One of the first necessary steps in starting your home business is making sure you are in legal compliance with federal, state, and local regulations.
Most home businesses fall into the category of sole proprietorship. The areas covered in this article address the legal and tax issues common to most home businesses of this type.
Register Your Business Name
Your business name must be registered if it is something other than your full legal name. This is a way of informing the public that you will be doing business as (DBA) an assumed, or “fictitious” name.
Some states may require a notice be published in the local newspaper, however, the details of registering varies from state to state, so check with your state office or county clerk for specifics.
License Your Business
Licensing of your business depends on the type of business you plan to start. Licensing occurs on the state and/or local level. Federal licensing is only necessary for businesses who engage in specific, controlled activities (things such as making firearms, alcohol, tobacco, etc.). Many cities, but not all, require a general business license, plus there may be a license required for your particular business type. You should contact your state and city clerk offices to find out what licenses you need.
You are responsible for filing and paying income taxes on your business. Because your business is a sole proprietorship, you will pay income tax on your net profits. You report your income tax using Form 1040 at tax time, with the additional requirement of filing Schedule C or C-EZ: Profit or Loss From Business. You can get IRS Publication 334 (Tax Guide for Small Business) for more information. You can access the IRS online for complete details.
If you expect to owe more than $1,000 in federal taxes, you need to make estimated payments quarterly. This may seem like a burden at first, but it actually protects you from having a big payment due at tax time. You can learn more about this from IRS Publication 505: Estimated Tax Payments.
A home business must pay self-employment tax on income over $400 using Schedule SE. Why? Because you are required to pay your fair share into Social Security and Medicare.
State Sales Tax
Contact your state treasury office for information on obtaining a sales tax certificate for goods sold. If your product is to be sold wholesale, or if you are buying materials wholesale, inquire about a resale certificate to avoid paying taxes twice.
Be sure to check with your city and county offices about zoning regulations for your home business. You don’t want to be in the position of having to shut down later because of zoning violations.
- Small Business Administration
The SBA (Small Business Administration) is a good place to learn more about the nuts and bolts of legally operating a small business.
- Your Local SBA
If you want to get specific information about licensing and taxes in your area, you can contact your local SBA office. This office can answer many, if not all of your questions about doing business locally.
- Service Corps of Retired Executives (SCORE)
Retired executives from all walks in business provide personalized and free counseling to assist you in making the right decisions for your business.
- Business Plan Outline
- Small Business Startup Kit
In conclusion, no two businesses are alike and it’s not a bad idea to consult with a lawyer and accountant for additional information. Doing so may prove valuable for you, both before startup and later on as your business becomes more complex.
ABOUT THE AUTHOR
Brett Krkosska provides how-to advice on small business and home-based work issues. He is the founder of HomeBizTools and the publisher of Straight Talk, a syndicated column that offers a unique perspective on today’s business issues.