Legal Traps for the Unwary Home-based Business
Sole-proprietors, freelancers, and start-ups frequently work from home (or at least begin there). Unfortunately, it is not as easy as putting up the proverbial shingle. There are many legal traps for home-based businesses. Before launching your home-based business, do not forget to investigate these often-overlooked legal matters:
- Risk management: Do you want to be a sole proprietor? Do you want the protections of an Limited Liability Company or a corporation? Each type of entity has its advantages and disadvantages. Research these or consult a professional for more information.
- Business name: Do you have a business name? Did you properly register it? Even if you choose to be a sole proprietor, you might need to register a fictitious name, depending upon what you named your business.
Licenses and Certifications
Do you need a license or certification to perform the service? From accountants to hair stylists to the home baker, so many professions now require a license or certification. Verify whether you need one. Also, some industries, such as hair styling or food preparation, require inspections. You do not want to temporarily close your business while waiting for a license, certification, or inspection.
- Do the zoning laws allow home-based businesses? If not, you will need to seek a variance or choose another location.
- Does your municipality regulate parking and signage? This is more common than you think and even some small communities and townships regulate these items.
- Does your subdivision, deed, or homeowner’s association place any restrictions on home-based businesses?
- In short, do not spend money on letterhead, business cards, and advertising without first confirming you may lawfully operate your business out of your home.
Did you purchase business liability insurance in case a client or customer is injured on your property? Slips and falls happen. Injuries occur. Contact your insurance company to confirm coverage or obtain additional coverage for your business.
Tax and Accounting Matters.
- Have you set up an accounting system for your business and opened a bank account solely for business use? You do not want to mix personal and business account for a variety of reasons. In addition, a separate business account provides a more professional appearance to your business.
- Did you obtain a Tax Identification Number? If you are performing services for which you will receive a 1099-miscellaneous form, you will probably not want to give your personal social security number to the client. Instead obtain a business EIN (employer identification number).
- Do you need a sales tax license? You would be surprised how many services and goods are taxed.
Do you have the security measures (physical and technological) to protect confidential customer and client data?
In the past, home-based businesses were often treated as hobbies, but in today’s economy, they are real, profitable businesses. Treat your home-based business as you would a business located in the central business district and follow through with the seemingly picky, but necessary, legalities.
Be prepared. Avoid home-based business legal traps
These are just a few of the traps that catch home-based business owners. With careful research and planning you can avoid these traps. When in doubt consult an attorney, tax professional, or other business consultant.