For many moms, a home-based business offers the smartest balance between work and family.
Running a business from your basement, guest room, or dining room table is a great way to keep your overhead costs down…and gives you the freedom to be home with the kids.
And while starting a business in your home is relatively simple, there are a few legal matters to consider to make sure your home-based business is legit.
Start A Business: 6 Legal Steps To Take
1. Choose a business name
Even if you’re just a solo freelancer, it can be a good idea to create an identity for your business that’s separate from yourself. Once you’ve brainstormed and picked a great business name, you’ll want to make sure it’s legally available (because trust me, you don’t want to be on the wrong end of a trademark dispute!).
To see is a business name is available, you can run a free trademark search to see if someone has already filed a trademark for your name. You can also check with your state’s Secretary of State database to see if the name you want to use is already registered by someone else.
2. Choose your business structure
The simplest way to structure a business that you run yourself is to operate as a sole proprietor; this is the default (if you don’t officially form a business structure, you’re a sole prop). However, a sole proprietorship doesn’t separate your personal and business finances – so if your business is sued or can’t pay its debts, your personal assets will most likely be on the hook.
Forming an LLC or corporation for your home-based startup will protect your personal assets (such as your savings and personal property) from any liabilities of the company. The LLC is a great option for small home businesses that want legal protection without a lot of paperwork and legal red tape. However, it’s smart to consult with a tax advisor or accountant to see what structure is best for your business.
If you’re not ready to plunge into a formal business structure, remember that you still need to register your name with the state (if you’re going to be doing business with a business name that’s different than your own name). This simple step is known as filing a DBA (Doing Business As or Fictitious Business Name). By filing a DBA, you’ll be legally able to use a business name. And best of all, it ensures that no one else can use your business name in your state.
3. Get a Tax ID Number
When you’re running a business, you’re not going to want to give out your social security number to every client or vendor you work with.
For this reason, you should get a Federal Tax Identification Number, also referred to as an Employer Identification Number. This step is mandatory if your business will have any employees (but again, it’s smart practice for solo businesses too). A Tax ID number is issued by the IRS; it’s free and simple to do.
4. Set up a business checking account
It’s important to keep your business finances separate from your personal accounts.
Once you have obtained your Tax ID number for the business, you should open a business checking account. You’ll appear more professional when you write checks from your business versus your personal account, and you will be able to accept payments in your business name. In addition, having a separate business account will streamline your bookkeeping, making it easier to understand your business’ cash flow on a monthly basis.
5. Check if you need any local permits
Depending on your business type and where you live, you may need to get a business license or permit from the state, county, town, or even federal level. It’s best to get the proper licenses from the start rather than dealing with back payments and penalties. You can find out what kind of permits you might need by visiting Business.gov and entering your Zip Code and type of business you’ll be starting.
In addition, it’s a good idea get to know the local zoning laws. If you’re a solo consultant or freelancer, there probably won’t be a problem. However, there can be restrictions against running a daycare center or having employees in your house. Check with your local zoning board to make sure that your planned business can be legally operated in your home.
6. Don’t forget your home office deductions
If you’re using any part of your home “exclusively for business purposes,” you’re able to deduct this use from your taxes.
If you’re operating as a sole proprietor, you can deduct certain home expenses based on the percentage of your home that is used for business purposes. For example, if your business uses a spare room in your house that’s 200 sq ft. and your home is 2,000 sq. ft. total, then you can write off 10% of certain home expenses (such as your rent/mortgage and utilities).
If you formed an LLC or Corporation, then the corp/LLC can reimburse you for the home office costs on a monthly basis under an accountable expense reimbursement plan. This becomes a deductible business expense for the corporation. Talking to an accountant will be the easiest way to figure out the most favorable solution here.
Start off smart
When you start a business, it’s an exciting time and no doubt, you want to get started as quickly as possible. However, take some time to lay down the legal groundwork so you can avoid any pitfalls down the road. Being “legit from the start” is the best way to ensure long-term success.
Editor’s Note: This was originally written by Nellie Akalp for The Mogul Mom.