Over the years, we’ve received a lot of queries from our readers whether the “usual legal strings” apply to them if they start an home business. Someone wanted to check whether she can make and sell cupcakes from home — without getting any food permits or licenses. Another person inquired whether it is ok for her to operate a daycare business from home “under the radar.” One guy asked whether he needs to bother with any legal filing and documentation to start a blog and earn money from advertising. We’ve also gotten questions whether a person can open a retail store in their own home.
Just because the business is home-based, it is wrong to think that you can skip the legal requirements and regulations imposed by the government. Or that your business is too small for the officials to go after you and your business.
Legal requirements are put in place to protect the general public and your customers, as well as you and your business. For some businesses, there are standards put in place especially if the products or services affects the the safety of the public such as daycare, food, or even a handyman business. It is your task as the business owner to ensure that your business complies with these standards. There are also some legal requirements that help protect you and your business, such as trademarks and copyrights, and even legal business structure. If you are hiring employees, there are employment and labor laws that you need to be aware of and follow.
Some of these legal requirements include:
- Business structure – e.g. sole proprietorship, corporation, LLC, partnership
- Intellectual property laws, such as trademarks, patents and copyrights
- Business license to operate the business
- Advertising and marketing rules, including packaging and labeling
- Online business regulations such as collection of sales tax
- Financial laws that protect your business and customers
- Workplace safety and health laws
- Financial contracts regulations such as compliance with Uniform Commercial code
- Regulations governing hiring of foreign workers
Learning all the legal requirements for your specific business is not easy, and may even be costly. For your food business, you may find that your home kitchen can never pass inspection from the health department, and that you need to invest in a kitchen that will meet the regulatory requirements. Or your handyman business can be slapped with a fine if you do not follow the guidelines on how to advertise your business.
As a business owner — even home-based — there are a number of advantages to making sure that your business follows all the legal requirements:
1. Peace of mind and security
Operating a business without following the rules and regulations puts you at risk of financial penalties, or even closure. Let’s face it: the last thing you want is for the local or state government (and the cops!) to come knocking at your door telling you that your business needs to cease operations.
2. It gives your business credibility.
Operating under a business name, or having a “DBA” tag gives your entrepreneurial venture the professional look it needs. Unless you are the main selling point of your business (e.g. computer programmer, freelance writer), having a business name also makes it easier for customers to know what your business is all about. Going back to our earlier example, if I name my furniture store simply as John Doe, people will not know what I am selling. Hence, for easier recall, I need to name my business as JohnDoe Furniture Store.
Even on the Internet, customers find it easier to trust a web site when they know that they are dealing with a business entity. Greater credibility means more business for you. It also projects the image that you are serious in your endeavor and is capable of delivering your promised services.
3. It allows you to open a separate bank account for your business.
For many self-employed, this part is oftentimes overlooked. You need to separate your personal and business expenses. Having your own account for your business is one effective way of doing it. However, you need to show proof of the existence of your business, normally your “doing business as” registration, if you are going to open a business account.
4. Tax considerations.
You do not need to formally file for any legal structure if you want to deduct your business expenses from your income tax. The IRS does not require that you show them any business licenses or registration. In fact, it defines sole proprietorship as “the sole owner of a business that is not a corporation.” You merely report your income and expenses from your sole proprietorship on Schedule C Form 1040, Profit or Loss From Business, or on Schedule C-EZ Form 1040, Net Profit From Business. If you use part of your home in your business, you should complete Form 8829. (source: IRS Web Site http://www.irs.treas.gov/tax_edu/teletax/tc408.html)
However, you also need to consider the tax advantages and disadvantages of each legal structure: sole proprietorship, partnership, corporation, S-corporation or limited liability corporation (LLC). Read the article Choosing Your Legal Structure of Your Business
5. Intellectual property protection
This is a growing concern on the Internet. While I am sure that you would want to avoid legal entanglements as possible, getting trademarks and copyrights for your business are your best way to protect yourself.
As for the process, the best thing is to visit your county government office and ask them for their requirements pertaining to your business. Laws differ from state to state, from country to country. You just need to throw in a little effort in researching the legal requirements for small businesses in your area, and be willing to shell out a few bucks. The few hours that you are going to spend trying to get a formal identity for your business will surely go a long way. Check in with your lawyer or accountant what the best recourse of action for your type of business and personal circumstances.
Recommended Books on Making Sure that your Home Business is Legal:
- Legal Guide for Starting & Running a Small Business
- Home-Based Business For Dummies
- Start & Run a Home-Based Food Business (Start and Run a…)
- The Stay At Home Tycoon
- The Small Business Start-Up Kit: A Step-by-Step Legal Guide