Ask the Small Biz Adviser
Starting a home business can be as labor-intensive as starting a regular brick-and-mortar company.
Dear Small Biz Adviser
How do I go about starting a home-based business, and how do I apply for a tax ID number?
Believe it or not, starting a home-based business requires as much planning as a brick-and-mortar venture.You need to:
- Research your market;
- Develop a good promotional strategy;
- Devise a functional in-house operation;
- Investigate and abide by licensing and zoning rules; and
- Consider the tax consequences.
Market research requires clearly defining what products and/or services you will provide and to whom you will sell; identifying where these potential customers are; and setting your pricing structure.
Some key questions to consider are: If you need to warehouse product and supplies, is there enough room in your home? Or will you need to rent mini-warehouse space? Will you have an appropriate space in which to greet customers or will you have to go out and visit with them? Or will you deal exclusively online?
In my case, I deal exclusively with my customers either online or visit them in their workplaces. However, I do have a space in my home where customers can be greeted and dealt with in a professional manner.
- advertisement -
Being home-based may afford you the opportunity to keep operating costs down. That will help you compete with brick-and-mortar competitors who have the added costs of rent, utilities, real estate taxes, leasehold improvements, mortgages and the like.
You will want to examine successful competitors to learn how they promote their businesses. For example, the Yellow Pages may or may not be the best place to advertise. Not all services are sought in the Yellow Pages. Then again, it is the first place most people go to find what they are looking for. You may also want to construct a Web site, given the fact that you will not have a brick-and-mortar presence. In turn, that will require you to educate yourself on the nuances of affiliations, co-branding, search engine ranking and the like to increase visitors to your site.Working from the home has many advantages over the more traditional street setting.
- Travel time and related expenses, in many cases, are eliminated.
- Leasehold improvements are minimized.
- There are no utility deposits for electricity and water.
However, you will want
to install a separate telephone line for your business. It is simply unacceptable to share business time with a home line. It can harm your image, prevent customers from accessing you and create added havoc if you also need to access the Internet.
Additionally, there are online services that provide fax and telephone answering services free of charge.
As for your office, try to set up a room devoted exclusively to your business. The sounds of TV, radio and family in the background when conducting business can be annoying and counterproductive. Do not allow your home office to be used for anything other than your business. Maintain and enforce the atmosphere of business in that room. In the morning, dress for work. It mentally helps you to prepare for the day ahead. Some people can work in their pajamas. For others it can impair productivity. You be the judge of what is best for you. Check out this story by Dana Dratch on coping with the stress of a home office.
Licenses and zoning are another matter of concern. Occupational licensing is typically the same for all, home-based or not. But zoning is another matter. Until recently, many municipalities banned home-based businesses. And there are still some that maintain such a ban to this day. There is the concern with "outsiders" traveling through the neighborhood and customer parking in a residential area. So check with the local authorities to ensure that this will not be a problem. Check out our basics on the rules and regulations you'll have to deal with as a small-business owner.
You asked about a tax ID number. You may already have the one you need -- if you are going to be a sole proprietor, your Social Security number will act as your ID number for taxation purposes.
If you are incorporating, forming a partnership or have employees, you will need to get an Employer Identification Number. The process is straightforward: Fill out a copy of Form SS-4, Application for Employer Identification Number. You can get Form SS-4 here -- detailed instructions are on the second page -- or by calling the Internal Revenue Service at 1-800-829-3676. For more on the structure of your business, check out this story by Jeff Ostrowski.
Finally, do take the time to read IRS Publication 587 and the Bankrate.com columns on tax tips for home offices. You will be amazed at some of the home expenses that partially qualify as deductions against the business's income.
I wish you well.