It’s that time of year when people think about starting a new home-based business. Here’s how to find the right legal structure and stay-out of trouble.
The end of the year is a time when people contemplate starting their own business. Whether that contemplation is triggered by an end-of-year layoff or a new year’s resolution, home-based businesses will be on the minds of many.
A home-based business can be anything from a single programmer or consultant who virtually hangs a shingle to a vintage clothing company, jewelry maker, window washer, or cupcake baker.
“When I was between companies, I started a tye-dye clothing business at home,” says Nellie Akalp, CEO of legal document provider CorpNet.com. Since her business these days is to help people creating companies, she shared some simple rules for making sure that you’re protecting yourself while starting a business.
1. Pick the right business name.
Make sure you do a search for your businesses’ name, and clear the trademark. “Check first with your Secretary of State’s Office for the use of your businesses’ name in the state and county, and then do a national trademark search,” says Akalp, whose company provides free name searches. “If you find someone else using the name, consider paying a service for a comprehensive name search to make sure you’re not going to impinge on another company’s trademark–the last thing you want to do is to have to change your business name after you’ve starting doing business.”
2. Pick the appropriate business structure.
Consult with a tax professional before you determine your businesses’ legal structure. While you can start doing business as a sole practitioner today, there can be tax advantages to forming an LLC or an S-Corporation. Additionally, having a corporation can provide you with an air of legitimacy–you’re no longer “some dude working out of his basement.”
The decision to form an LLC or a Chapter s corporation can also be based on your comfort with formality. “An LLC provides maximum legal protection with minimum paperwork,” says Akalp. “An S-Corporation is good for a company who can handle the paperwork and you can qualify to be on the payroll as an owner. If you’re not ready to incorporate, create a fictitious business name, also known as a “DBA” or Doing Business As name.”
3. Get a tax ID.
While a sole proprietor can give a social security number to vendors or customers for their records, it is best to get a tax ID, also know as an EIN, which issued by the IRS. “You don’t want your Social Security number floating everywhere,” Akalp states. It is also more professional to have an EIN. These are required for an LLC or Corporation.
4. Obtain a registered agent.
If you’re working from home, you may not want clients to know it. Since the legal address for your corporation is made part of the public record, you may want business and legal notices to be delivered someplace other than your home. For an LLC or S-corporation, a registered agent’s address is substituted for yours for purpose of public notices. Additionally, says Akalp, if you’re not incorporating, you can get a P.O. Box or use a mailing company for a DBA entity.
5. Get permits or licenses.
As home-based business owner, it is your job to check on local permits. You may need a business license. A cupcake baker may have to undergo a health inspection, and there may be zoning rules as well. Akalp advises, “Handle them from the start rather than dealing with it after the fact, as you may have back payments or penalties for ignoring the rules.”
Will you be starting a home-based business this year? Have you benefited from other advice about home-based business creation? Please share what you’ve learned in the comments section or ask any questions.