When my husband and I started our pet-sitting business, we ran it out of our little apartment. We happily offered to watch dogs in our own home, and for a while, we made a quick profit doing so. However, one day we received a letter from our landlord that said we were in violation of our lease for running our business this way.
Checking my lease had never occurred to me, and I felt really stupid when I got that letter. Even worse, we had to change our business completely. We lost large chunks of income while we scrambled to find a solution.
I’m certainly not alone. About one-half of all U.S. businesses are run from home, reported the Small Business Administration. In their eagerness to get a home-based business off the ground, many people make mistakes that can cost them in the long term.
Whether you’re selling meal-replacement shakes or doing web design, here are five mistakes you should avoid if you’re starting a home business.
1. Not checking with your landlord or HOA
As I found out, many landlords and homeowners associations (HOAs) have strict rules about what you can do in your own home. Some prohibit running any kind of business from your house, while others allow you to run your business as long as you don’t have clients coming to your door.
If you go ahead and start a home-based business anyway, you could be subject to eviction. That consequence can cause you to lose thousands of dollars while you try to find a new home and workspace.
Even worse, there might be local zoning laws that forbid an at-home business. The consequences for violating zoning laws are even more serious: Your city or county can shut down your business.
To keep your business in good standing, check your lease or association agreement to see if a home business is forbidden. If you’re unsure, contact your landlord or head of the HOA for their guidance.
For zoning issues, call or visit your local municipal building and ask about the ordinances for home-based businesses. Many towns post the rules online, so you can often just visit your county’s website.
If you don’t know where to start, the U.S. government has a list of all of the state and county websites.
2. Skipping essential permits and licenses
Depending on what kind of business you launch, you might need several different licenses and permits from both the federal and state government.
Some of the most common licenses and permits include:
- Business license: This general license is required by some states and counties. There is usually a fee you have to pay to receive the license.
- Professional license: Some local governments require professionals in certain fields be licensed. For example, most states and counties require all real estate agents to be certified.
- Home occupation permit: If you’re working out of your home, some areas insist that you have a permit for your home-based business.
Going without the necessary licenses and permits can cost you hundreds of dollars in fines. For example, in Santa Ana, Calif., you’ll pay a penalty of 50 percent of the business license fee — plus extra charges, depending on how long you’ve been operating without a license.
You can find out what permits and licenses you need from the Small Business Administration.
3. Not establishing business accounts
When you’re running your own business, filing your taxes can be much more complicated than when you had a regular, full-time job.
Many small-business owners start their company using their personal bank account and credit card, but that can cause issues later on. Having a separate account can help you track profits and expenses much more easily.
Besides making your taxes easier to complete, business bank accounts can help you in the case of an audit. If the IRS audits you for your profits and losses, they can only look at your business accounts and not your personal ones. Having a clear delineation between your personal and business financials can give you some protection.
4. Working in common areas
Many businesses are started from kitchen tables and couches. But if you’re using the family common areas for your business, you’re losing out on a valuable tax deduction. Through the home office deduction, you could deduct as much as $1,500 on your taxes.
However, you can only qualify for the deduction if you work in a space that is exclusively dedicated to your business. If your children use the same area to do their homework or you sit at the desk to catch up on “Game of Thrones,” you’re ineligible for the deduction.
To qualify for the deduction, designate a corner of a room or a spare bedroom as your office space. Make sure every member of your family knows it’s off limits.
5. Tossing receipts
When you buy supplies for your business or spend money on advertising, you might be able to deduct those expenses on your taxes. However, the IRS might ask for proof of these purchases. If you estimated the expenses but don’t have receipts, you could owe unpaid taxes and penalties.
When running your at-home business, develop a system for recording your work-related receipts. One easy way is to use your phone to take a picture of each receipt and put them in a designated “expenses” cloud-based folder. That way, you can access the receipts quickly and get to them even if your computer dies.
Running a home-based business
While there are certain considerations you should keep in mind, don’t let a fear of permits, licenses, and taxes deter you from your dream. If you research applicable laws and ordinances and reach out for help, you can launch a home business legally and safely.
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