Have you dreamed of — or even dabbled in — starting a home-based business? Maybe you love the idea of working from home but haven’t yet taken action to officially set up your company.

If you’re looking for a road map to making your dream a reality, this guide will walk you through a basic process and considerations for setting up a business from your home.

You’ll also get answers to common questions about the nuts and bolts of operating a home-based business — as well as guidance on where to find answers to any questions specific to your own situation, like tracking down state or local regulations and requirements.

When you finish, you’ll be armed with the knowledge you need to make a to-do list for setting up and running your own home-based enterprise.

Home-Based Businesses 101

If you’d like to run a business without leaving home, you’re in good company. In fact, over 50% of U.S. businesses are based in a home, according to the U.S. Small Business Administration.

There are many advantages to starting a home-based business, including lower overhead and the ability to ramp up slowly. And it’s important to point out that starting off at home doesn’t limit your growth potential. In fact, the long list of large corporations that started as home businesses includes: Amazon, Disney, Google, Hewlett Packard, Ford Motor Company, and Mary Kay Cosmetics.

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While many think of a home-based business as a micro business, it’s actually possible to grow massively while working out of your home, says Craig Wolfe, president of CelebriDucks, a rubber duck company started in 1997 that manufactures its products in the United States and is run from an office in Wolfe’s San Rafael, California home.

His company has produced millions of the beloved bath-time toys, including creating ducks for Fortune 500 companies, major league sports teams in the NBA, NHL, and Major League Baseball, and celebrities. He is the only employee, and he outsources almost all of the work, from design to manufacture, to other businesses. “You can grow your brand to be really huge, all from your home,” Wolfe says.

And, of course, it’s possible to start out at home and then expand into getting your own commercial space as your business grows.

Should You Open a Home-Based Business?

Before starting a business, it’s important to look at the big picture and ask a few key questions to determine if a home-based business would be a good fit for you.

First, consider the many advantages — as well as the disadvantages — of owning and operating a home-based business.

On the plus side, starting a business based out of your house allows you to:

  • Minimize the cost of overhead. “The number one thing that will kill any business is overhead,” Wolfe says, noting that high overhead costs often pile stress onto new business owners. It can be costly to rent commercial office space and set up a phone system, internet, and other services in the space. In contrast, with a home-based business, you make use of space for which you were already paying rent or a mortgage, and you can piggyback off some services that are already in your household budget, such as home internet, he says.
  • Enjoy plenty of flexibility. One big pro of running a home-based business is that your home office is just a few steps away. So if you’re a night owl whose prime work hours are from 10 to midnight, you can take advantage of that without having to drive to a commercial office and let yourself in after everyone else is gone for the day. Working from home, without set office space size and costs, also gives you the flexibility to scale up or down as needed. For example, if you grow quickly and need to contract or hire more help, you don’t have to worry about whether more workers will fit in the office space you lease. On the other hand, if business slows and you need to streamline temporarily, you’re not stuck with more space than you need.
  • Squeeze more work into your day. Another plus is that you cut commuting time out of your workday, allowing you to trade minutes or hours of stress and traffic jams for focused, productive work time.“A lot of folks spend a lot of time on the roads commuting,”
    says Josh Braaten, CEO and cofounder of Brandish Insights, a home-based brand analytics business in St. Paul, Minnesota. “The best commute is from your bed to your
    desk.”
  • Take advantage of tax breaks. Home-based business owners also have the ability to benefit from a tax break available only to them — the home office deduction. The tax break really helps, says Christina Disbrow, who runs her advocacy, grant writing, and fundraising company, All Write, All Write, All Write, from her home.

On the minus side, working from home can pose challenges, too — for example, having limited space in the home, difficulty separating work from family life, and issues with neighbors. So think about whether your business idea, work style, and family life are a good match for a home-based business. Some businesses and homes are a perfect fit, while others might pose too many challenges.

Here are two questions to ask, keeping in mind that there are workarounds for less-than-ideal situations:

1. Can your business be conducted at home?

Considerations include how much foot traffic you’ll get and whether you’re comfortable having customers, clients, patients, or service providers visiting your home.

Some types of service businesses — such as bookkeeping, consulting, and graphic design — tend to work well as home-based businesses. E-commerce also is a popular home-based business. Other types of businesses, such as retail sales, might need to be moved to a physical space as quickly as possible.

The workaround: Hold meetings at alternative locations, such as co-working spaces, cafes, or restaurants, says Braaten. Or, meet clients at their own offices, suggests Disbrow, who says her nonprofit clients love not having to leave work to meet with her, and she is able to learn more about them by seeing their workspace. “It was something I worried about in the beginning, but it’s actually worked out really well,” she says.

2. Do your home and life fit with a home-based business?

Consider the space you have in your home, and whether you have room for a home office or even a small space you can separate from your living area. Also think about what your family schedule is like and whether comings and goings and noise — kids, a spouse, or a barking dog — could interrupt the flow of your work.

The workaround: “If you have a family like I do, make sure they understand that you have work hours, and not to bother you,” Disbrow says, though she admits this is sometimes easier said than done. She addresses this issue by planning ahead and tailoring her work hours around the times when her seven-year-old son is at school.

So, should you start a home-based business? “If you want to do it, and if you have the drive and are going to put in the work, go for it,” Disbrow says. “For me, it’s one of the greatest decisions I ever made, and I’ve been more successful than I ever thought I would.”

Learn What Regulations Apply to Home-Based Businesses

When starting a business, in addition to having a business idea and a business plan, it’s important to check state and local rules and regulations specific to home businesses, as well as licensing requirements.

Start at the state level by searching online for “starting a business in” plus the name of your state, Disbrow recommends. Most states have resource guides online that walk your through the process of making your home-based business legitimate.

In general, you’ll need to take the following steps:

1. Pick a Business Structure

Your business structure will have a big impact on your startup, including taxes, liability, and other facets of your business. Possible business structures include: sole proprietorship, limited liability company (LLC), partnership, and corporation. Business structure decisions can be complicated, so consult with a tax professional, attorney, or other qualified expert to explore the pros and cons of each structure. For whichever structure you choose, you will have to meet your state’s filing and registration requirements.

2. Get Your Tax Numbers

Unless you are a sole proprietor, you will need to get a federal Employer Identification Number (EIN), which is issued for tax filing and reporting purposes. If you’re a sole proprietor, you can choose to get an EIN or use your Social Security number instead. You may also be required to get a state tax ID number.

3. Get Licensed if Necessary

It’s important to get the proper business licenses or permits. Check to see if the federal, state, county, or city government requires a license for your type of business. If you run a home-based business, you might be required by your state, city, or town to get a home occupation permit.

4. Check Into Local Zoning Laws

Cities zone areas for different activities to ensure that residents and businesses can coexist harmoniously. Make sure you’re allowed to set up and operate a business out of your home. If you live in an area with a homeowner’s association, verify that the HOA allows you to run a home-based business. Investigate any other city, town, or county laws that could affect your home business.

For example, many local governments place limits on the amount of traffic at a home-based business, as well as restrictions on the type and size of signage permitted or changes to the outside of the property. If your business would violate zoning laws, you may be able to apply for a special exception, known as a variance. You may have to attend a hearing with the city zoning board to present your case. If you can show your business will not negatively impact the neighborhood with traffic or noise, you might win.

When Disbrow set up her business, she says jumping through the hoops was pretty easy. Her city required her to register her business and fill out a few pages of paperwork. “They just want to make sure you’re not running a dentist office out of your garage,” she says. “But if I hadn’t known about the requirement for registering, I could have gotten in trouble.”

Getting Your Home-Based Business Insured

Obtaining proper insurance coverage is key for home-based business owners, and your homeowners or renters insurance probably isn’t enough. In fact, it’s likely that you’ll need small business insurance to protect your investment in your business.

That’s because you face an array of home-based business risks, including lawsuits, property damage, business interruption, illness and injuries, and data breaches. Fortunately, getting the right insurance will help you weather glitches or disasters and stay in business.

What kind of insurance is right for your home-based business?

Some entrepreneurs who are starting a business at home choose to get a rider, which is add-on coverage, on their homeowners or renters insurance policy. But even with a rider, your home insurance coverage might not be adequate.

Consider consulting with an experienced insurance agent to determine whether you need more comprehensive coverage. If you do, your home-based business insurance options include:

  • General liability insurance. A general liability policy can protect you from lawsuits — for example, if a client trips and falls while visiting your office or a customer claims they were injured by your product.
  • Business owner’s policy. A business owner’s policy, also known as a BOP, usually includes general liability coverage that protects you against lawsuits and also property damage insurance that covers you if, for example, equipment in your home office is destroyed by a fire or stolen in a burglary.

Also find out whether it would benefit you to get additional coverage for certain circumstances. It’s possible to add riders to a business owner’s policy — for example, to add coverage for data breaches or business interruption due to a problem with your utility services.

If you have employees, your state probably requires you to carry workers’ compensation insurance, which covers your employees in the case of a work-related injury or illness. Workers’ compensation insurance provides affected employees with benefits such as medical care and wages for lost work.

Figure out from the beginning exactly which types of insurance your business needs, so you don’t get an unpleasant surprise or even lose your business to a disaster for which you could have been covered.

Setting up Your Home Office or Workspace

Whether you plan to set up a spacious home office filled with the latest gadgets or work from a desk in a corner, the main work-at-home essential is a space dedicated just to your business. This is important not only to help you qualify for the home office tax deduction, but also to allow you to focus and be productive.

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“It’s a gazillion times easier if you can dedicate a room that you can shut the door to that really is your space,” Wolfe says. He recommends decorating your office so that it reflects the personality and achievements of your company, using artwork, awards, products, or anything else that conveys your vision. His home office is filled wall-to-wall with rubber ducks, and the space reflects his company so well that he proudly invites film and TV crews in, even though he works at home. “Film crews come in and say, ‘Wow,'” he says.

Home Office Essentials

Getting beyond the decor of your office, it’s important to fill your workspace with the proper tools. Opinions vary, but generally your home office essentials should include a computer, a second monitor so you can multitask if necessary, backup for your data, a printer, and a scanner. Other home office must-haves: good lighting, virtual or traditional telephone service, a surge protector, a fire safe box, a shredder for sensitive documents, and an uninterruptible power supply. Even if a paperless office is your goal, you might still need a file cabinet to neatly store the inevitable documents that will otherwise pile up in your office.

It’s also key to consider ergonomics, says Braaten, who put an ergonomically correct chair in his workspace when he was creating his setup. He also recommends having a place where you can stand to take a break from sitting. “It doesn’t have to be an expensive stand-up desk,” he says, adding that you could even use your kitchen island.

Other Home Office Considerations

When you work out of your home, pay attention to security and professional appearance. For example, if you live in an apartment or prefer not to circulate your home address on your business materials, consider getting a mail receiving service (or virtual office address) or a post office box.

Managing Employees of a Home-Based Business

Many home-based business owners work alone, but you might need to hire a virtual assistant or even one or more employees.

Using a virtual assistant can help you to grow your business without committing to part-time or full-time employees. In fact, V.A.s can save you time, allowing you to devote your working hours to directly growing your business. And you can easily manage your V.A. from your home office without having to conduct any physical meetings.

At some point, you might be ready to hire employees. Fortunately, that won’t necessarily require you to expand into a commercial office space because your employees can work remotely from their own homes. Not only is it becoming more common to have a remote workforce, apps and other tools make it fairly easy to manage others from afar, so long as the job can be done remotely and you use the right tools.

This works well for Disbrow, who started as a “one-woman shop” and now has two employees. Two of her favorite tools are Dropbox, a file sharing and collaboration tool, and Redbooth, online project management software. By using these tools, she can easily check in to monitor workflow and communicate about next steps on a project.

“If we need to meet, we can, but for the most part it’s Skyping, texting, or just a good old-fashioned telephone call,” she says.

Handling Home-Based Business Taxes

You have a choice when it comes to taxes: use a home-based business tax program to file your taxes yourself or get a pro. Many home business owners swear that getting a pro pays for itself several times over in reduced stress and increased tax savings.

Jane Olson, owner of Sassy Bibs, a home-based company that sells baby bibs emblazoned with cheeky sayings, says her CPA does her taxes and provides advice on billing, sales tax, refunds, and bad checks — and also advised her on setting up a 401(k) retirement plan. “It’s the best money I spend every year,” she says of her payment to her CPA.

Your tax pro will go over your situation with you in detail, but here are a few important tax considerations for owners of home-based businesses:

The Home Office Deduction

This tax deduction is one of the biggest benefits of working from home, but it’s important to know the ins and outs to understand if you qualify. The main rule is that you must have a space that’s used only for your business.

For example, you can’t work from your dining room table in the morning and then eat dinner there at night and call it your home office, says LuSundra Everett, an enrolled agent — that is, a federally licensed tax professional — who specializes in home business taxes. “It has to be a specific, designated area where nothing goes on but business,” Everett says. “It can be a desk or even just a closet, but it has to be a specific, dedicated space.”

Your home office also must be your principal place of business if you want to claim the deduction. Some small business owners fear that taking the home office deduction will trigger an IRS audit. While even tax pros don’t know exactly how the IRS decides whom to audit, most agree that small business owners should not worry about the home office deduction bringing the IRS to their door.

The Need for Good Recordkeeping

When you’re starting a business, it’s crucial to keep good business records. In fact, being disorganized about recordkeeping is one of the top mistakes home-based business owners make, Everett says.

Home-based business owners must keep receipts, track their home mortgage, insurance and utilities, and meticulously track their mileage when, for example, they go to meetings at the offices of their clients. It’s also necessary to keep track of all of your sales transactions so you have an accurate record of your income.

Managing Virtual Assistants, Employees and Taxes

If you enlist a virtual assistant to help you with your business, make sure that you’re using your V.A. as an independent contractor and not as an employee. If your V.A. functioned as an employee, you could end up being on the hook for payroll tax withholding and complying with a host of federal and state regulations.

If you have employees who work remotely, know that your official company address matters for tax purposes. For example, small business expert Gene Marks has a home-based business with 10 employees who all work remotely. He uses a post office box as the official address of the business, so employees get reimbursed for the miles they drive beyond the official address to get to a meeting.

If they weren’t being reimbursed, they could deduct that expense on their own taxes. If your home is your official HQ, a remote employee’s drive to your home office for a meeting would be considered a commute to work by the IRS, Marks says. The IRS does not allow deduction of commuting expenses.

Overall, owning a home-based business can be every bit as complicated as running any other business, which is all the more reason to use the services of a tax professional. “Build a relationship with a good tax professional to look at the big picture of your business and where you’re going,” Everett says.

Starting a Business at Home

Starting a home-based business can be an excellent choice if your business can easily be conducted from a home office for the long term. Or, it can be a good a way for a new entrepreneur to get started and test the waters affordably before expanding into a commercial space.

For more guidance, tips, and advice as you start and build your home-based business, sign up for our free newsletter for small business owners.

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