6 Ways to Smartly Run Your Small Business from Home

6 Ways to Smartly Run Your Small Business from Home

Legalities

Like any other business person, you need to set up your business legally. You will have to choose a form of business ownership (such as a sole proprietorship, partnership or corporation), and register your business name if your business has a name other than your own. 

You may also need a business license, depending on the type of business you're running. And you have to run your business according to provincial and federal laws, which means you may need to register for Workers' Compensation insurance with your province or collect GST/HST and/or PST.

But you have to do all of these things no matter where your business is located so let’s look at factors specific to home-based businesses that you need to consider before you turn a room of your home into an office and start selling your products or services.

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3. Designate dedicated office space within your home

Working in the middle of the dining room table with your child’s high chair at one end and laundry that needs to be folded at the other end is definitely not the most efficient way to run your business. It’s essential that you carve out a dedicated workspace within your home. Convert an extra bedroom into an office. Or if you don’t have a spare room, partition off an area of living space where you can set up your desk, computer, printer, and any other necessary equipment. Your business tools and materials should not be intermingled with the rest of your household belongings. Making the effort to establish a fully equipped home office will pay off in the long run.

Simple infrastructure needs for your small business at home include the following:

• Power: Computers, printers, scanners, and more will greatly increase your power usage. Be sure your home’s electrical system and circuitry will suffice, and be wary of warning signs of electrical problems such as dimming lights or blown fuses.

Decide on your business’s legal structure

Choosing the correct legal structure is an important part of running your business. If you want to get started quickly and with as little hassle as possible, a sole proprietorship may be right for you.

With this type of business model, you don’t have a partner or executive board to answer to, so you’re in complete control of all the decisions. Keep in mind, though, there is no legal separation between you and the business; you’re responsible for any debts and lawsuits that the business incurs.

In contrast, a limited liability company (LLC) provides more flexibility and creates a legal separation between you and the business; however, there is more paperwork to fill out, and you’ll have to file your business with the state.

[Read more: Sole Proprietorship vs. LLC: Which Should You Choose?]

Set up a home office

If you plan to work from home, it’s a good idea to set up a designated home office. This can either be an empty room in your home or just a designated corner in your bedroom.

But you want to choose an area that will offer you a certain degree of privacy. Also, be mindful of the background, especially if you’ll have to conduct client calls regularly.

[Read more: How to Create an Effective Home Office Setup]

8. Choose your vendors

Running a business can be overwhelming, and you and your team probably aren’t going to be able to do it all on your own. That’s where third-party vendors come in. Companies in every industry from HR to business phone systems exist to partner with you and help you run your business better. 

When you’re searching for B2B partners, you’ll have to choose carefully. These companies will have access to vital and potentially sensitive business data, so it’s critical to find someone you can trust. In our guide to choosing business partners, our expert sources recommend asking potential vendors about their experience in your industry, their track record with existing clients and what kind of growth they’ve helped other clients achieve. 

Not every business will need the same type of vendors, but there are common products and services that almost every business will need. Consider the following functions that are a neccessity for any type of business.

Taking payments from customers: Offering multiple payment options will ensure you can make a sale in whatever format is easiest for target customer. You’ll need to compare options are find the right credit card processing provider to ensure you’re getting the best rate for your type of business.

Managing finances: Many business owners can manager their own accounting functions when starting their business, but as your business grows you can save time by hiring an accountant, or comparing accounting software providers.

Running a Business Out of Your Home Is Part of the Fabric of American Commerce

But that doesn’t mean that town bylaws and zoning created by zealous and anti-business politicians can’t make your life miserable and in some cases shut down your business.

Many localities do not permit any businesses to be operated in residential neighborhoods without a specific variance, which many zoning boards are very reluctant to grant except under extenuating circumstances. Often, variances are only given after an extensive public hearing, including invitations for presentations of objections by all nearby residents.

Just because there are already some businesses operating in your neighborhood does not mean that your neighborhood is zoned commercially or that you will easily obtain a variance. Many businesses currently operating in residential neighborhoods were “grandfathered in,” meaning that they were in operation before the zoning laws took effect and were therefore almost automatically granted variances.

Most towns and cities have various zoning districts allowing different types of homes and businesses. Usually in any one town many businesses have successfully obtained variances allowing an exception to zoning in their district, but there are plenty of other businesses that did not successfully receive variances. There are still other businesses that did obtain variances but only after agreeing to certain changes in their plans (such as a smaller building) or limits on their operations (such as no business after 9 p.m.).

3. Join professional groups

One of the downsides to running a home-based business is limited social interaction, so Evans suggests joining professional groups in the area.

“Even the smallest towns have networking groups, and joining them is a way to get out of the house, away from the computer, and in position to enjoy the company of like-minded people,” he says. “Plus, going to these events helps you spread the word about your product or service.”

Your Houses Suitability 

If the only space in your home you can devote to your business is the kitchen or a corner of your basement, don’t, unless your business is virtual and no one is ever, ever going to see your premises. People who visit your business will expect it to look (and operate) like a “real” business. They expect to be able to do things such as sit down and sign papers in a business-like environment. Any home-based business will need to have an entire room set aside as an office space.

Some home businesses will need even more space. For instance, if you consult with clients, you'll need an actual consulting room separate from your office. If your home-based business involves creating arts or crafts, or manufacturing, you'll need a suitable studio or shop. If you're in this position, and you don't have these already, it may be easier and cheaper to find suitable quarters for your business elsewhere then try to renovate your home to accommodate your business plans.

Key tax breaks and deductions

If you run your business from home, you could enjoy some valuable tax breaks, including the home office deduction for IRS-approved home office areas. You might also qualify for a tax break on a portion of your home-related expenses, including:

  • Homeowners insurance
  • Homeowners association fees
  • Cleaning services or supplies for the rooms of your home used in your business
  • A portion of your mortgage insurance and interest
  • A portion of your utility bills, including electricity, internet, heat and phone
  • A portion of your home repairs and maintenance

The IRS has very strict requirements surrounding home office areas. Review them carefully before starting or relocating your business to your home.

It’s also important to recognize the taxes that could impact your home-based business. You could be responsible for income tax, self-employment tax, employment tax and excise tax.

Tax Deductions for a Home Office

If you’re excited about the flexible working hours and reduced expenses that come with home-based businesses, it gets even better.

13. The Home Office Tax Deduction

Home-based businesses also can be entitled to tax benefits such as the home office tax deduction. Under the IRS rules, this deduction allows you to write off:

  • Rent
  • Utilities
  • Real estate taxes
  • Repairs
  • Maintenance

Keep in mind that you can only write these items off when you use part of your home “exclusively and regularly” for conducting business activities. This deduction can be applied to homeowners and renters who reside in a single-family home, an apartment, a condo, or even a houseboat. It cannot be applied to temporary living situations like hotels.

The home office tax deduction is based on the amount of your home that is dedicated to your business activities. To figure this out, you’ll want to calculate the percentage you use. One way to calculate this is to find the square footage of your area.

For example, say your home office measures 100 square feet, and the total area of your home is 1,100 square feet. Your business use percentage would be 9% or (100 / 1,100).

Professional tax preparers and programs like TurboTax also can help you determine what your deduction would be.

Dealing with Employees

It might be easier and more cost-effective for you to have a virtual staff working from their homes rather than your home. If you choose to go that route, Michelle Gamble-Risley, CEO of 3L Publishing, a publishing firm run entirely as a virtual distributed company with staff located in their home offices, offers these words of wisdom.

58. Only hire people you completely trust. A virtual environment begs for staff that you do not need or want to directly supervise. You have to work with people who you know are trustworthy and true to their words. Their words and actions are the only things you can truly count on when you don't see them in person.

59. Personal initiative: A virtual team needs to be loaded with people who take true personal initiative. They do things without asking permission, and they are skilled and knowledgeable enough that what they do is professional and competent.

60. Competence: Your virtual staff has to be competent enough [that you can] rely on them to do the job effectively. For example, when I hire someone, I let them know they are on their own. They will be expected to figure it out without training or assistance, because I'm not going to send that assistance.

61. Good communication: Your virtual team needs to stay in good communication. They need to answer their emails, mobile phones, or texts and not ignore the team's requests. Poor communication suggests they're not doing their jobs. It also erodes trust that they're doing what they said they're doing. [In addition, good communication] enhances your customer service.

62. Time management: A virtual staff needs to be able to effectively manage their own time. If they flex their schedules, it has to be according to the needs of the company — it cannot ignore the needs of the company. They also have to prioritize their time correctly based on these needs and not their personal needs, unless it's a day off.

63. Child care: A work-at-home environment and a working mother is a poor substitute for actual child care. We expect our team to have proper arrangements for child care and avoid trying to do both at the same time.

64. Availability: While we don't work in the same physical office, we do activities together. I expect my team to be available for networking and meetings outside of the office.

65. Open schedules and flexibility: We're not opposed to open schedules. Our edict is to get the job done on time and right the first time. In some cases, when and where that job gets done is not as important as the fact that it gets done.

66. Conference calls: We try to do regular conference calls with the group to keep everyone on the same page, promoting the same vision.

67. Virtual tech equipment: Make sure you have equipped your team with the right tools to stay in communication [and] send large files, or provide [them] access to systems. You want to ensure you remove barriers to performance by providing the right tools for virtual business. (Note: Tools such as instant messaging, wikis or message boards, and conference meeting software will help improve communication.)

But if you choose to bring employees into your home, you may want to set some ground rules to keep lines from blurring. Richard Rabinowitz runs a national, multimillion-dollar photo workshop series, Digital Photo Academy, right from his home. A staff of six works around the dining room table in his New York City apartment keeping track of teachers, students, and workshop spaces. Chaotic though it may seem, the business brings in over $2 million per year. Rabinowitz maintains order by enforcing the following seven rules.

68. Only use the designated DPA lines for work calls. Do not use or answer the house lines. Personal calls should be kept to a minimum as if the office space were in corporate quarters, with personal calls made on your own time during breaks.

69. Work hours are from 10 a.m. to 6 p.m. After 6 p.m. the office becomes Richard's apartment, whenever possible.

70. Everyone must clean up after themselves. They are, after all, in someone's home.

71. Everyone should go out for lunch or bring prepared food. They should not use the kitchen beyond refrigeration.

72. Staff are not allowed to enter certain rooms. Understandably, bedrooms, the master bathroom, and other personal spaces are off-limits to employees.

73. Residents should try to handle family issues before or after office hours. When residents are at their "office desks," they are working and should not be disturbed with nonwork issues.

74. Use keys to enter the office during work hours only. Employees do not have an all-access pass to drop in whenever they want.

Are you looking for a home based business idea?

See my article, 42 Home Based Business Ideas You Can Start Today. This article presents my best ideas for starting a business in your home plus my insight on each idea.

Also consider my longer and most popular article, The 300 Best Small Business Ideas. This comprehensive multi-page article offers expert advice on every single business idea. Includes home based, online, steady income, low cost, product and service ideas. Many of the ideas in this long article can be started part time.

Resources for Growing Your Home-Based Business

Everyone needs a helping hand. Denise Beeson recommends the following resources.

84. Free consulting from SCORE

85. Free consulting from the SBDC in your local area

86. The SBA.gov website for podcasts, webinars, and basic information about starting and growing a business

87. Your local community college for inexpensive classes on how to start and run a small business

88. Your local university for interns to assist you with research or to write your business plan

89. See the Economic Development Board or Chamber of Commerce in your city or county for assistance with small business growth.

90. Check out the local business incubator in your area. It may offer classes and/or the future opportunity to move into an environment to move your business to the next level.

91. Find online resources such as BatchHaus, which offers a weekly coworking open house to give at-home workers the opportunity to meet others for brainstorming and inspiration, recommends Theresa Freeman on behalf of BatchBlue Software.

What Should I do to get Started with a Home-Based Small Business?

After planning your business, you should look into state and local regulations for running your chosen business. Be certain that you are obeying all zoning laws when it comes to running a business in a residential house. Comply with the business licensing or fictitious business name requirements in your state and city or town. You may need additional licensing and permits to run certain types of businesses.

If you run an in-home daycare, for example, you will need a daycare license. If you will prepare and sell food, you may need a food preparation license. Contact your state or town office of business registration to learn the requirements in your area.

Create space for running your business out of your home. The amount of space you need to run a business from home depends on the type of business you choose. If you need an office, clear out a spare bedroom or clean up a basement for this purpose. Some businesses can be run from a kitchen table. If you stock products, consider shelves in a garage or an unused walk-in closet for storage.

5. Learn tax laws for home-based businesses

How your small business is taxed depends on the business structure you’ve set up for your company. However, running your company out of your home entitles you to additional tax deductions. While you’re allowed to deduct all the same expenses that any company can, having a small business at home also affords you deductions for:

• Direct business expenses: This includes supplies, materials, product samples, meals, and entertainment.

• Operating costs: If your home is your main place of business, the IRS allows you to claim some expenses for operating your small business. To determine what you can write off, calculate the percentage of your home devoted to your work (by dividing the square footage of your home office by the livable square footage of your entire home), and then apply this percentage to expenses such as your mortgage interest, property taxes, utilities, repairs, and maintenance.

• Vehicle expenses: You can deduct a portion of your vehicle expenses by multiplying the IRS mileage rate (58 cents for 2019, up from 54.5 cents in 2018) by the total miles you drive in a year for business.

Do your own research on the tax laws ahead of time so that you’re not caught off guard come tax season. But also consult a professional, as your accountant can confirm that you’re getting the most deductions you are allowed for your home-based business.

3. Assess your finances

Starting any business has a price, so you need to determine how you’re going to cover those costs. Do you have the means to fund your startup, or will you need to borrow money? If you’re planning to leave your current job to focus on your business, do you have money put away to support yourself until you make a profit? It’s best to find out how much your startup costs will be. 

Many startups fail because they run out of money before turning a profit. It’s never a bad idea to overestimate the amount of startup capital you need, as it can be a while before the business begins to bring in sustainable revenue. 

Perform a break-even analysis

One way you can determine how much money you need is to perform a break-even analysis. This is an essential element of financial planning that helps business owners determine when their company, product or service will be profitable. 

The formula is simple:

  • Fixed Costs ÷ (Average Price – Variable Costs) = Break-Even Point

Every entrepreneur should use this formula as a tool because it informs you about the minimum performance your business must achieve to avoid losing money. Furthermore, it helps you understand exactly where your profits come from, so you can set production goals accordingly. 

Here are the three most common reasons to conduct a break-even analysis: 

  1. Determine profitability. This is generally every business owner’s highest interest. 

    Ask yourself: How much revenue do I need to generate to cover all my expenses? Which products or services turn a profit, and which ones are sold at a loss?

  2. Price a product or service. When most people think about pricing, they consider how much their product costs to create and how competitors are pricing their products. 

    Ask yourself: What are the fixed rates, what are the variable costs, and what is the total cost? What is the cost of any physical goods? What is the cost of labor?

  3. Analyze the data. What volumes of goods or services do you have to sell to be profitable? 

    Ask yourself: How can I reduce my overall fixed costs? How can I reduce the variable costs per unit? How can I improve sales? 

Watch your expenses

Don’t overspend when starting a business. Understand the types of purchases that make sense for your business and avoid overspending on fancy new equipment that won’t help you reach your business goals. Monitor your business expenses to ensure you are staying on track.

“A lot of startups tend to spend money on unnecessary things,” said Jean Paldan, founder and CEO of Rare Form New Media. “We worked with a startup that had two employees but spent a huge amount on office space that would fit 20 people. They also leased a professional high-end printer that was more suited for a team of 100; it had key cards to track who was printing what and when. Spend as little as possible when you start, and only on the things that are essential for the business to grow and be a success. Luxuries can come when you’re established.”   

Choose the right business bank

When you’re choosing a business bank, size matters. Marcus Anwar, co-founder of OhMy Canada, recommends smaller community banks because they are in tune with the local market conditions and will work with you based on your overall business profile and character. 

“They’re unlike big banks that look at your credit score and will be more selective to loan money to small businesses,” Anwar said. “Not only that, but small banks want to build a personal relationship with you and ultimately help you if you run into problems and miss a payment. Another good thing about smaller banks is that decisions are made at the branch level, which can be much quicker than big banks, where decisions are made at a higher level.” 

Anwar believes that you should ask yourself these questions when choosing a bank for your business: 

  • What is important to me?
  • Do I want to build a close relationship with a bank that’s willing to help me in any way possible?
  • Do I want to be just another bank account, like big banks will view me as? 

Ultimately, the right bank for your business comes down to your needs. Writing down your banking needs can help narrow your focus to what you should be looking for. Schedule meetings with various banks and ask questions about how they work with small businesses to find the best bank for your business. [Read related article: Business Bank Account Checklist: Documents You’ll Need]

Key takeaway:Key takeaway: Financially, you will want to perform a break-even analysis, consider your expenses and funding options, and choose the right bank for your business.

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