Accustomed to the freedom and flexibility of remote work, some workers have quit their jobs to pursue more flexible work arrangements. But for others, even two or three days a week in the office is too much. As a result, Americans are starting new businesses at an unprecedented rate, and a large percentage of them are home-based businesses.
If you, like many Americans, have dreamed of being your own boss, this might be the time to make that dream a reality. Launching a home-based business requires much of the same preparation needed to start any new business. However, home-based businesses also have their own challenges and considerations. Before making a move to home-based entrepreneurship, you need to lay the groundwork.
Pandemic Powers Surge in Entrepreneurship
In many ways, COVID-19 has been a disaster for small businesses. However, the pandemic is fundamentally reshaping the way that people work—and many think it is for the better.
First, the bad news: around 800,000 US businesses permanently closed during the first year of the pandemic. Although the number of COVID-19-related business closures appears to be lower than expected, that is cold comfort for owners who were forced to shut their doors forever. Many other small businesses are still struggling to stay afloat.
The good news? When one business door closes, another opens. Analysis of United States Census Bureau data by Growthink Inc. shows that in Q3 of 2020, more new businesses were started in the United States than in any quarter in history. From Q2 to Q3 of 2020, nearly 1.4 million new businesses started—a 49 percent increase.
Growthink attributes this trend to two major factors. The first is that unemployed workers, realizing they need to be responsible for their own financial futures, started their own businesses. The second is that remote employees launched their own businesses.
The growth in entrepreneurship has continued into 2021. Census Bureau data shows that in January 2021, more than 492,000 start-up applications were filed. That is a year-over-year increase of nearly 75 percent. In August 2021, there were 428,000 business applications.
Not all of these new businesses are home-based. But most of them involve ecommerce, retail, professional services, real estate, finance and insurance services, information, health services, administrative and support services, and construction, which people can provide from home.
About half of all US small businesses are home-based, according to statistics compiled by Fundera. Roughly 15 million businesses are home-based, 69 percent of startups are home-based, and about 60 percent of home-based businesses have no employees (i.e., sole proprietorships).
Starting Your Home-Based Business
Starting a home-based business requires more than an internet connection and a clean, well-lit space. You need an idea for a start-up, and that idea must make sense in a home setting. Rather than try to break into a different industry, it is more practical to apply the skills you already have to a new business. The United States Chamber of Commerce lists fifteen ideas for businesses that can be launched virtually. Already have a side hustle? One-third of Americans do. Perhaps now is the right time to make it a full-time hustle.
The actual requirements for a home-based business depend on the type of business you are interested in forming. Here are some additional points to keep in mind as you start down the path to self-employment.
- Funding. Figure out the start-up costs associated with your business idea and determine how you are going to meet your financing needs. Microbusinesses—defined by the Small Business Administration as businesses with one to nine employees—cost around $3,000 to launch, and most home-based businesses cost between $2,000 and $5,000 to start. If you do not have that kind of cash on hand, you will have to apply for funding, open a line of credit, or seek outside investors.
- Registering your busines Eighty percent of small businesses have no employees, and as noted above, about 60 percent of home businesses have no employees. Sole proprietorships can hire employees, which requires an Employer Identification Number (EIN) from the Internal Revenue Service (IRS), but they do not have to register with the state. However, limited liability companies and corporations must be registered with the state. Sole proprietors also have the option to register a “doing business as” (DBA) name that is legally distinct from the business owner’s name.
- Licenses and permits. Even if you do not have to register your business, you may have to obtain business licenses and permits, such as a home occupation permit, property use and zoning permits, a business operating license, a professional license, and a sales tax permit. Your city may prohibit certain types of home businesses or require you to apply for a zoning variance that allows you to operate from home.
- Tax implications. Tax-wise, working for yourself is different than working for somebody else. Qualifying businesses can take advantage of home office deductions for expenses such as rent, utilities, repairs, maintenance, and cleaning. You do not have to own a home to qualify; renters may qualify, too. But to get the home office deductions, the space you use for business has to meet IRS requirements. The IRS offers both a simplified deduction method and a regular deduction method that is more complex. Also, remember that self-employed individuals must pay quarterly estimated taxes.
Starting a home-based business is challenging yet rewarding. Entrepreneurial-minded individuals enjoy a challenge, but first-time business owners should work with a legal professional to ensure that they take all of the steps needed to operate their business legally—and successfully—from home.
From obtaining business funding and an EIN to understanding licensing and taxation issues, our attorneys can help with every aspect of forming and running a business. Schedule a call with someone from our office today.
