9 Steps: How do I start a small home business?

Brad Nakase, Attorney

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Do you identify with this story?

After five years, Scott has quit his job at Home Depot to start his own landscaping business. With his passion for gardening and design, Scott is eager to run his own business from the comfort of his home. He can’t wait to make his own decisions and have the responsibility of running his own home business. However, he is not sure where to begin. He has always been an employee, never an owner. He has the passion for the job, but not the business expertise. He wonders what specific challenges comes with starting a home business, and whether there are any steps he can follow to make his landscaping home business become a reality.

Is It a Good Idea to Start a Home Business?

There is no time like the present to start that dream small business from home. What with the modern age’s ever-improving technology and the increased normality of working from home, there has never been a better time to launch a home business. But it is always wise to keep one’s feet on the ground. While there are certainly perks to starting a home business, there is still a process full of challenges involved in getting the idea off the ground and successful, as with any traditional business.

For anyone who is interested in starting a home business, there is a series of steps that should be followed to ensure a smooth process creating the business. This process will require planning, preparation, and legal paperwork as with any business.

Even though a home business simplifies some aspects of running a company, it can still feel overwhelming and stressful at times. However, by taking the process one step at a time, starting that dream business becomes much more manageable.

When an entrepreneur first decides that they want to create a home business, the first step in getting started is to decide what kind of business they want to run. There are a lot of home business ideas out there, and a quick Google search will show examples of what other people have thought up, as well as any current trends. Certain industries are more friendly and popular for home businesses than others based on the type of work being performed. For example, according to the Small Business Administration, a company involved in the information industry is 70% more likely to be based at home. Similarly, construction businesses are almost 70% more likely to be home-based.

But how does an individual decide on the type of business that best suits them and will work as a home-based business?

Ironically, this step in the process is a whole process in and of itself. There are a few steps to figuring out an idea, and this idea will influence the steps from this point onward.

To come up with the perfect business idea, an individual should consider the following questions:

  • What Skills or Talents Does the Entrepreneur Have?

An aspiring businessperson should think about their skills, talents, and passions as a way to come up with business ideas. For example, if someone is talented at baking and has a passion for it, then he or she should consider starting a baking business. Perhaps he or she make their own cakes and pastries and sell them through their home business.

  • How Can These Skills and Talents Turn into a Business Idea?

The truth is that not every skill or talent will be translatable into a valid business idea. This could depend on a number of factors including financial feasibility, the limits of one’s abilities, geographic location, etc. For example, perhaps someone is very talented at swimming. However, they do not live near the beach and their community does not have any public pools. In this case the idea is not feasible.

  • Can the Business Idea Be Run from Home?

Not only is it important to come up with an idea that suits one’s talents, but it is also crucial to come up with a business concept that can work as a home-based business. For example, if a person is a talented chef, it may at first seem like a good idea to start a private chef business from the comfort of their home kitchen. However, due to laws and regulations, it might be difficult to run a catering business from home.

After a business owner has considered the feasibility of his or her idea for a home-based business, it is necessary to ensure it will be worth investing money and time in. To conduct this evaluation, a business owner should do the following:

  • Conduct Market Research

An entrepreneur should first conduct some market research to make sure that there is market demand for the product or service. This process will also help a business owner determine who their industry competitors are, what their value proposition is, and what the target clientele and market look like.

  • Think About Startup Costs

Before deciding on any idea, it is a good idea to consider how much it might cost to start that kind of business from home. For instance, if someone is thinking about becoming a freelance writer, the startup costs for this at-home profession are low. This is especially true if one already has access to the internet and a computer. However, if someone is interested in starting a sales business, then more money might be needed to deal with inventory, packing, and shipping.

  • Test the Idea Before Committing

It is a good idea to test an idea before deciding if it is a worthwhile investment of one’s time and money. So, if a person is planning to sell a service, then he or she may wish to offer the service for free to test the market. If a person is planning on selling a product, then he or she may wish to test the product with a group of customers or advertise it on a crowdfunding site to get feedback prior to going forward.

In the end, there are many ways to find success in the world of home businesses. After losing their traditional jobs, some people decide to become entrepreneurs and run a business from the comfort of their home. Sometimes, the new business has nothing to do with their old job but is a passion project that they may have dreamed of for a while. Once they start a home business, many people become addicted to the flexibility and freedom from office politics. Indeed, they may never want to go back to a traditional office environment.

2. How to Write a Business Plan for a Home Business

After deciding on a valid home business idea, the next step in the process of setting up the business is to create a business plan. Writing this plan can be one of the most time-consuming parts of the process because it involves learning about how to start and run a small business. However, it is essential not to skip this step. It is important in determining potential growth and how operations will proceed.

A business plan should have all the information that an individual needs to run a business from home. There are different ways to write a business plan, but there are certain elements that all have in common. These include the following:

  • Executive summary
  • Overview of the business
  • Market analysis
  • Description of service or product
  • Marketing and sales plan
  • Financial plan and projections

The process of creating a business plan will give the business owner a chance to think more in depth about the topics discussed in the first step, such as feasibility and market research. Thinking about the business in this way will help the owner know how to operate the business. In this way, the business plan acts as a kind of roadmap that will help the business grow and become successful over time.

A business plan is also helpful in that it can help an owner seek funding or investors. Down the road, the business may need money to grow or expand. If an owner has a funding plan prepared for the business, then potential investors and lenders will feel more comfortable. They will know that the owner has considered all risks and is financially responsible and aware.

While an owner creates a business plan, he or she should also do more research about the field or industry in which the home business will operate. Sometimes an entrepreneur comes up with an idea, and he or she does not necessarily have experience in that subject area. Research can therefore build up knowledge and expertise, making up for a lack of a track record. It is important for a person in this situation to understand the challenges and hurdles involved in their particular field.

3. How to Choose a Name and Business Entity for a Home Business

Once an entrepreneur has completed their business plan, he or she is ready to come up with a name for the business. It is wise to pick a name that is memorable and that informs the public what the business does, or what its purpose is.

After coming up with a name, a business owner should ensure that the name is available to use and that no one else has already claimed it for their business. There are a few resources one may use to check name availability. One of these sources is the secretary of state’s website or business bureau website. One may also check the U.S. Patent and Trademark Office or even conduct a basic Google search to see what pops up.

However, it is important to look beyond one’s own state, especially if a business owner plans on having an online part of the business that sells outside the home state. The owner will want to make sure that a potential domain name is available to use for the business’ website. If a business is called Patty’s Cakes, then the owner of the business will need to make sure that a domain like “pattyscakes.com” is available for use. If there is another domain with the same name in use, then Patty’s Cakes might not be the best option for the business.

In addition to picking a name for the business, an entrepreneur must also select what type of entity the business should be. The entity he or she picks will define the business’ structure. The business entity he or she chooses will affect how the business is taxed as well as the legal risk the owner is exposed to. It will also determine whether or not the owner must register the business with the state.

For this decision, it may be helpful for a business owner to talk with an attorney or legal service to ensure that he or she is picking the right entity type for the particular business. There are a few types of entities to choose from, each with their own benefits and disadvantages:

  • Sole Proprietorship

There are a few advantages to creating a sole proprietorship. One of these is that it is easy to start a sole proprietorship in that the owner does not need to register the business with the state. Filing taxes is also simple. There is also no legal paperwork to worry about, and there are no corporate formalities such as board meetings.

However, an owner of a sole proprietorship will be personally responsible for all the business’ debts and obligations. In this sense, there is no separation between the owner and the business. This means that if the business is sued, the owner may lose his or her personal assets, such as their home, car, or personal savings. It is also harder for the owner of a sole proprietorship to build business credit.

  • General Partnership

One of the advantages of starting a general partnership is that it is easy to start. Like a sole proprietorship, it is not necessary to register the business with the state. Another advantage of this entity type is that partners divide the profits and losses amongst themselves. Also, it is possible to deduct most of the business’ losses on personal tax returns.

However, a disadvantage is that each owner of a general partnership is personally responsible for all the business’ debts and obligations. This means that if the business is sued, the partners may lose their assets (homes, cars, savings, etc.) in a judgment. Disputes between partners can also harm the business. In addition, it is harder for a general partnership to build business credit.

  • Limited Liability Corporation (LLC)

One of the best advantages of a limited liability company (LLC), and what makes it so popular among business owners, is that the owner is not personally responsible for the business’ debts and obligations. This means that if the business is sued, the owner is not legally responsible, and his or her assets are safe from confiscation. A business owner may also choose how they want their LLC to be taxed. Another benefit is that an LLC does not have as many formalities as a corporation.

That said, LLCs tends to be more expensive to start than a sole proprietorship or a general partnership. It is also necessary to register the business with the state.

  • C-Corporation

Like a limited liability company (LLC), one benefit of a corporation is that the owner is not personally responsible for business debts and liabilities. This means that if the corporation is sued, the owner will not lose personal assets (home, car, savings, etc.) in a judgment. There are also more tax deductions for corporations than other entity types. There are also lower self-employment taxes.

However, it is more expensive to create a corporation than it is to create other entity types. Also, corporations face double taxation. In addition, running a corporation means dealing with a lot of corporate formalities such as board meetings. An owner is also unable to deduct the business’ losses on his or her personal tax return.

  • Other Notes on Choosing an Entity Type

It is important to remember that if a business owner chooses to structure their home business as a sole proprietorship or a general partnership, it is not necessary to register the business with the state in which it will be operating.

As a result, the business will not be registered under a specific name. The business will by default be given the owner’s legal name. Therefore, if the owner wishes to start a home business with a different name, he or she will have to file a DBA, or “doing business as.” A DBA is filed with the state and allows the owner to use that name for his or her business.

4. How to Register a Home Business

If a business owner decides to structure his or her home business as an LLC or C corporation, then it will be necessary to register the business with the state in order to operate it legally. Each state has its own process for registration. To learn about a state’s specific process, one can consult the local Secretary of State or business bureau for instructions on how to register a business.

However, whether or not an owner registers his or her company with the state, it is necessary to register the business with the federal government. The purpose of this is to receive an employer identification number, or EIN. An EIN is the equivalent of a Social Security number, only for businesses. This number has a number of benefits, so it is a good idea to apply for one whether or not it is legally necessary for the business.

This number will be helpful when hiring employees, opening a bank account for the business, and filing the business’ taxes. It is easy to apply for an EIN online through the IRS.

5. How to Get a Business License for a Home Business

After a business owner finishes registering the business with the state and federal governments, he or she should next go about getting a business license for their home business.

Business license requirements for home businesses tend to be different than those of other business types. Also, the licenses and permits needed will depend on the state in which the business is located.

When starting a small home business, an owner should look into the following types of business licenses:

  • Home Occupation Permit

Typically, home-based businesses will need to acquire a home occupation permit in order to legally operate. This permit proves that a home-based business does not add to traffic, noise, or poor environmental conditions in the local area.

  • Property Use and Zoning Permits

An entrepreneur who is starting their own home business should research local zoning laws that apply to home-based businesses in the area. Some places have strict regulations that either limit or prohibit home-based businesses’ operations. To determine whether these apply, one should check with the local or city government to learn about local regulations.

  • General Business Licenses and Permits

In addition to the permits specifically related to home-based businesses, an owner will also want to consider general licenses. For example, it might be necessary to get a business operating license, a professional or trade license, a sales tax permit, or more.

Even if a person is simply starting an online consulting or freelance business at home, it may still be necessary to get the relevant permits. In addition to checking local and state business resources, one may also consult a legal service to ensure compliance with local laws and regulations.

6. How to Separate a Home Business and Personal Finances

Once a business owner has ensured that their business is official and legal, he or she is ready to learn how to operate a business from home. The first step in this process is managing finances.

Even if a business is a solo operation run by one person, it is very important to separate business and personal finances. This is especially important when first starting out. Because home-based operations are typically sole proprietorships or general partnerships, the owner(s) typically accepts personal responsibility for the business’ debts and liabilities. This means that it is critical that an owner separates their personal assets from the business’ finances to protect them. Also, this separation is a good idea for bookkeeping, filing taxes, and organization.

How to Open a Business Bank Account

As discussed above, one way to separate business and personal finances is to apply for an employer identification number (EIN). However, it is also useful to open a business bank account.

This bank account can be used to manage revenue as well as to pay vendors, services, or employees.

There are several business bank accounts to choose from. However, it might be best to start at the bank where one already has a personal account. It is also possible to look for a free business checking account.

Because a business owner is running their company from home, it may be useful to search for a business bank account with online and mobile banking, as well as mobile check deposit and free ACH payments.

How to Apply for a Business Credit Card

After opening a business bank account, a home business owner should then continue to separate and manage finances by getting a business credit card. A business credit card is useful in that it helps create business credit and can be used for business transactions. This will make filing taxes much easier.

There are a number of options when it comes to business credit cards. It might be best to look at the bank where one opened the business’ checking account. Or it may be preferable to search by rewards preferences, such as travel points or cash back.

How to Choose Accounting Software

The last step involved in managing finances is selecting an accounting software. The most successful home businesses use one of these automated systems to make filing taxes and bookkeeping easier. Luckily, there are free options in addition to accounting software designed specifically for home-based businesses.

7. How to Secure Funding for a Home Business

One of the good aspects of starting a home business is that an entrepreneur does not have to pay for renting an office space or opening a physical location. In fact, sometimes there may not be any business startup costs whatsoever, depending on the service or product.

That said, depending on the type of business, an owner may need to get financing to help pay for the startup costs. For a business that needs a lot of inventory or equipment, there will certainly be some initial costs to deal with. The good news is that almost 50% of home businesses are able to get up and running with less than $5,000. However, if an owner’s business requires more money than that, it may be time to explore financing options.

Generally, it is harder for new businesses to secure financing through traditional methods. For this reason, it might be best to start off with a business credit card or a line of credit. There are also more creative forms of financing such as a crowdfunding campaign or working with friends and family.

8. How to Set Up a Home Office

Once the above steps are accomplished, a business owner can move on to running the business from their home. To do this, it is important to have a space devoted to working. This can be difficult to achieve when a home business owner is working in the same place that they live.

However, by picking a specific place, such as an office, that is dedicated to work, this separation can be achieved. A home office can boost productivity and keep personal matters distanced from work.

When working at home, it can be easy to get distracted. Therefore, it takes dedication and discipline to start and run a home business. This is especially the case when no one is supervising the work expect the owner him or herself. All the responsibilities fall on the owner’s shoulders.

To set up a home office, a business owner should consider doing the following:

  • Choose a space dedicated to work
  • Invest in technology, tools, and furniture
  • Decorate the office
  • Minimize distractions

When a business owner has created a comfortable space to work in, running a business from home becomes much easier.

9. How to Set Up Home Business Tax Accounts and Learn About Deductions

One of the hardest parts of running a business can be figuring out business taxes. Home businesses could have unique taxes. A business owner will need to pay self-employment taxes every quarter to both the state and federal government. If the home business owner has employees, then he or she will need to set up payroll withholding accounts. Similarly, if the home business owner collects sales tax, the he or she must set up sales tax accounts with the state.

When running a home business, there are certain home office tax deductions that one should consider. If a home business owner uses a home office regularly, then he or she may qualify for the home office deduction. It is possible to claim this deduction by calculating the square footage or tallying home office expenses using Form 8829.

Using this deduction can save money when tax season comes around.

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