associated with launching and running a business. Home-based businesses are not immune to legal issues, so it pays to make sure you’re in the know about your responsibilities.
Keep in mind that when following your attorney’s guidance, you can enlist CorpNet’s help to you complete many of your business registration and compliance filings. Contact us today to find out how we can help your home-based business get off on the right legal foot and stay there!