How to Start a Home Business in 8 Steps
Step 1: Decide what type of business to start.
Step 2: Choose a name and entity for your home business.
Step 3: Write a business plan.
Step 4: Register your home-based business.
Step 5: Get a business license.
Step 6: Get a business bank account and credit card.
Step 7: Secure funding.
Step 8: Hire any employees you may need.
If you’ve ever spent the day working from home and loved it, you may be wondering how to start a small business at home. After all, it has some definite perks: being your own boss, no commute, flexible schedule, and more.
You’re not alone. Plenty of other people have had the same idea and launched a home business. About half of the businesses in the United States are home-based, and many of those are non-employer businesses, meaning just one person runs the show. There are plenty of options you have when it comes to choosing what you’d like to do as your home-based business, from event planning to accounting and everything between. So if you’ve been considering how to start a home business, this guide will break down everything you need to know. But first, let’s start by defining what a home business truly is.
What Is a Home Business?
A home-based business is one that operates primarily out of the home. That means the business is headquartered in the home, usually the home of the business’s founder, and though some business practices may take place outside of the home, there is no other main office.
These home-based businesses are far different than simply working from home, which can be done while still working for a business or company that is headquartered elsewhere. While various businesses can be run from home, some industries are exceptionally popular for home-based businesses. In the information industry, there’s a 70% chance of a company being a home-based business, according to the Small Business Administration. The construction industry follows closely behind at 68.2%.
People arrive at the idea to start their home business 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, says Yang. “I love the flexibility. I love not having to deal with office politics.”
But working from your home isn’t without its challenges. For one, it can be somewhat isolating, which Yang combats by scheduling lunches with friends and colleagues to break up the day. Another challenge? Being self-disciplined. “It’s easy to get distracted with other things,” says Yang. 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.
So now that we’ve got a good idea of some of the benefits and challenges of running a home business and what a home-based business really is, let’s get into how to start a small business at home.
How to Start a Home Business: Your 8-Step Guide
As is the case with starting any business, starting a small business at home requires some formal planning and legwork to make it official. Of course, one thing you won’t have to worry about? Finding office or retail space. But here’s what you will need to do to start a home business.
Step 1: Decide What Kind of Home Business You Want to Start
Like we mentioned above, there are a number of different home-based business options you have available to you—and within some industries, home businesses are far more popular than others.
When deciding what type of home business you want to start, you should consider a few factors. The first and most obvious one will be what skills or passion you have that you feel would translate well to a business. But when starting a home business you’ll want to take it a step further and make sure your business idea can effectively be run out of your home. Additionally, you’ll want to conduct some market research to make sure there’s demand for your product or service, who your competitors are, and more.
Once you choose the type of home business you want to start then you can move onto the other steps in how to start a home business.
Step 2: Choose a Name and a Business Entity for Your Home Business
Now that you’ve chosen the kind of home business you want to start, a name might be obvious to you. Keep in mind, a good business name is one that’s memorable and 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 state’s secretary of state or business bureau website, the U.S. Patent and Trademark Office, and by searching Google. Extending your search beyond your state is especially important if you plan on launching an online component to your home business, as you want to make sure your domain name is available.
You’ll also need to choose a business entity to define your business structure. The business entity you choose for your home business will affect how your business is taxed, the legal risk you’re exposed to, and more, so it’s a good idea to consult a professional at this stage to ensure you’re choosing the right one for your specific circumstances.
Some popular business entity options are a sole proprietorship, general partnership, LLC, or corporation. Again, the right one for your home business will depend on several factors.
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. Because you won’t be registering with a specific business name, the name of your business will default to your legal name. If you don’t want the name of your home business to be your own name, you can file a DBA, or “doing business as,” in order to operate your business under a different name.
Step 3: Write a Business Plan
Once your business idea, name, and entity are locked down, the next step in starting a home business is writing a business plan. Your business plan should be thorough and in-depth to best prepare you to run your new home business. You can use a business plan template or make your own, but either way, you want to include an overview of your business, a market analysis, a financial plan, and a marketing and sales plan, among other details about your business. Think of your business plan as a roadmap for how you’ll take your home business from an idea to a profitable company.
Keep in mind, a lack of demand for the services or goods a business provides is one of the main reasons small businesses fail. This means you really need to be sure that your home-based business is filling some sort of gap in the market. 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 plan for your business and have considered all of the risks is essential.
This is also a great time to do 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 him, his research centered around understanding the challenges and pitfalls of the business. “I’m 6’7” myself, and I grew increasingly frustrated with the 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,” he explains. This lack of clothing options revealed a gap in the market that he decided to capitalize on.
Step 4: Register Your Home Business
Starting a home business may seem like a personal matter, but you’ll still need to register your business with the state and federal governments. It may be an office from home, but in the eyes of the government, it’s a business nonetheless.
You should first apply for an employer identification number. This number (called an EIN) comes with several benefits that you might appreciate, whether you’re required to obtain an EIN or not. You can easily apply for an EIN online with the IRS and will need one depending on your business entity, whether you plan to hire employees, want to open a business bank account, and more.
You’ll also need to register your business with the state and the federal government in order to pay taxes and comply with any additional requirements. The specifics of registering your home business will depend on the state where you’re located, but your secretary of state or business bureau’s websites are a good place to start.
Step 5: Get a Business License
Depending on what your business will be doing and what state you’re in, you might also need to get a business license. Some industries are more heavily regulated than others and require more licenses, but chances are good you will need a business license of some kind to start your home business.
If you’re not sure whether or not you need a business license, you don’t want to just assume the answer is no. Finding yourself wondering, “Do I need a business license?” is totally normal, but a very important question to answer. You will most likely at least need a local business operating license if not others, like health licenses or building permits. You might want to consult a legal professional to make sure that you’re doing everything correctly and legally before moving onto the next step.
Step 6: Get a Business Credit Card and Business Bank Account
You may be mixing your work and personal lives by bringing your business into the home, but that doesn’t mean you want to commingle your finances. Having separate business and personal finances is crucial for easy bookkeeping and tax filing, as well as protecting your personal assets.
Having separate business finances will also allow you to build business credit. Opening a business bank account is the first step to setting up your business finances. You’ll use this account for any money coming into your business and for paying any suppliers, services, or employees. When you’re just starting your home business, you will likely only need a business checking account, but as your business grows and you have extra capital that you don’t need to invest immediately back into your business, you can also explore your business savings account options to help your money grow.
Next, you’ll want to get a business credit card. You’ll use this card for any transactions related to your business, which will make your business taxes much easier to navigate. Plus, using the card responsibly—meaning you maintain a good credit utilization ratio and always pay your balance on time—will help boost your business credit score, something that will come in handy if and when you seek funding.
Step 7: Get Any Funding You Need
Starting a home business does eliminate some of the costs of starting a business, like renting office space. However, you’ll likely still have significant expenses when you’re first getting started, depending on the type of home business you’re launching.
If you’re lucky, though, you might not have any startup costs at all. That was the case for Alexis Haselberger, a time-management and productivity coach, who launched Alexis Haselberger Coaching. “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,” Haselberger says. Even with putting no 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.
Of course, if you’re starting a business that requires a lot of inventory or equipment, you will definitely have some initial costs—which many new business owners do. 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 may explore your funding options.
Getting a business loan as a startup is challenging, as most loan options will require a minimum time in business and a good credit score. However, there are options for new businesses, such as an SBA microloan, business line of credit, or equipment financing. You may also find a 0% intro APR credit card is particularly useful, as you can treat the introductory period as an interest-free loan of sorts. Just make sure you have a plan to pay off the balance before the offer period expires and the APR jumps.
Step 8: Hire Any Employees You Need
Most home businesses in the U.S. are considered “non-employer” businesses, meaning they don’t actually have any employees other than the one person running the business. But, if you do find yourself hiring your first employee, you’ll probably want to work out your hiring standards and know exactly what you’re looking for. When choosing someone else to bring on board, consider what skills you might not have or what skill gap you’d like them to help fill.
Keep in mind, hiring an employee also comes with a lot of additional requirements, such as insurance, taxes, and more. Make sure you consult with a legal professional to make sure you’re prepared to take on this extra expense before you start your hiring search.
How to Start a Home Business: The Bottom Line
When it comes to starting a home business, it offers you a huge amount of flexibility you might not get working in an office or for another company. Working for yourself at home grants you the freedom to be your own boss and make your own hours.
“Even with flexible work hours, I had never managed to get to my cross-town office before 7 a.m. When I started running my home-based business, I was able to start work as early as 5 a.m. which, for a morning person like me, is when I produce my most valuable work,” Sarah Anne, founder of Good Life Marketing, told Fundera.
She’s been working at her home-based business for more than 10 years and recommends working from home to others as well. “If you’re self-motivated, disciplined, and excited by the idea of being your own boss, working from home can be remarkably rewarding. I highly recommend it to clients who work best alone and derive satisfaction from doing things their own way,” she says.
When it comes down to it, the statistics don’t lie. Plenty of people in the U.S. are working at their own home businesses and finding success in them as well. With the steps above and some advice from business owners, you too can join the millions of small business owners who tackled starting a home business.