April 1, 2011
Hundreds of thousands of individuals decide to start a home-based business each year. Many succeed. About 70 percent of all home based businesses are in operation after two years. Before entering this venture, entrepreneurs should consider several key questions:
* Can you operate the business alone with little help?
* Do you have contact with buyers or your services?
* Is the location such that distributors, sales staff, clients and others can reach it without difficulty?
* Is start-up and operations capital available for the first year?
* Can the business really be operated from the home?
* Do you have separate spaces for storage, records, isolation, parking, etc.?
* Can a business in the home compete with similar businesses?
As in most businesses, there are advantages and disadvantages to the home-based business. A business in the home permits flexibility of working hours, lower start-up costs and allows family affairs to continue during business hours. There are also disadvantages—zoning restrictions may prohibit business, the IRS may raise tax questions, it may be difficult to get materials and customers to the location and financing the business could be challenging.
The IRS specifies that a home-based business must have its own location away from the family living space that is devoted exclusively to the business. The business must be in regular operation, profits must exceed expenses in order to claim deductions, the business must be conducted almost exclusively in the home and the motive must be profit.
A major challenge in operating a home-based business is isolation from distributors, merchants, clients and interested parties. Modern communications help to alleviate the problem—a computer is a necessity. A fax machine and Internet access are almost certainly necessary for communications within the business community. In addition, separate telephone phone lines must be installed for telephone, fax and Internet access and the business phone needs some type of answering service.
In summary, the business must be run as a business not as an extension of the home. It is essential that the prospective business owner have a good business and financial plan, separate from the family finances, that clearly spells out the present and future of the business.
Be aware that many neighborhoods have deed restrictions forbidding the operation of a business. Some require extra off street parking, others forbid deliveries and signs, etc. It is wise to check with your Home Owners Association and with your local government for a complete survey of your city or county regulations.
It may be difficult to raise capital. The average home-based business requires about $10,000 in start-up costs. Although this may be much less than opening a business outside the home, both the start-up and operating funds should be in hand before beginning the business operation.
Help is available. The National Association of the Self-employed (NASE) can provide help and information, as well as your local SCORE office. Find SCORE on this Web site to meet face-to-face with a professional business counselor.
This article was written by J.H.U. Brown, a counselor with the Houston SCORE Chapter, and a former director with the National Institutes of Health and a health care administrator.