Home-based businesses are becoming increasingly popular and accessible in a wide variety of industries. As of 2017, there were 38 million such businesses in the United States, and the opportunities are growing every year.
The perks of this type of business seem endless. Instead of trekking through a couple hours of traffic each day, you can simply roll out of bed, have a relaxing breakfast, and head straight to your office down the hall.
Working from home can be freeing and cost-effective and potentially increase your chances of success. About 70 percent of home-based businesses are successful within just three years of their founding. That's pretty impressive when you consider that only 30 percent of businesses in commercial spaces are successful in this same timeframe.
But before starting a home-based business, consider these five factors — from insurance and taxes to productivity and client satisfaction — to help you succeed down the road:
- Is your home suitable for your needs?
- What are the zoning and mortgage laws in your area?
- How much insurance do you need?
- Will you qualify for tax benefits?
- How might working from home affect your productivity?
1. Your Home’s Suitability
Before you dive into legal requirements, taxes, or insurance needs, first take a moment to question if starting a home-based business is practical for your location. For those who mainly work from their computers and phones, no one knows or cares about where you work. For all they know, you could be on a beach in Cabo.
But if you need to have meetings or office hours, or people are coming to you, stop and consider how your business will be perceived. Think about your neighborhood and location.
Are you in a good spot to physically reach clients? Does your location project the same sense of professionalism as a traditional office?
Practically, you’ll need to consider parking availability for clients, and you’ll have to balance their comings and goings with those of your family. It’s certainly not impossible, but you have more to consider than someone who runs a business from the local Starbucks.
At the very least, set aside a space for working. A dedicated home office shows you’re serious about your business. Your clients will more likely see you as a savvy professional than as someone who’s struggling to get their start-up off the ground.
2. Zoning and Mortgage Laws
Beyond the practicalities of owning and operating a home-based business, you need to verify that it’s legal to do so in your area. Zoning laws ensure that residents and business owners peacefully coexist. Make sure you learn the requirements for your area. The same holds true for homeowners associations (HOAs).
For instance, there may be limits on the amount of traffic allowed into your home, or on the sizes of signs that you place outside your property. In some cases, you can attend a hearing with your local government and plead your case for allowing a home-based business. Still, it’s better to know the rules and regulations before starting one.
As for mortgage regulations, it’s important that your home is first and foremost your primary residence. It can’t just be a business disguised as a three-bedroom bungalow. You need to live there.
Some loan types restrict the amount of space your business can take up in your home. For FHA loans, up to 49 percent of the total space can be commercial. For VA loans, the limit is 25 percent. And with a jumbo, you won’t be able to have any commercial use. For more information speak with a home loan expert from Quicken Loans.
3. Insurance Needs
When deciding on the insurance needs for your home-based business, start by looking at your current homeowners insurance policy. In some cases, regular home coverage will cover a business property up to a point.
To discover the limit for your plan, speak to your insurance agent. If you need more coverage, many insurance providers will allow you to purchase optional business property coverage.
When deciding how much insurance you need, start by considering what business assets you have in your home.
Someone who owns and operates a home-based cosmetics business, for instance, likely has inventory that he or she should cover in the event of a disaster. And beyond inventory and equipment, consider important documents, such as financial records and other paperwork that you'll need to cover under your current policy.
The three common insurance options for home-based businesses are a homeowners policy endorsement, an in-home business policy or program, and a business owner's policy. Decide which one is right for you based on the nature of your business. Speak with your insurance agent to get more information.
There are some great tax benefits for home-based businesses. Having a home office allows you to deduct the expenses of operating your business out of your home. Make sure that your business space qualifies before pursuing this deduction.
For several years, entrepreneurs wouldn’t take this deduction for fear of an audit. But in the 1990s, the rules were changed, making it easier for people who work from home to qualify.
The home office deduction includes direct expenses, such as maintenance, repairs, and business-related bills. It also takes the costs of running your home into consideration. After all, part of your home qualifies as a business.
So if your office space occupies 10 percent of your home, you can deduct 10 percent of your utility bills, homeowners insurance, etc. You can even deduct rent. Or as a homeowner, you can depreciate the business part of your home.
For more tax benefits, check out Fundera's definitive list of home business tax deductions.
Starting a home-based business offers a lot of perks and freedom. But sometimes that freedom can make it difficult to focus on the task at hand.
One of the best ways to be productive is to separate your work and home life. Instead of working from the couch, have a dedicated office space, and — this is the important part — actually go to work. Spend time in your office as much as would in a traditional job. You’ll be able to concentrate on the work you need to do to make your business successful.
If you need more hands, consider hiring a virtual assistant — someone who works for you outside the office and interacts with you virtually. A virtual assistant can take over certain tasks for you. This will allow you to spend more time building your business. A remote workforce can be an excellent way to cut costs and keep your home-based business running smoothly.
The Bottom Line on Starting a Home-Based Business
Starting a business from home can be a great choice for entrepreneurs, allowing them to cut costs and test the waters before deciding whether leasing commercial property is right for their line of work. Take time to prepare a foundation that allows you to achieve success down the line.