5 Rookie Mistakes to Avoid With Your Home Business

home-based business

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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SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
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