7 Tips to Make Sure Your Home Business Is Operating Legally

Updated on October 28, 2020
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how to run a business from home legally

Now more than ever feels like a great time to launch a home-based business—remote work is the new norm and ecommerce is showing no signs of slowing down. What’s more, running a business from home often translates to significantly lower startup costs since renting office space is out of the equation.

If you’ve got a great idea and some time to develop it, you may be itching to get moving on your new at-home venture. You might also be asking yourself how to run a business from home legally. Home-based businesses aren’t immune to legal challenges. In fact, legal woes are among the top 20 reasons why startups fail, according to a 2019 study conducted by CB Insights.[1]

Following all the legal requirements for your home business is the best way to make sure everything’s on the up and up. These insider tips are designed to make the process a little easier.

1. Give a Lot of Thought to Your Business Name

There are plenty of legal requirements for running a business from home. When thinking about how to name a new business, it’s easy to focus solely on attracting customers. This is certainly important, but failing to do your research here could have legal repercussions if you unwittingly use a name that another business has already claimed—especially if it’s in a field that’s closely related to yours.

To avoid an infringement claim, spend some time doing a Secretary of State business search. This will help you find other businesses near you that are already operating under the name you want. Poking around the U.S. Patent and Trademark Office to search for trademark filings is another way to sidestep a potential lawsuit down the line.

Entrepreneurs who don’t have time for this kind of legwork can partner with a trademark attorney to do the heavy lifting for them. These types of lawyers can also offer personalized guidance around protecting your business’s intellectual property assets.

One other note about naming your company—filing something called a DBA (shorthand for “doing business as”) allows you to do business under a name that’s different from your business’s legal name. General partnerships and sole proprietorships, which we’ll explain in further detail shortly, are required to file DBAs.

2. Figure out the Right Way to Structure Your Business

When it comes to understanding how to run a business from home legally, it’s important to understand that home businesses come in all shapes and sizes. The way you structure yours will largely determine your level of legal protection. It also plays into your business’s financial dealings—the business entity you choose impacts how much you’ll ultimately pay in taxes, as well as your ability to raise capital.

Each type of business entity has its own legal pros and cons. Choosing the right one is important in the event that your home-based business is sued. It’s a lot to unpack, but here are the key legal points to consider for the most common business entity types.

 Type of Business Entity What It Is Legal Protection
Sole proprietorship

Unincorporated business that’s owned by a single person or married couple
The owner is on the hook for all business liabilities. That means your personal assets are up for grabs if someone sues your home business.
General partnership
Unincorporated business owned by at least two owners
Like a sole proprietorship, each owner is personally responsible for business liabilities. Depending on your state, you may also be liable for another owner’s negligence.
Limited liability company (LLC)
Registered business that provides all members with built-in protection from personal liability
Offers more legal protection because business liabilities do not affect the owner’s personal assets
Incorporated business that’s made up of shareholders, officers and directors
C-corps are separate legal entities, so personal liability is a non-issue

Remember, if you’re unsure which entity type is best for your home-based business—or how to stay compliant once you’ve registered—consulting a business attorney and/or tax professional can help guide you through the process.

3. Clarify Whether or Not You Need to Register Your Home Business

There’s no shortage of laws on running a business from home The way you structure your home business determines whether or not you’re legally required to register it with your state or local government. Sole proprietorships and general partnerships are free to take a pass, but home-based LLCs and C-corps are legally required to register with the state.

Business registration isn’t a one-size-fits-all situation. The process varies from state to state, so check out your local business bureau or Secretary of State for clarity around the proper procedures.

Let’s look at California as an example. Their Secretary of State clearly outlines all of their requirements and fees for getting registered. Home business owners in this state who have at least one employee must also register with their Employment Development Department. Those using a DBA will need to file it with their county, as well.

4. Consider Registering for an Employee Identification Number

An employer identification number (EIN) is exactly what it sounds like. Companies use this business tax ID number, which is assigned by the IRS, when opening bank accounts or applying for loans or credit. An EIN also comes in when a business is filing its payroll tax return and income tax return.

So do you need one for your home business? From a legal standpoint, it all depends on how you’ve structured it. If you have employees, an EIN is legally required to dole out wages and file payroll taxes. An EIN is also on the table if your business is a corporation, partnership, or LLC with multiple members. In these cases, you’ll need an EIN to file your business income tax return. Applying for one is free, and you can do it online directly through the IRS.

If you have no employees and are a single-member LLC or sole proprietor, you’re under no obligation to get an EIN, although they do come with some administrative perks. An EIN also protects you from identity theft since you’re keeping your social security number out of your business dealings.

5. Apply for All Required Business Permits and Licenses

Keeping your home business legally compliant may involve locking down required business licenses and permits from your city, county, state, or country. It all depends on where you live and the type of business you have. If your business is in an industry that’s overseen by some type of regulatory agency or association, obtaining a business license may also be contingent upon presenting certification from those organizations.

Making sense of how to run a business from home legally means understanding these key details. At the end of the day, business licenses are designed to make sure companies are operating in a way that’s transparent and safe for consumers. Your local business licensing agency is a great jumping-off point when starting your research.

Let’s say you’re looking to open an at-home daycare center. Each state requires a variation of certifications and licensing to operate legally. This involves training and special credentials. For example, you may need to get CPR-certified or undergo a background check. Doing your homework on the front end can only help you stay in compliance.

6. Make Sure Your Local Zoning Laws Allow for Residential Businesses

You may think running a company out of your home is your business alone, but that isn’t always the case. Your local zoning rules may prohibit home-based businesses altogether, though this is uncommon.

According to Nolo, most municipalities aren’t this strict.[2] The majority allow it as long as the property is used primarily as a residence. Business activities also cannot negatively impact neighbors. Contact your city or county clerk’s office or check their website to see if your home business idea is in accordance with residential zoning ordinances. If not, you may need to tweak your plan or appeal to the zoning board to see if they’ll grant an exception.

Another concern for home-based business owners has to do with their specific neighborhood. If you live in a condo, subdivision, or planned unit development, there may be special rules around property use. These rules—called covenants, conditions, and restrictions (CC&Rs)—might prohibit a residential business. It pays to take a close look at these conditions before rolling out your business.

7. Stay Compliant With All Tax Laws

No matter what your business, paying taxes comes with the territory. Income tax and self-employment tax are a given. You’ll also be responsible for paying sales tax if your business sells a product or a taxable service. In this case, you must collect sales tax from your customers, then report it and pay up to the appropriate agency.

Staying compliant with tax laws is a non-negotiable, even for at-home business owners who act as online sellers. Some businesses, like medical services, for example, are exempt from sales tax. Check in with your state’s department of revenue or tax agency to get clear on what you can expect. This State and Territory Business Resource tool may also shed light on state-specific business tax information.

Using accounting software or outsourcing the task to an accountant might be worth it to ensure you don’t miss a beat. Both can help you understand the deadlines and rules so that you don’t run into any back taxes or fines.

The Bottom Line

Getting a home-based business off the ground is an exciting venture, but it also requires understanding the legal requirements for running a business from home. Failing to do so could come back to bite you. The last thing you want is to expose yourself to unnecessary risk that could have been avoided. As the old saying goes, hindsight is 20/20.

From appropriately structuring your business to applying for required licenses and permits, taking the time to follow the steps outlined above can help put you on solid ground so that you can focus on what matters most—growing your new business.

Article Sources:

  1. CBInsights.com. “The Top 20 Reasons Startups Fail
  2. Nolo.com. “Home Businesses and Zoning Laws
Marianne Hayes
Contributing Writer at Fundera

Marianne Hayes

Marianne Hayes is a small business owner and longtime freelance writer who’s been covering personal finance for nearly a decade. She specializes in small business news, budgeting, saving, and wealth management. Marianne has written for Forbes, CNBC, LendingTree, Experian, Mint, LearnVest, The Daily Beast, HuffPost, and more. When she isn’t writing about small business and finance, she’s teaching creative writing workshops and curling up with a good book. She lives in Florida with her husband, three daughters, and miniature dachshund.

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