Starting a Home Based Business
Updated March 05, 2008
Many of us dream about working out of our homes. It's seems rather complicated, but it's really not very difficult to work through all the details. It just takes some time, concentration, and effort. And if you're doing something you love, it will only feel like you're working half of the time.
And, as always, if you start to feel like you're getting in over your head, or you're not quite sure that you've got all the information, be sure to talk to a licensed lawyer, accountant, etc. And be sure to talk to other business owners.
Don't quit your day job. Start small.
When I say start small, I mean it. Don't quit your job and expect to be able to make a living off of your home business. At worst, you'll lose everything. At best you'll get in over your head and make foolish mistakes. Instead, focus on learning how to run the business, deal with customers, handle taxes, and so forth before you get big. Growth is good, but you don't want your business to grow faster than your ability to keep on top of it. Yes, there are the lucky few who drop everything, put their life savings into a company and get rich, but it's rare. Most successful companies (even many of the millionaires and billionaires) started small, mastered their products and services, learned how to handle the market, and then grew to their amazing status today.
Even though you're starting small, don't be afraid to think about how to expand your company and go big. You never know, your company might blossom into the next huge industry leader, so always think about how you can make that growth more manageable by thinking ahead. If you're an online company that makes comic strips, maybe you can eventually expand to printed books, posters, animation, television, movies, and your own theme park. Don't neglect those big dreams. Write them down.
Start reading business resources
There are lots of books, websites, magazines, TV shows, etc. about starting a business. Start looking at them. Even if you learn only one new thing from each resource, you'll eventually become your own business expert.
Popular online business sites:
Don't forget to look up business resources for your local area (e.g. city and county levels), such as the local chamber of commerce and small business groups, since some local laws may affect you (such as zoning laws, license and permit requirements, insurance requirements, etc.).
The best book I've ever read about home business (and I've read many) is Homemade Money: Bringing in the Bucks! A Business Management and Marketing Bible for Home-Business Owners, Self-Employed Individuals and Web Entrepreneurs Working from Home Base.
How do you want your business to impact the world? The mission statement.
This is where you get to think about your mission statement. Your company's mission is the motivation behind everything that you do, so be specific. Your mission is also what you want people to think about when they think about your company. Do you want people to think that your company is only interested in getting their money, or do you want them to think about how you offer luxury items at affordable prices, are working toward cleaning up the environment, or can help them have fuller lives through physical fitness?
For example, my company's mission statement is "to help people live happier lives." Everything I do in my business is based on this mission statement. I design tools, like printable lists and calendars, because they make life a bit less stressful, and that helps people live happier lives. I write articles about how to follow your dreams or overcome frustrating obstacles because we can all use a little help and motivation, and that helps people live happier lives. I create things that are beautiful or funny because seeing them makes people feel a little happier, even if only temporarily. However, since a "happy life" refers to lifetime happiness, I do not do things that detract from my customers' long term happiness (even if those things contributed to short term happiness), so I don't sell tobacco, alcohol, or gambling (because they are addicting to many people, and such addictions destroy health and families). When my customers think of my business, I want them to think about how using my products or services will help them achieve an overall happy life.
How will your business achieve it's mission through your passion?
Think about things that you are passionate about. You will need to spend many, many hours of your life on your business. Would you rather spend those hours doing something you love and enjoy or something you dread? (From experience, I can tell you that doing something you dread is a BAD idea.) So what do you love to do?
Once you have a list of things you love to do, make a list of ways that you can do those things and make money from them.
For example, let's say you love art. You work on your art for hours for free anyway, so making money from it would just be a bonus. Make a huge list of every possible way you could turn your art into a business.
Now go over your giant list of ideas and think about which ones can be used to achieve your company's mission.
Back to our art example. Let's say that your company's mission is to help children learn life skills. How can your art help children learn these skills? Perhaps you can make posters for classrooms, picture books for younger children, comic books for older kids, calendars that teach a new skill every month, etc.
After you have your list of passions and business ideas, look through it to see if any ideas jump out at you and excite you. That is where you need to start your business.
Who would your customers be and what do they need?
Let's say that you're starting a scrapbooking supplies company. There's a very good chance that the majority of your customers will be women because most scrapbooking fans are women. So ask yourself, what is it that women who scrapbook want? Many of them probably have children, so they'll probably want supplies that fit in the "kid" category. And if they have kids, they won't have time to spend long hours cutting out little pieces or managing messy glues. They'll be looking for things that are quick and clean and can easily be locked up or moved to a place where little hands can't get them. Mothers and even women without kids are also likely to be travelers, wanting to create scrapbooks about their vacations, and participants at weddings, birthdays, and other life events, so you'll want to create products that address these categories as well.
Take some time to sit down and think about your customers. There's probably a very good chance that they're a lot like you, so think about what you want when you are acting as the customer. What do you and your friends talk about when you complain about businesses? What do you see missing from the market? Focusing on your customers' wants and needs will allow your company to get a second look, and maybe even get a "Wow! What a great idea," from the people you'll need to impress the most, your customers.
Why should customers come to you instead of going to somebody else (or even doing it themselves)?
This goes along with knowing your customers. If you know what they want, then you can figure out how to make your business stand out in the crowd.
If you're selling skin care products, why would customers choose your products instead of your competitors'? If you're offering a housecleaning service, why would customers hire you?
Lots of companies have great ideas, but it's the companies that have a niche, an advantage over their competitors, that get to move up the business ladder. Always keep your competitors in mind. How can you make your product or service better? (Make it faster, cheaper, more customized, eco-friendly, vegan, safer, etc.)
Start writing a working business plan.
There are lots of entrepreneurs who declare, "I've never used a business plan." Liars! If they even so much as wrote a to-do list for their company, then they've made a business plan.
A business plan is simply a step-by-step plan to build your business. It's where you ask questions like, where will I setup my shop, and which permits will I need? Then you keep adding items to your plan as you answer those questions. Eventually, you'll have a giant to-do list to keep you on track toward your business goals.
Example: Let's pretend you're trying to set up a babysitting company. You will be performing the childcare services at the home of the child (not at your home), and you only wish to work with families you know (no strangers for safety purposes). Here's a simple business plan to get you started.
- How will I get to clients' homes? (e.g. public transportation, driving, biking, etc.)
- Sign up for babysitter and first-aid certification classes and get certified.
- Learn games to play and songs to sing with kids. (e.g. Borrow books from the library and visiting websites about these topics.)
- Determine how much to charge per hour per kid to cover business costs and earn profit. (What are other babysitters charging?)
- Get city and county licenses to run a babysitting business. (What licenses and permits do I need?)
- Get an EIN.
- Find out what taxes I need to pay?
- Set up a business bank account and fund it with startup capital.
- Purchase liability insurance.
- Get a cell phone to use as a business phone.
- Set up contracts, waivers, medical permission forms, and information sheets using legal document software.
- Order business cards and pass them out whenever possible to people I know.
- Tell friends, family members, and neighbors about my babysitting business and give them extra business cards to pass to referrals.
- Volunteer at local elementary school to build networking contacts.
- Order business card magnets and give them to customers, so they can quickly have access to my phone number whenever they need a babysitter.
Note: there is a difference between a working business plan and a presentation business plan. A presentation business plan is something you show to prospective investors and loan officers to show how your company works and why it will succeed. A working business plan is something that you personally use to help you figure out how you'll get your company moving in the right direction.
Do you need a business phone?
If customers or clients will be calling you, then yes. If only vendors will be calling you, then no (your personal phone line will do).
This is an important thing to figure out before you start doing legal paperwork since you'll often need to put your business phone number on your applications. You can often transfer the service into the name of your company after your company is up and running.
You can get a FREE business phone number if you're willing to use the Internet as your phone line. There is a growing number of online services that allow you to give out a phone number that's connected to voicemail. You get the voicemail via your email and return calls using any phone of your choice (just make sure you block the caller ID, so people aren't calling your home at 3am to place an order). These services also offer upgraded accounts, with features such as with local phone numbers, custom answering systems, and call forwarding, which is important if you'll be receiving a large number of phone calls from customers.
I highly recommend getting a cell phone. You can do business while having a day out with your family (but not while you're driving; don't talk on the phone and drive!) or in your office. When you decide that the office is closed, just turn off your phone or mute the ringer and all of your callers will get your voicemail. Cell phones also have the ability to act as digital organizers (storing electronic calendars and contacts), and many have Internet access, so you can even check your email and reorder items that you need to stock up on while you're away from your home. Cell phones are also coming down in price (unlike putting in a 2nd phone line, which the phone company will still charge you an arm and a leg for).
Do you need to rent a PO box or mailbox?
If you will be selling products through the mail or will frequently need customers to mail documents to you, then you must get a PO box at your local post office or rent a mailbox from a local business services store. Otherwise, people will have your home address. This can get confusing if customers think that your home address is a store rather than a house. It can also be a safety issue if you end up having any mentally unstable customers who either really love or really hate your business.
Like the phone number, you'll need to put your mailing address on many of your applications, so consider getting a PO Box before your company gets started. You can transfer the lease into your company's name after your company is up and running.
How much money will you need to get started (start up costs)?
Make a list of all the things you'll need to get started with your new business. Perhaps you'll need basic office supplies. Maybe you'll need a website (highly recommended!). You might even need expensive equipment.
Think about how you can get the things you'll need as well as how much these things will cost you. Will it be better to rent or buy? Can you buy it used? Do you really need the top-of-the-line products, or will the basic quality items be enough for now? Do you already have some of the supplies you need? Which shipping services will you use? Do you need a professional wardrobe?
Now add up the cost of all these necessities. This is your start up cost.
How much money will you need to keep going (monthly expenses)?
Think about all of the things you'll need to pay as your business progresses.
Depending on the type of business you create, you'll probably have lots of monthly bills, like website hosting, extra electricity, extra water, fuel for your car, shipping services, office supplies, insurance, childcare, etc. With planning, these expenses can be brought down to a manageable level that won't break the bank.
Some costs may be a bit more expensive, though. Maybe you'll need to rent industrial kitchen space or booths at shows or marketplaces. Maybe you'll need to rent large industrial equipment. This is where teaming up with other small business owners can be helpful since it will allow you to share the costs.
Add up all of those expected expenses. Remember, you'll need to earn at least enough money from sales to pay for these expenses; plus, you'll need to pay for salaries, including your own. If you don't think that you'll be able to manage making a sufficient amount to cover all your costs, you can always consider starting smaller.
For example, instead of starting a full service landscaping business, you can start with a lawn mowing or leaf raking business and gradually add new services as your profits increase and your customer base grows.
Where can you get the money you need to get started?
I highly, highly, HIGHLY recommend building a business on cash, not credit. Business loans can be useful to get you off the ground, but what if you can't repay them? What if your brilliant idea doesn't sell? This is the reason why it is so important to start small. Start with what you can afford, build a customer base, and work your way up.
If you need a small loan (something you can easily pay back from the wages you make at your day job), go ahead and do it, but strive to build a zero debt company.
If you absolutely must get more money to start your business, look for investors rather than loan officers. Investors get to own part of the company, so if the company makes money, they make money. If the company loses money, they lose money. It's a risk they take, not you. And you can always set up an agreement that after the company makes $xyz of profit, the investor has to sell his/her share of the company back to you.
Start learning about business financial record keeping.
There are books, computer programs, community college classes, and even websites that can teach you the basics of accounting. (I stress, you should learn to use a double entry method of accounting rather than a single entry method. It's a bit more work, but it actually saves you time and money in the long run. Most computer programs will do it for you.) Also, decide if you will use a calendar year or a fiscal year as well as if you will use the cash method or accrual method for taxes. (If you aren't familiar with such terms, just use a calendar year (i.e. Jan-Dec) and the cash method (i.e. the same way you keep track of your checking account).)
Also start looking into bookkeeping software. There are many free bookkeeping programs on the Internet, but they only have a limited number of features. They're good to start with, but you may eventually want to upgrade to a program with more features.
Learn what taxes you'll need to pay.
Go to the business section of IRS website to find out what taxes you'll need to pay.
Go to your state's website to find out about taxes you will owe your state.
Go to your county and city websites to find out about local taxes. Don't forget to find out about sales taxes, which are usually at the state level but can also be at the county or city level.
You will likely need to keep records for your taxes (e.g. receipts, bank deposit slips, invoices, credit card charge slips, canceled checks, account statements, petty cash slips, travel receipts, transportation receipts and log books, entertainment receipts, gift receipts, and asset records, etc.), so start a filing system for them.
Name your business.
Before you settle on a name, make sure that nobody else is using it. Search for it online, and if it pops up, pick a new name. Many states are also starting to give new business owners access to the database of businesses registered in the state, so be sure to check out your state website. Also search for it in these broader databases.
If you use your own, legal name and plan on having a sole proprietorship, make sure that your name is obviously being used in the name of your company, such as the Joseph A. Douglas Insurance Agency. Some states do not require you to register your business name if you use your own name, but always check your state requirements just in case.
Partnerships can use the legal name of all individuals in the partnership, but this tends to create insanely long business names. For example, Alice J. Anderson, Phillip T. Smith, & Donna D. Dewberry Interior Design Services may be legally correct, but it's not easy to fit something that long on a business card. Try making up something shorter instead.
If you are making up a name or using any name that isn't your legal name or implies that there are other people involved in the business (i.e. and associate, and company, etc.), you will need to file a business registration, such as an assumed business name registration or a fictitious business name statement. For example, if Joseph W. Baxter runs a construction company and wants to call it Joey & Company Construction, he'll have to register an assumed business name because he isn't using his legal name, and even if he did use his full legal name, he's still have to file because his company name (& Company) suggests that there are other individuals involved.
You may also want to register an assumed business name if your company has a long legal name and you want to shorten it. For example, a company with the legal name Zelidoo's Family Restaurants of Long Island Inc. (which doesn't quite flow off the tongue) could also operate under the assumed name Zelidoo's if they register Zelidoo's as the company's assumed business name.
Registrations are usually done through your county or state.
What is the legal structure of your business? How will you own your business?
There are many different business forms. Your business could be a sole proprietorship, general partnership, limited partnership, limited liability company (LLC), professional limited liability company, limited liability partnership, C corporation, S corporation, or professional corporation. And new business ownership forms are always under development.
The rules regarding legal structure vary from state to state, so ALWAYS check your state's rules before choosing a legal structure. Most states simply require you to do an initial registration and an annual renewal, both of which almost always require a registration fee.
A sole proprietor is not only the owner of the business, the proprietor is the business. If the business is worth $1000, the the proprietor is worth $1000. When the business gets sued, the proprietor gets sued, and all of the proprietor's assets (house, family car, television set, etc.) are at risk. The business doesn't get taxed for profits; the proprietor does. When the proprietor dies, the business dies and the business assets go to the proprietor's heirs. (The heirs can reform the business if they wish.) It's pure self-employment. This is the form of business most work-from-home entrepreneurs have, but you may want to become incorporated or form an LLC if your business may be at risk of being sued or if you have other businesses as clients.
A general partnership is similar to a sole proprietorship when it comes to taxes and liability, but in a partnership, each partner gets a specified amount of ownership in the company rather than just having one owner. Also, like a sole proprietorship, when one partner dies, the partnership dies. A major problem of this is that you'll have to start a new company to take it's place, and unless your partner has willed all of his/her business assets to you, it is likely that you will not have any of your partner's assets to help you form your new company. The main problem with a partnership is liability. If your partner does something illegal or causes damages in the name of the company, YOU can get sued for your partner's actions.
A limited liability partnership is much like a general partnership, but you will not be held liable for the wrong doings of your partner. If you make a mistake, though, your personal property (e.g. house, car, etc.) are at risk.
A C corporation is a separate entity, a creature that consumes and produces, grows and shrinks. The corporation is owned by shareholders rather than a single individual and can be transferred to new shareholders. Shareholders are taxed for the dividends, wages, salaries, and other benefits they receive, not how much the company profits; meanwhile, the company is taxed separately. If the company gets sued, only the company's assets are at risk; the shareholders won't lose their houses because the company goes bankrupt. If you need more money, you can sell more shares of the business. And even if every single shareholder dies, the company continues to live. States often have strict regulations about how corporations can operate, so be sure to check your state's laws.
An S corporation is like a C corporation in structure, but it avoids double taxation because the profits go straight to the shareholders and is treated as personal income instead of company profit. However, there is a limit to how many shareholders the company can have, which can make it difficult to grow the company. If you have no desire to grow the company into something with dozens of shareholders, then it may work well for you.
Corporations have lots of advantages, but they are often a bit too complicated, though, for people starting a home-based business. So how can you get the benefits of liability protection without jumping through hoops to form a corportion? An LLC.
The structure of an LLC varies from state to state. The beauty of an LLC is that it is very flexible. It can give a sole proprietor the benefit of having some liability protection (in case the company gets sued) but not the complication of additional taxes because it can be taxed just like self-employment income. If you set up an "Operation Agreement," you can often specify when the company terminates, including what will happen to it if a member dies. Forming a corporation or LLC often sounds intimidating, but it's actually not very difficult. There are even kits to help you do it yourself, and you can always get a lawyer to help you if it seems too complicated.
Get an EIN (Entity Identification Number) for the IRS.
Once you have registered your company with the state (if necessary) get an EIN. An EIN is like your business's social security number.
If you are doing business as a sole proprietor or single member LLC, you can usually use your social security number as your tax ID, but I highly recommend getting an EIN in case you have to provide the number to clients, banking institutions, etc.
If you plan to grow your business into a separate entity as an LLC or corporation or if you plan to have partners or hire employees, then you definitely must get an EIN.
Setup your financial accounts.
DO NOT use your personal bank account to pay for business expenses or to receive business income. It will make tracking business transactions difficult and can have legal consequences.
Set up a bank account just for your business transactions. You can set up an account in your own name and use it just for business transactions if you're running a sole proprietorship, but if you're business is an LLC, partnership, or corporation, you'll have to set it up under your business's name.
Get a credit card just for your business transactions. You can apply for a card using your business name or get one in your name and use it just for businesses purposes. BE CAREFUL with your credit card. You do not want to fall into deep debt before you even get started.
Accept credit and debit cards by getting a merchant account. You MUST do this. If you don't accept credit and debit cards, you will have a difficult time doing any online transactions. Customers may even assume that your company isn't professional if it doesn't accept electronic transactions.
I can't say enough about how much I love PayPal. No setup fee. No monthly fees. Free shopping carts for your website. Credit cards. Debit cards. Transfers directly from bank accounts. Seamless integration with eBay. You can even earn interest on money kept in your PayPal account. They make my life so much easier. If you're going to do business online, you MUST get a PayPal account.
I highly recommend getting your required insurance before you start selling your products and services.
Let's say one of your toy products ends up breaking into pieces and some kid chokes on them or your landscaping service accidentally cuts down Mrs. Patel's prize-winning apple tree. You're going to need liability insurance to pay for the law suits.
And don't forget property insurance. For example, if house burns down, along with all of your business supplies and products, you'll need to replace them, and that will cost money. Insurance will help you cover the losses.
Register your domain name and secure a web host.
You will want to have a website. Correction, you NEED a website. Some customers won't even consider a company that doesn't have a website.
Register your domain name as soon as possible. If you plan to use your company's name (which you probably will), you'll need to do it quickly before it is taken. If it is already taken, you will need to come up with some creative names (include hyphens, use abbreviations, or initials, come up with a catchy title for a catalog or website that describes what you do, and so forth).
Find an affordable website host. They're not very expensive. You'll want to make sure that they include email service in the package, so your email address will be email@example.com for professional email correspondence. You'll also want to make sure that they offer any extra services and support you may need (e.g. FrontPage extensions if you plan on using FrontPage to design your site, asp support for asp pages, php support for php pages, etc.). If you don't know how to make a web page, use a template layout (many web hosts offer them) or hire somebody to create a site for you. If money is tight and you want to hire somebody, try hiring website design students or a website designer just starting out with her own business.
Protect your trademarks and service marks.
If you've invented something, designed something, or created something, you need to get a patent. If you plan on selling your design to a manufacturer to let them deal with all the headaches of making and marketing the thing, you may be able to get away with having them sign a non-disclosure agreement (so they don't tell anybody about it) and a contract stating that they will not use the design without your permission before you actually show it to them, so they aren't tempted to steal it from you without facing a lawsuit.
If you have logos, brand names, etc. that you want to register, you will also need to protect those as well as trademarks and service marks.
For everything about US patents and trademarks, visit http://www.uspto.gov
If you can't afford to register your marks with the USPTO, at least register them with your state since state registration is much cheaper and has fewer restrictions. It isn't necessary to register your trademark, but it does offer some added protection.
If you register your trademark, you can put the official ® next to your logo. (Note: You can only register your trademark or service mark with the USPTO after you have actually used it in your industry. This keeps people from abusing the trademark system by trying to trademark stuff that they don't actually use and trying to sell it for a lot of money to somebody who wants to use it. So, put it on some letterhead and business cards, and include it on your products and advertising. Then register it as soon as you can afford to do so.)
If you do not register your trademark or service mark, you can let people know that you are claiming it as a trademark or service mark by putting a TM or SM next to your logo.
Protect your intellectual property.
If you have written something or created a work of art, you are automatically protected by copyright from the moment you put it in a tangible form. You may want to consider registering it with the copyright office for extra protection, though. You may want to consider registering your work in your own legal name, not your business name, if you think that you might sell off your business and still want to get royalties for the use of your work. You can always create a contract of license to let your business use what you have created.
For everything about US copyrights, visit http://www.copyright.gov/
See other Kristen's Guide topics in this category.