From a legal standpoint, a home-based business isn’t much different than any other business. You need to choose a business format – sole proprietorship, partnership, corporation, or LLC. And you need to buy insurance, pay taxes, sign contracts, and collect from customers.But before you set up shop at home, you should address a few special issues.
- Check the Zoning Ordinance. Each city, township, and village has its own zoning ordinance. A zoning ordinance typically restricts the extent to which you can do business from a home located in a residential district. If your home-based business consists mainly of you and your computer, you’re unlikely to have a problem complying with a local zoning ordinance. In most other cases – especially before you invest money in a home-based business – check with the local authorities to see if you’ll be in compliance.
- Review Private Use Restrictions. Even though your home-based business doesn’t violate the zoning ordinance, it may violate a private restriction. So check to see if there are such restrictions on using your home for business. Many subdivisions have use restrictions that apply to all homes in the neighborhood. And if your home is part of a condo development, the condo association bylaws may restrict business usage.
- Make Sure You Have the Right Insurance Coverage. Your homeowner’s insurance may not cover you for events related to your at-home business. After your business computer is stolen, you may find out that it’s not covered by your homeowner’s policy because business property is excluded. Or after your house is damaged by fire, you may find that the fire coverage is void because you didn’t disclose your business use to the insurance company. Check with your insurance agent to make sure you have proper coverage.
- Learn the Tax Rules. Don’t overlook the income tax deductions available to a home-based business. Start by reading IRS Publication 587, Business Use of Your Home. You’ll find it at www.irs.gov. You can always take deductions for regular business expenses such as stationery, equipment, wages, professional memberships, publications, and a business phone line. But, in addition, if you meet certain technical requirements, you can claim depreciation for part of your home, and can deduct a portion of your utility bills and home repair costs.
The attorneys at the Ann Arbor law firm of Hamilton, London, & Davis can advise you on setting up a home-based business.