If you’re looking at starting a home-based business, you’re not alone. According to the Small Business Administration (SBA), almost half of small businesses are run from home. During the COVID-19 pandemic, the U.S. saw a record number of new businesses – many of those home-based. Many of these entrepreneurs found themselves unemployed, temporarily laid off or discovered that working from home was something they wanted to be able to do full-time.
If you’re one of the budding entrepreneurs looking into starting your own home-based business, here are some important factors to consider along the way. Be sure to consult with your legal and financial advisors as well.
Determine Your Home-Based Business Idea
Your business should be something you enjoy; in particular because you’re going to be doing it in the same place you live your everyday life. Take some time to think about your business idea: what you’re passionate about, what you excel at and what you enjoy doing. Of course, you want to have a profitable home business idea, so carefully consider how this venture will make you money.
Some home business ideas include:
- Selling homemade products such as jewelry or crafts
- Teaching classes, either online or in person
- Offering a service such as photography, party planning, pet sitting or personal training
- Offering online freelance work such as web design, coding or copywriting
- Starting a catering business
- Repairing cars, bikes, computers or furniture
- Starting a subscription box business
Sometimes it’s helpful to talk to friends, family, business acquaintances or other entrepreneurs to get ideas and get their opinions and advice about the feasibility of your desired venture. Once you have an idea for your home business, make sure you do research to determine if there’s a market for what you’re providing and who makes up that market.
Write a Business Plan
If you don’t have a business plan, you need to think about creating one before you go much further in the planning process. A business plan is important because it summarizes both your vision for the company and your blueprint for the company’s operating success.
The business plan is a written guide that details the startup and the future direction of your company. Most business plans include:
- Cover page—Identifies your business
- Table of contents—Organizes information for the reader
- Executive summary—Provides a “big picture” view of the plan, highlighting the factors that will lead to success
- Business background—If it is a brand-new business, include your background and skills
- Marketing plan—Relates the business’s marketing strategy
- Action plan—Summarizes how you will create and deliver your product or service
- Financial statements and projections—Illustrates how the business will perform financially based on the plan’s assumptions
- Appendix—Includes statistical analyses, marketing materials and résumés.
Estimate Startup Costs
According to the SBA, there are various types of expenses to consider when starting your business. First, make sure to separate one-time versus ongoing costs. One-time expenses will be mostly related to starting your business. This would include any of the incorporating or legal drafting expenses and one-time purchases such as a desk, computer, printer, website, etc. Ongoing costs, by contrast, will be paid on a regular basis and can include things like payroll, advertising, licensing, insurance and website maintenance. Fixed expenses will be consistent from month to month, whereas variable expenses will depend on the direct sale of your product or service. And finally, take into account essential expenses, which are items or expenses you absolutely need to start your business, versus optional expenses that aren’t completely necessary and could be purchased at a later date.
Most Common Startup Expenses
Here’s a short list of costs you’ll likely have as a new business:
- Legal fees
- Web hosting and other website costs
- Office furniture
- Basic supplies
- Basic technology
- Insurance, license or permit fees
- Advertising or promotions
- Business plan costs
- Payroll for any employees
- Taxes
Determine Funding
Once you’ve estimated your startup costs, you’ll have a better idea of whether or not you’ll need funding. There are a few ways to obtain funding for your home-based business:
Self-Fund
Otherwise known as bootstrapping, self-funding lets you leverage your own financial resources to support your business. Self-funding can come in the form of turning to family and friends for capital, using your savings accounts or even tapping into your 401(k). With self-funding, you retain complete control over the business, but you also take on all the risk yourself. Be careful not to spend more than you can afford, and be especially wary of tapping into retirement accounts early – be sure to talk with your financial advisor to understand the penalties and fees.
Small Business Loan
If you want to retain complete control of your business, but don’t have enough funds to start, consider a small business loan.
To increase your chances of securing a loan, the SBA recommends you have a business plan, expense sheet and financial projections for the next five years. These tools will give you an idea of how much you’ll need to ask for and will help the bank know they’re making a smart choice by giving you a loan.
Once you have your materials ready, contact banks and credit unions to request a loan. You’ll want to compare offers to get the best possible terms.
SBA Microloan
SBA microloans are a great option for entrepreneurs with good personal credit and a solid business plan. These loans provide up to $50,000 for small business owners to purchase inventory and equipment or to provide the working capital required to get a company off the ground. These are part of the government-backed SBA loan program, so they come with favorable repayment terms and some of the best interest rates you can score – especially as a new business owner.
Set Up a Business Bank Account
When you have your own business, keeping your business finances separate from your personal finances will be crucial for bookkeeping, tax filing and general organization. Therefore, you should consider opening up a business bank account. This account will be used to manage any money coming into your business, as well as for paying suppliers, services or employees. There are a variety of business bank accounts to choose from – however, you might start with the bank where you have your personal account, or look for a free business checking account.
Since you’re running your business from home, you may want to focus your search on a business bank account with online and mobile banking, mobile check deposit and free ACH payments.
You may also want to consider a business credit card, which can help you establish business credit and can be used for any transactions related to your business – which will make filing your taxes much easier to navigate. Talk to your financial and tax advisors for more information.
Do the Legal Work
Before you commit to a business, make sure everything is on the level. Here are some things you should review with your lawyer:
- Check zoning rules. Residential zoning laws may allow small, non-polluting home businesses to operate, as long as any home containing such a business is used primarily as a residence and the business activities don’t negatively affect neighbors. To find out whether residential zoning rules allow the home-based business you have in mind, have a look your local ordinance via your city or county clerk’s office, the city attorney’s office or your public library. If you won’t have a sign, work with toxic materials or see clients in your home, you might be able to get a waiver.
- Check with your homeowners association. Check your homeowners association’s covenants and restrictions, as well as your lease agreement if you rent, for any restrictions on home business.
- Contact your city or county regarding a business license. Most areas have a business license requirement. Usually, it’s a relatively small cost.
- Contact your state’s occupational regulatory agency to see if your business is regulated and requires additional permits or licenses. For example, most businesses involving grooming (people or pets), financial help, childcare and food are regulated by the state. You may also need to get a permit.
- Get a sales tax license from your state’s taxation or comptroller’s office if you sell tangible goods. This allows you to collect and pay sales tax.
- Consider getting an employer identification number. You can use your Social Security number as your EIN, but you may not want to. While not required in a sole proprietorship, it is necessary if you employ people – and it’s free to obtain through the IRS.
- Protect your intellectual property. If you’ve invented or created something, you can protect it with a patent, trademark or copyright.
Pick a Business Name
The name of your business is more important than you might think. It has to be a name that is memorable, inspires confidence and attracts new customers. It should be easy to remember and distinguish your business from the competition.
It helps to come up with a list of names and test drive them with friends, family or business acquaintances. A name that’s too generic may not set you apart from your competition and can be difficult to register or trademark. Also make sure that if your product or service is included in the name, it’s not too narrow to pigeonhole you, and not too broad that no one will know what you offer.
The name should be relatively short and easy to pronounce and spell. You may want to also think about a logo and how the name would translate visually.
Be sure to check whether anyone else is using the name, since state law usually prohibits two similar business from using the same or similar names. Also, consider the meaning of your name; most states don’t allow use of a name that would confuse or mislead consumers about the type of business or the qualifications of the person running it.
Determine Your Business Entity
The type of entity you choose for your home-based business determines how your company is structured and taxed; it’s key to talk with a business attorney to pick the right format and help ensure compliance. The three most common entities for home-based businesses include:
Sole Proprietorship
The simplest business entity, with one person (or a married couple) as the sole owner and operator of the business. If you launch a new business and are the only owner, you are automatically a sole proprietorship under the law. There’s no need to register a sole proprietorship with the state, though you might need local business licenses or permits depending on your industry.
Partnership
Partnerships share many similarities with sole proprietorships – the key difference is that the business has two or more owners. There are different kinds of partnerships; most people are familiar with: general partnerships, or GPs, and limited partnerships, or LPs. In a general partnership, all partners actively manage the business and share in the profits and losses, which can also affect liability.
LLC
LLC stands for Limited Liability Company. A limited liability company is a business entity that is separate from its owners, like a corporation. However, unlike a corporation, which must pay its own taxes, an LLC is a “pass-through” tax entity by default: the profits and losses of the business pass through to its owners, who report them on their personal tax returns just as they would if they owned a partnership or sole proprietorship.
Secure a Domain Name
Once you’ve decided on a name, registered it and filed your incorporation papers, secure an online domain name for your website by visiting a domain name registrar such as GoDaddy or Google Domains. You can’t buy just any domain, of course – only one that isn’t already registered by another person or business and that bears a valid domain suffix. The most popular suffix is .com, which is supposed to indicate a commercial site, but you could also go with .net, .biz or .org.
Look Into Business Insurance
The type of insurance coverage you need for your home-based business will depend on your type of business. A general liability insurance policy can provide coverage for business equipment and inventory and liability protection for home-based, business-related activities such as a client falling or inventory product causing damage.
Because every type of business is different, you should consult an insurance broker to understand if special coverage is needed, like professional liability for giving advice or caretaker coverage for an at-home daycare.
It’s important to note that your homeowners insurance likely excludes coverage for business activities, including for the items you own for your business. Thus, it’s important to secure the right coverage. Talk to one of our business insurance specialists to learn more.
Create a Space
One potential drawback to having a home-based business is that your business is right where you enjoy your leisure and family time. It’s important to choose a designated space that will have minimal distractions, can accommodate employees and/or clients if they will be on site and has the furniture, tools and technology you need to do the job.
Market Your Home-Based Business
Home-based businesses may need to market their business even more than traditional storefronts. Here are some important marketing tools to consider:
Website
A website is crucial to your business, no matter what you’re offering. You can create one yourself with with DIY tools such as Squarespace, Wix and Godaddy, or hire a web professional to create one for you. Make sure your website is mobile-friendly and be sure to ask for search engine optimization, which can help improve your rankings in an online search.
Social Media Profiles
Social media is a free or inexpensive way to market your business. You don’t have to be on every social media site; just the ones your target audience is using. Facebook is generally good for a diverse audience, but if you’re targeting professionals, you may want to try LinkedIn. If you have lots of visual content, Pinterest, Instagram or YouTube might be a good fit.
Whichever ones you go with, make sure you’re keeping your pages updated (posting at least once or twice a week) to develop consistency with your followers. Down the line, you can consider buying ads targeted to your audience to engage current and new customers.
Traditional Marketing
Traditional marketing includes “offline” marketing such as direct sales, TV, radio and mail advertising. Traditional methods relied heavily on print advertising such as magazines, coupon books, billboards and other printed promotional materials like catalogs or brochures. While there is a cost involved with traditional marketing, it again depends on who your target audience is and how they consume their information.
Ultimately, a home-based business can afford the best of both worlds – doing a job you love in a comfortable, convenient environment. While it can often take more time and dedication than working for someone else, being your own boss can also be just as rewarding.