Home based businesses are the ultimate entrepreneurial dream. You get to work from home, set your own hours, and keep overhead low. But here’s the kicker…
Operating a home based business isn’t legal until you follow some important legal requirements. Don’t get caught unprepared or your startup could be shut down or fined.
The good news is that the legal essentials for home businesses are not overly complicated. With the right guidance, any home based business can operate legitimately and professionally.
Legal Essentials for Home-Based Businesses
In this complete guide to home business legal requirements we cover:
- The importance of legal compliance for home businesses
- Local zoning laws and home occupation permits
- Virtual business address services, what they are and why you need one
- Business licenses, registration and the difference
- Protecting your personal privacy
The Importance of Legal Compliance for Home Businesses
Home based businesses have exploded in number in recent years. Per the U.S. Chamber of Commerce, 50% of all small businesses are home based. That’s tens of millions of entrepreneurs running their operations from living rooms, spare bedrooms and garages.
But being common does not mean being easy.
Each of those home based businesses must legally comply with federal, state and local laws in order to operate legitimately. This includes everything from zoning and signage permits to using an official business address. Most business owners use a virtual address for business to protect their privacy while building credibility.
Legal noncompliance could result in fines ranging from minor violations to total business shutdown.
The tricky part of home businesses is…
The legal requirements are all over the place. They depend on location, business type, and even specific zoning districts. Requirements for a home based graphic design business will differ from a home bakery or real estate office.
Zoning Laws and Home Occupation Permits
The first and one of the most important legal hurdles for home businesses is zoning. Zoning laws are local regulations which govern how property in designated areas can be used.
Residential zones are designed for people to live, so strict conditions generally apply to running a business from a home.
Standard zoning rules for home businesses include:
- Limitations on customers coming to the home
- Signage, advertising and office requirements
- Limitations on employees (generally household only)
- Limitations on operating hours and noise
- Traffic and parking limitations
Always check with the local planning or zoning department first before starting a home business. Most cities and municipalities require a permit for home occupations before they begin operation.
An application is typically filed and then reviewed by a local zoning board. The public may even be notified and given a chance to object.
Pretty simple, right?
The mistake to avoid is failing to do this first. Without proper zoning approval, a home business is at risk of neighbor complaints and municipal enforcement actions.
Virtual Business Address Services, What They Are and Why You Need One
The other “gotcha” for home based businesses involves business addresses. Using your home address in the business comes with a ton of problems and red flags.
First, it publicly discloses your private personal information in business registrations and directories. It also looks unprofessional to customers. Finally, it can violate zoning restrictions as mentioned above.
This is the exact reason why most legitimate home based businesses use virtual business address services. A virtual business address gives your company a real street address without a physical office space.
The benefits of virtual addresses are huge:
- Privacy protection – Keep home addresses off public business registrations
- Professionalism – Put a business street address on cards and marketing materials
- Mail forwarding – Get mail, packages, and correspondence at a secure location
- Legal compliance – Provides a legal address for licenses, LLC registration, and taxes
Virtual business addresses are completely legal in the United States. They can be used for most business registrations, receiving official government correspondence, and even for an EIN from the IRS.
The key is to work with a reputable provider that is itself a registered CMRA (Commercial Mail Receiving Agency) with the postal service.
Business Licenses and Registration
No business can legally operate without appropriate licenses and registrations. Home based businesses are no different.
The specific licenses and registrations required will depend on the business type and location. But most home businesses should at least have a general business license from the city or county.
Here are the common licenses and registrations most home businesses need:
- General business license – Issued by the municipality where the business is located
- Professional licenses – Varies by state and profession
- Sales tax permit – Required to collect sales tax on goods or services sold
- Health permits – Required for food related businesses
In addition to these licenses and permits, most home businesses should also register as a formal legal entity. An LLC or corporation is often chosen to create a legal separation between personal and business assets.
According to the SBA, 69% of all startups are home based businesses. Each of these businesses needs proper registration and licensing in order to operate legally.
Don’t forget about the Employer Identification Number (EIN) either. This is a unique business identifier issued by the IRS and required for business bank accounts, taxes, and employees.
Protecting your Personal Privacy
Running a business from your home creates unique privacy challenges. Address information is often required on business licenses and registration documents.
The problem is that public business records are available to anyone.
Curious strangers can lookup business registration documents and easily find where business owners live. The potential risk goes from simple junk mail solicitations to unknown visitors and identity theft.
Protecting privacy requires a layered approach:
- Virtual business address for public filings
- Separate business phone number
- Separate business bank account
- Registered agent for legal documents
Privacy concerns are often overlooked by home business owners until issues arise. Taking simple precautions from the start will prevent these problems later.
HOA and Lease Restrictions
Of course, zoning laws aren’t the only rules which apply to home businesses.
Homeowners Association (HOA) rules must also be followed. CC&Rs (Covenants, Conditions and Restrictions) for planned developments often restrict or prohibit business activities more strictly than municipal zoning laws.
Renters also need to be aware of lease and rental agreements. Business operations are often explicitly restricted in these documents. Risk operating a business without landlord consent at your own risk.
Before starting any home based business, review:
- HOA rules and regulations
- Lease or rental agreements
- Neighborhood covenants and agreements
- Insurance policy restrictions
Get landlord or HOA approval in writing to protect against future issues.
Wrapping Things Up
Operating a legitimate home based business requires more than just a good idea and hard work. Staying on top of legal essentials is the foundation all the other work is built upon.
The home business legal essentials include:
- Checking local zoning laws and obtaining necessary permits
- Using a virtual business address service for privacy and professionalism
- Registering the business and getting required licenses
- Creating a legal entity to separate personal and business assets
- Reviewing HOA rules, lease agreements, and insurance policies
Addressing these legal requirements from the start will prevent bigger headaches later. It also sets the professional foundation for home businesses to compete against larger companies.
The home business legal requirements might sound like a lot at first. But when broken down into actionable steps, compliance becomes practical for any home based entrepreneur.
