Running a home-based business has been an ideal for decades. In the late 1980s and 1990s, home-based businesses were advertised on late night infomercials, many of which turned out to be multi-level marketing programs. Still, thousands of people saw success with MLMs and gained the experience necessary to start their own home-based business. It’s been gaining popularity ever since.
A home-based business sounds perfect – almost too good to be true. You don’t have to go anywhere, and all your clients come to you. However, there are some precautions to take before diving too deeply into a home-based business. Some of those precautions are legal matters that you can’t afford to ignore.
- Not forming a legal entity puts you at risk
The key to being successful with your home-based business is doing things correctly from a legal standpoint. You can file for a DBA to look professional on paper, but a DBA won’t provide you with legal protection. Without legal protection as an established corporation or LLC, your personal assets are at risk.
For example, if you’re running a licensed business in New York, the easiest thing to do is form an LLC. An LLC separates business assets and debts from your personal assets and debts. If an unhappy customer sues your business, you don’t have to worry about losing your home. An LLC also makes it easier to file your taxes compared to forming a corporation. It’s also a less expensive entity to form.
- Your lease might not allow you to run a home-based business
Your landlord can legally bar you from running a home-based business from your rental unit, whether it’s a house or an apartment. There are exceptions, though they are few. For instance, in California, a tenant may use the rental premises as a licensed daycare, even if the lease prohibits operating a business.
There are two primary reasons landlords ban home-based businesses in their lease agreements. First, they don’t want the neighbors to be disturbed by heavy foot traffic, or inconvenienced by a lack of parking. Second, they don’t want tenants using equipment and machinery in the unit that might cause damage. For example, if a tenant does their screen printing in the living room, it can ruin the carpet.
Some landlords are willing to make an exception if your business doesn’t generate any traffic or require equipment. If your lease bans running a home-based business, and your business presents no potential for damage, ask for permission anyway. For example, if you sell handmade jewelry through the mail, you might only use a pair of pliers and scissors, but you should still talk to your landlord.
The difference between self-employment and running a home-based business
You’re self-employed if you run a home-based business, but not all self-employed people run a home-based business. The distinction is crucial to understand. Working from home doesn’t automatically make your business a home-based business. In fact, some home-based business owners need to travel to provide their services.
A home-based business is a small business whose administrative and managerial activity operates primarily out of the business owner’s home. The business owner must be licensed to do business in the state. If you don’t need a license to conduct your business, you’re probably freelancing, not running a home-based business.
Not all self-employed people need to be licensed, and many don’t form a legal entity. For example, many YouTubers, bloggers, and freelancers operate without a business license and do business in their name. Your landlord probably can’t tell you not to run a basic YouTube channel or blog from your rental unit.
- Your mortgage might prohibit using your home for a business
Residential mortgages often prohibit the use of property for business. Your lender will know. Breaching your mortgage contract can terminate your loan, making it payable immediately.
- You need to comply with multiple ordinances
Even if your lease allows you to run a home-based business, zoning laws may not. If your landlord approves of your business, contact your local zoning office to find out if your business will be acceptable.
Once you’ve established that both your landlord and zoning laws allow you to run your business, you still need to comply with other ordinances such as mercantile, vendor, fire codes, and maximum occupancy limits.
- Your HOA may not allow home-based businesses
When you’re bound by HOA covenants that say you can’t run a home-based business, you can ask for a special exception hearing. Depending on the type of business you want to run, they might grant you the exception. Your HOA wants to keep the neighborhood quiet and respectful, so if your business won’t involve people coming and going, they’ll likely grant your request.
Consult a lawyer
Before getting started, consult a lawyer to find out every area of compliance you need to meet. Invest the time now so you aren’t surprised later.