How to Start a Home Business: The Ultimate Guide
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If you've ever been interested in learning how to start a small business from home, now might be the perfect time. Due to the global COVID-19 pandemic, more people than ever before are working from home and launching their own startups.
Although starting a business from home has its perks, like starting any business, there is a lot to go through in order to set yourself up for success. In this guide, we'll break down everything you need to do, step-by-step, to learn how to start a home business.
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How to start a home business in 9 steps
So, if you're wondering how to start a small business at home, you'll find that the process requires planning, preparation and the documentation to make it official (and legal).
Although it may seem overwhelming — as starting a business often is — if you take things one step at a time, you'll find that the process becomes much more manageable. Plus, when you're starting and running a business from home, there are a number of details you don't have to worry about, like finding an office or retail space.
1. Decide on a successful idea
The first step in starting a business from home is determining exactly what kind of business you want to start.
Of course, there are a number of different home business ideas out there — and within certain industries, home businesses are far more popular (and feasible) than others. As an example, according to the SBA, a business in the information industry has a 70% chance of being home-based, closely followed by businesses in the construction industry, at 68.2%.
So, how do you decide on the perfect (and profitable) idea for your home-based business?
In essence, this part of the process is a process in itself. After all, deciding what type of business you're going to run will influence all of the other steps from here on out.
With this in mind, to make this important decision, you can consider the following:
What skills or talents do you have? Thinking about the skills, talents and passions you already have is a great way to start brainstorming the best business ideas. For example, if you're good at sewing, you might consider starting a seamstress business, or you might consider making and selling your own apparel.
How can these skills or talents translate into a business idea? Unfortunately, not every talent or skill will translate into an actual business idea. For instance, you might be a great soccer player, but it may not be feasible to start a soccer coaching business.
Can this business idea actually be run from home? It's not only important to find an idea that plays to your talents, but also one that can be run from home. If you're a skilled cook, you may be able to start a private chef business where your home serves as your office, but you may find it difficult (with laws and regulations) to start a catering business from home.
Once you've gone through this exercise and have an initial idea for your home-based business, you'll want to ensure that it's worth investing in. To make this evaluation, you'll want to do a few things:
Conduct market research: First, you'll want to perform some research to ensure there's market demand for your product or service. Through this process, you'll also want to consider who your competitors are, what your value proposition is and what your target market looks like.
Consider startup costs: Before you decide to run with any given idea, you'll want to think about how much it will cost to start this type of business from home. If you're going to start a freelance writing business, your startup costs may be very low — especially if you already have a computer and internet access. On the other hand, if you're planning on starting an Amazon selling business, you might need to invest more in terms of inventory, packing and shipping, etc.
Test your idea: There are a variety of ways you can test your idea to decide whether it's a worthwhile investment. If you're starting a service-based business, you might offer your services for free to test the market. On the other hand, if you're planning on selling a product, you might test it out with a select group of people or advertise it on a crowdfunding platform to gather responses before moving forward.
Ultimately, people arrive at their successful home business idea in all sorts of ways. Scottie Yang, a Tempe, Arizona-based business owner, decided to go all-in on his home business after he lost his job. After a career in television and video production, he switched gears to start his own clothing company called Heights Apparel, which creates clothing specifically for men who are above-average height.
"Once I got a taste of getting to work from home, it made it really hard to want to go work in an office every day," Yang says. "I love the flexibility. I love not having to deal with office politics."
2. Write a business plan
Once you've decided on a profitable home business idea, your next step will be to write a business plan.
Writing a business plan can often be one of the most time-consuming parts of learning how to start a small business at home, however, it's essential to the potential growth and progression of your operations.
In this way, your business plan should contain all of the information you need to prepare you to run your business from home. Although there are different methods for writing a business plan, generally, you'll want your business plan to include:
An overview of your business.
A description of your product or service.
A marketing and sales plan.
A financial plan and projections.
By going through this process, you'll have an opportunity to expand upon the considerations you made in the first step — thinking about the way your business will operate in more detail. Along these lines, you can think of your business plan as a roadmap for how you'll grow into a profitable home business.
Moreover, your business plan will also help you later on when you need to apply for funding or seek investors to start or grow your business. Showing potential investors or lenders that you have a funding plan for your business and have considered all of the risks is essential.
This is also a great time to do more research if you aren’t experienced in the field you’re starting your home business in. Yang was doing research on his business three years before he even started it.
"Because of my lack of experience and knowledge, I began researching the concept in 2015. I did tons of research," he says. He officially formed his LLC in 2018 and started selling online in 2019.
For Yang, his research centered around understanding the challenges and pitfalls of the business.
"I'm 6'7'' myself, and I grew increasingly frustrated with the [clothes] options available to me, and the large amount of additional money I had to spend in order to get pieces of clothing to fit my frame the right way. It really has an impact on how you feel."
This lack of clothing options revealed a gap in the market that he decided to capitalize on.
3. Choose a name and business entity
After you've written your business plan, you'll want to officially decide on the name of your business.
You'll want to choose something that's memorable, but also something that makes it clear what your business is or does.
Once you have a name in mind, you’ll have to make sure it’s actually available to use. There are a few places you can check this — including your secretary of state's website or business bureau website, the U.S. Patent and Trademark Office and by doing a simple Google search.
This being said, extending your search beyond your state is especially important if you plan on launching an online component to your home business, as you'll want to make sure that a potential domain name is available for your business's website.
In addition to deciding on a name, you'll need to choose a business entity type to define your business structure. The business entity you choose for your home business will affect how your business is taxed and the legal risk you’re exposed to, as well as whether or not you need to officially register your business with the state.
At this point, you might decide to consult an attorney or online legal service to ensure you're choosing the right entity type for your unique business. The chart below can help you determine which of these options will work best for your business:
Business Entity Type
-Easy to start (don't need to register with the state) -Tax filing is simple -No corporate formalities or paperwork
-You're personally responsible for all business debts and liabilities -No separation between you and the business -Harder to build business credit
-Easy to start (don't need to register with the state) -Partners divide profits and losses -Can deduct most business losses on personal tax returns
-Each owner is personally responsible for all business debts and liabilities -Issues between partners can damage the business -Harder to build business credit
Limited liability corporation (LLC)
-You're not personally responsible for all business debts and liabilities -You can choose how you want your LLC to be taxed -Not as many formalities as other corporation types
-More expensive to start than a sole proprietorship or general partnership; requires state registration
-Owners do not have personal responsibility for business debts and liabilities -More tax deductions than other entity types -Lower self-employment taxes
-More expensive to create than other entity types -Face double taxation -Numerous corporate formalities required -Cannot deduct businesses losses on personal tax returns
If you choose to structure your home business as a sole proprietorship or a general partnership, you won’t actually have to register your business with the state where you’ll be operating.
Therefore, because you won’t be registering with a specific business name, the name of your business will default to your legal name. In this case, if you'd prefer to start your home business with a different name, you can file a DBA, or “doing business as,” with your state in order to operate your business under that name.
4. Register your home business
If you decide to form your business as an LLC or C corporation, you'll need to register with your state to start and run your business from home legally.
The exact process that you'll need to follow to complete this registration will be unique to your state. Therefore, you'll want to consult your local Secretary of State or business bureau for guidelines on how to complete your business registration.
This being said, regardless of whether or not you have to register with the state, you'll want to register your business with the federal government by applying for an employer identification number. This number (also called an EIN) comes with a number of benefits, making it a worthwhile choice whether or not you’re technically required to obtain one.
In short, this number will be useful for hiring employees, opening a business bank account, filing business taxes and more. You can easily apply for an EIN online with the IRS.
5. Get a business license
Once you've completed your necessary registration with the state and federal governments, the next step in learning how to start a home business is getting a business license.
As a home-based business, your business license requirements may differ from other types of businesses. Nevertheless, the licenses and permits that you need will also vary based on the state where you're located.
Generally, when you're starting a small business from home, you'll want to look into the following types of business licenses:
Home occupation permit: Most home-based businesses will require a home occupation permit to operate legally. Essentially, this permit shows that by running your business out of your home, you're not adding significant traffic, noise, or harmful environmental conditions to your area.
Property use and zoning permits: When you're starting your business from home, you'll want to check into local zoning ordinances that apply to home-based businesses in your area. Some residential areas have strict zoning regulations that may limit or even prevent home-based businesses from operating. You'll want to check with your local or city government office to find out what regulations might apply to you.
General business licenses and permits: On top of the two previous permits that are more specific to home-based businesses, you'll also want to consider any general business licenses you need to operate legally. Along these lines, you might need a business operating license, professional or trade license, sales tax permit and more.
Overall, even if you're just starting an online consulting or freelance business from your home, you shouldn't assume that you don't need a business license. In addition to consulting local and state business resources, you might also work with a legal professional or service to ensure that you've taken all the necessary steps to run your business from home legally.
6. Separate your business and personal finances
At this point, you've taken the steps necessary to make your home-based business official and legal. Now, you're ready to take the steps to learn how to run a business from home legally — starting with managing your finances.
Although you may be a one-person operation, it's essential to separate your business and personal finances, especially when you're just starting out. As we mentioned briefly above, one of the downsides of some of the most common business entity types for home-based businesses is that you're personally responsible for your business's debts and liabilities.
For this reason, it's even more important to ensure that you protect your personal assets by separating your finances — plus, keeping your finances separate will be crucial for bookkeeping, tax filing and general organization.
Open a business bank account
In addition to applying for an EIN, one of the best ways to separate your finances is to open a business checking account.
You'll use your business bank account to manage any money coming into your business, as well as for paying suppliers, services, or employees.
There are a variety of business bank accounts to choose from — however, you might start with the bank where you have your personal account, or look for a free business checking account.
Since you're running your business from home, you may want to focus your search on a business bank account with online and mobile banking, mobile check deposit and free ACH payments.
Apply for a business credit card
After you've opened a business bank account, the next step you can take to separate and start managing your finances is to get a business credit card. A business credit card can help you establish business credit and can be used for any transactions related to your business — which will make filing your taxes much easier to navigate.
Once again, there are a variety of options for business credit cards — so you might start by looking at the bank where you opened your checking account — or narrow down your search by your rewards preferences — such as cash back or travel points.
Choose accounting software
Finally, the last important piece of learning to manage your finances as a new home-based business is to choose accounting software.
Although you may not think you need an accounting software platform, successful home businesses often use one of these automated systems to make bookkeeping and taxes much easier. Plus, if you're concerned about cost, there are options for free accounting software, as well as specifically designed home-based business accounting software options.
7. Secure funding
One of the benefits of starting a business from home is that you can eliminate some of the costs associated with renting an office space or opening a brick-and-mortar location.
In some cases, you might not have any business startup costs at all. This was the experience that Alexis Haselberger, a time-management and productivity coach, had when launching her business.
What surprised me most was how easy it was to get started; as a service-based business working from my home, I had virtually no startup costs. Even without investing money into her business to start, Haselberger was able to gain clients from big-name companies like Google, Lyft, San Francisco State University and more.
However, depending on the type of business you're launching, you may need to secure financing to help cover some of your startup costs. If you’re starting a business that requires a lot of inventory or equipment, you will definitely have some initial costs. Luckily, about 44% of home-based business owners are able to start their businesses with less than $5,000 — but if your home business requires more capital, you'll want to explore your options for financing.
Typically, it's difficult for newer businesses to access traditional financing methods, so you might start with a simple business credit card or line of credit, as well as consider more creative forms of financing — like working with friends or family or starting a crowdfunding campaign.
8. Set up your office
Next, you're ready to move from starting a home business to actually running a successful home business.
The first thing you'll want to do to set yourself up for success in this regard is to set up your home office. Although there are a number of benefits to starting a business from home, there are also some drawbacks — namely, that you'll be working in the same place that you live.
For this reason, it's important to designate a specific home office space in order to promote productivity and separate your work from your home life.
As Yang said, it's easy to get distracted with other things. You will need discipline to start a home business, since no one will be monitoring your work — it’s really up to you. But once you successfully make the shift, the pros can vastly outweigh the cons.
Therefore, to set up your home office, you'll want to do things like:
Choose a designated space.
Invest in the right furniture, tools and technology.
Decorate your office in a way that works for you.
Take steps to minimize distractions.
Once you have the space you need to start running your business from home, it will be much easier to get going from there.
9. Set up tax accounts and learn about deductions
Understanding business taxes can be one of the most difficult parts of running a business — and as a home-based business, you may have unique tax obligations. We've already talked about how to obtain an EIN (if needed) and the different ways you can be taxed, depending on your business entity. As a business owner, you'll need to get set up to pay self-employment taxes quarterly, to both the federal and state government. If you have employees, you'll need to establish payroll withholding accounts, and if you collect sales tax, you must set up sales tax accounts with your state.
You'll also want to consider some key home office tax deductions you can enjoy when running a profitable home business. If you use your office regularly and exclusively for your business, you'll qualify for the home office deduction (in most cases). You can claim this deduction by calculating your square footage (the simplified way) or calculating specific home office expenses on Form 8829 (the regular method).
Taking advantage of this deduction can help you save money come tax season.
Use our guide to learn more about home business tax deductions.
Tips for running a successful and profitable home business
Even if you've technically completed all the steps necessary to start a home business, the learning process will continue as you begin your day-to-day operations. Therefore, once you've gotten to this point, you might consult these tips to successfully running a small business from home.
Consider investing in business insurance: Although insurance might not be one of your initial priorities, investing in business insurance can be crucial to mitigating your risks and protecting your personal assets. At a minimum, you'll want to look into general liability insurance for your home-based business.
Create a business website and social media profiles to promote your business online: One of the best ways to establish and promote your business's presence is to create a website and social media profiles. These online resources make it easier to interact with customers — giving customers an opportunity to learn about who you are and what your business does, as well as reach out for more information.
Always be marketing your business: Marketing is always essential to a business, but even more so when you're first starting out. You can start your marketing strategy by referring back to the plan you developed as part of your overall business plan. As you learn more about your customers and what works and what doesn't, you can adjust your strategy accordingly.
Determine when it's the right time to hire your first employee: Finally, when your home-based business grows to more than you can manage on your own, you'll want to consider hiring your first employee. Being an employer, however, will mean that you need to meet additional requirements for insurance, taxes and more. Therefore, you'll not only want to ensure that you complete all of the steps necessary to hire an employee, but that you can afford and it's the right time to do so.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.