How to Run a Home-Based Business Without Breaking Any Rules
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When Watt Sriboonruang began baking vegan pies for friends in her New York neighborhood, she didn’t expect anyone to pay her. Sriboonruang had developed recipes based on the raw, plant-based diet she adopted while training as a muay thai kickboxer. Word of her vegan pies spread outside of her gym, and she realized she had a business opportunity on her hands.
Sriboonruang started Rawsome Treats in 2013, selling the vegan desserts she made in her apartment. New York state law requires all home-based food businesses to obtain permits and follow health code regulations. Such “cottage food” laws regulate home-based food businesses — if you don’t follow the proper procedures when making and selling homemade food, you may be fined. You could also rent space in a commercial kitchen if your home kitchen doesn’t make the grade, but Sriboonruang said she couldn’t afford kitchen rent in addition to her personal and other business expenses. She ran Rawsome Treats out of her unregulated apartment kitchen until opening a brick-and-mortar location in March.
“I was struggling to make this happen,” she said. “So I had to be smart about money.”
About 50% of all businesses are home-based, according to data from the Small Business Administration. Of those home-based businesses, 70% fall in the information industry, while 68.2% are construction businesses and 65.3% provide professional, scientific and technical services. As remote work becomes more common, the number of home-based businesses will likely increase, said Abigail Salisbury, a Pittsburgh-based attorney who advises many small businesses.
“A business can just be you, a desk and a computer,” she said.
Some of Salisbury’s clients run a part-time job from home to supplement their income, while others are full-time home-based sole proprietors. She also works with stay-at-home parents who started their own home-based business to avoid gaps on their resumes while raising their children.
Although you don’t have to trek to an office every day, a home-based business still needs many of the same things that brick-and-mortar ones must have. As a business owner, you have to file the right paperwork, pay the correct taxes and remain legally compliant, Salisbury said. Home-based businesses are no less legitimate than those in an office building.
Rules and regulations for home-based businesses: What to expect
Not only would your home-based business have to follow industry regulations, but you would face added rules from your city and neighborhood community association.
Local cities and towns set regulations for home-based businesses, such as zoning laws determining where they can and can’t operate. Additionally, cities often regulate what kind of signage you can feature outside your home.
Community associations take on the task of setting specific rules for individual residential properties, including neighborhoods and town house and condo complexes, said Dawn Bauman, the Community Associations Institute’s senior vice president of government and public affairs. Some associations ban businesses from operating in the community, while others approve businesses on a case-by-case basis, Bauman said.
“What associations typically look for is information about the home-based business as to whether it will compromise the safety of the neighborhood,” she said.
When you move into a neighborhood or complex with a community association, you would receive paperwork outlining the association’s bylaws and expectations of residents. The association’s board of directors, comprised of community residents, crafts those rules and maintains all documents.
“Each association chooses the rules that work best for their community,” Bauman said.
The nature of your business would affect how heavily the association regulates your operation, Bauman said. For example, if you run a painting business and store toxic chemicals in your home, the community association may be reluctant to let you operate in the neighborhood.
Another factor is whether your clients and customers would regularly visit your home. Frequent visitors are usually the first giveaway when someone is trying to run a home-based business under the radar, Salisbury said. The most common indicator of a home-based business is an influx of people coming to your house and taking up parking spaces, she said.
“Are you going to be seeing clients in your house? If you are, that’s where you’re going to trigger a lot of those home-based business rules,” she said. “Generally, the triggering issue is people will look around and say there’s nowhere to park on the street anymore.”
You may face additional regulations if your business involves the following:
- Children (e.g., a day care)
- Hazardous materials
Regardless of your industry, there are a few general steps you would have to take as a home-based business owner.
Need business funding? Learn more about small business loan options here.
All home-based businesses must pay income tax, estimated tax and self-employment tax. You would also have to pay employment tax if you employ workers and excise tax if you manufacture or sell certain products. Your business entity, such as a sole proprietorship, partnership or limited liability company, would also determine what taxes you owe. You may be able to deduct the expense of using your home for business. To qualify for the deduction, your home must be the regular and principal location of your business.
Your homeowners insurance policy may not include coverage for anything business-related. There are several business policies you could purchase to cover liability claims, theft, vandalism and other scenarios. These policies may include property insurance, liability insurance, workers’ compensation insurance, business auto insurance or business crime insurance to keep your company protected.
Comply with zoning requirements.
Many zoning and planning committees require all home-based businesses in the city or county to obtain a home occupation permit. Your local zoning office would also be able to tell you if your neighborhood is zoned for the type of business you want to operate. If it’s not, you may be able to file for a variance or conditional-use permit, which would allow your business to operate in your home.
Potential penalties you could face
If the business violates your community association’s bylaws, the board of directors typically has a set process for handling the violation, Bauman said. The association would likely first send you a letter informing you of the violation and the steps you need to take to correct your actions, whether that means disposing of hazardous materials or equipment or closing down altogether.
There’s a wide range of enforcement, Bauman said. You could be charged a recurring fine until the problem is fixed or you may be ordered to immediately shut down your operation. Homeowners are usually surprised to receive the letter, Bauman said, believing they have the right to do what they want in their own house. But when you move into a community, you are obligated to follow the association’s rules, Bauman said.
“To ignore that first letter is the worst thing that can happen,” she said. “Typically, things can be worked out if you respond to that first letter.”
Your homeowners association could take you to court if you don’t comply, Salisbury said. You could be charged the cost of enforcement and may find yourself paying the association’s court and attorney fees.
Penalties could come from beyond your community association as well. You may face a fine if your business violates your city’s noise ordinance, Salisbury said. Before starting any home-based business, you should familiarize yourself with industry regulations, she said. You may be required to obtain certain professional or trade licenses or undergo safety inspections.
“A lot of people’s misconception is that they’re allowed to do what they’re doing,” Salisbury said. “People just jump in and start doing something that’s regulated.”
You could hurt your company in the long run by not following the rules from the start, Salisbury said. If your customers find out you were not fully compliant, they may not trust you as a business owner.
“If you do get caught, you don’t want rumors ruining your reputation,” Salisbury said.
Precautions to take when starting a home-based business
Understand your safety risks.
When you register your business with your state, you have to provide an address for your operation. If you run your business at your house, your home address would become publicly searchable, Salisbury said.
“A savvy person can do a search through your Department of State and figure out where you live and come to your house,” Salisbury said. “You need to figure out if that’s an issue for you.”
While most states require a street address for registered businesses, you may not have to disclose your home address. In Oregon, for example, you could request a personal safety exemption to protect your private address. Sole proprietors in Oregon do not have to register their business with the state or provide an address unless they are using an assumed business name.
Some business types may not warrant a reason to worry about people knowing your address, Salisbury said. If you’re a seamstress altering clothes for people you already know, then there may not be a safety issue, she said. But clients visiting your house for psychological counseling may blur the lines between personal and professional space.
“They know where you live if they’re unsatisfied,” Salisbury said.
Don’t waste your money.
Before you open a home-based business, you should understand how your community association and city would regulate your operation, Salisbury said. Knowing the rules ahead of time would prevent you from losing your business later.
“You don’t want to invest a huge amount of money in a business that is going to get shut down,” Salisbury said.
Although Sriboonruang bent the kitchen requirement rules when selling pies from her apartment, she wasn’t worried about authorities coming after her. Customers would come to the lobby of her apartment building to pick up orders and Sriboonruang said the security guard never spoke to her about the exchanges.
“I don’t think anybody bothered me because I did not bother anybody,” she said.
Sriboonruang did have her food handlers’ certificate from the state of New York when she opened Rawsome Treats, and she is educated in proper food safety techniques. She always planned to open a storefront location, but she decided to first build her business from home as she saved up for her shop. While she doesn’t recommend other entrepreneurs follow in her footsteps, the risk paid off for Rawsome Treats.
“A lot of times, I make decisions and I use my heart rather than my head,” Sriboonruang said. “Do what you love and what you believe in.”