There are countless garage-to-Fortune 500 success stories. Jeff Bezos first ran Amazon.com out of his garage in Bellevue, Wash. As Stanford University graduate students, Larry Page and Sergey Brin launched Google from Susan Wojcicki’s garage. And invoicing company FreshBooks was headquartered in Mike McDerment’s parents’ basement for 3.5 years.
Launching a business from your garage, basement or dining room table is a great way to keep overhead costs down when you’re just starting out. And in most cases, it’s usually the only option for bootstrapping startups. But how are you supposed to handle a home-based startup from a legal perspective?
Whether you’re developing a mobile app or digital media consulting group, here are six steps to ensure your home-based business is legit.
1. Select Your Business Name
Even if you’re a solo business, you’ll still want to create a name and identity for your business that’s separate from yourself. Once you decide on a great business name, make sure it’s legally available, as you don’t want to find yourself on the wrong end of a trademark dispute.
Follow these three basic steps to ensure your desired name is available.
Check with your Secretary of State database to see whether the name is already registered within your state.
Perform a free trademark search to determine whether someone has already filed a trademark for your name.
Run a comprehensive national name search into all state and local databases. This can usually be completed for a small fee with an online service. This step is important, since you can still infringe on someone else’s name even if she's never formally registered it with the U.S. Patent and Trademark Office (USPTO).
2. Incorporate (Or at Least Register Your Business Name With the State)
Forming an LLC or corporation for your home-based startup will protect your personal assets (such as your savings and personal property) from any liabilities the company may encounter. In short, should your business be sued or can’t pay its debts, your personal property may be shielded from any judgment.
Each business structure has its own advantages and disadvantages, depending on your specific circumstances. The LLC is great for small businesses that want legal protection, with a minimum of paperwork and legal red tape. A C Corporation is good for bigger companies that plan to go public or seek VC funding. And an S Corporation can be a good option for those companies who qualify. Your choice in business structure will impact the taxes you pay, so it’s wise to consult a tax advisor or accountant first.
Some new startups aren’t quite ready to take the plunge into incorporation, and that’s okay. If you’ve formed a business and aren’t planning on incorporating or forming an LLC in the near future, you should register your business name with the state. This simple step is known as filing a DBA (Doing Business As or Fictitious Business Name). By filing a DBA, you’ll be legally able to use a business name. And best of all, it ensures that no one else can use your business name in your state.
3. Get a Tax ID Number
You don’t want to give out your social security number to every client and vendor your business encounters. For this reason, you’ll need to secure a Federal Tax Identification Number, also referred to as an Employer Identification Number. Issued by the IRS, the tax ID number is similar to your personal social security number, and allows the IRS to track your company's transactions. Click here to learn more and get started.
4. Get a Registered Agent
If you’ve incorporated or formed an LLC for your startup, the state requires that an agent for the business is always available during normal business hours and has a physical address, in order to receive important mail sent by the state (such as tax documents or a notice of litigation).
For this reason, many small businesses get a registered agent to take the responsibility. The other benefit for the home-based business is the registered agent’s address is publicly available, so anyone has access to it. If you want to keep your personal address information confidential, getting a registered agent gives you an added layer of privacy.
5. Check if You Need Any Local Permits
Depending on your business type and local ordinances, you may be required to have one or more business licenses and/or permits from the state, local or even federal level. These licenses can include a general business operation license, zoning and land use permits, sales tax license, health department permits and occupational or professional licenses. It’s best to get the proper licenses from the start, rather than dealing with back payments and penalties.
6. Know Your Home Office Deductions
If you use any portion of your home exclusively for business purposes, you’re entitled to claim a home office deduction. If you operate your business as a sole proprietor (i.e. you didn’t incorporate or form an LLC), you can deduct certain home expenses based on the percentage of your home that is used for business purposes.
For example, if you use a spare room of 180 square feet as an office, and your home is 1,900 square feet, you can write off 9.5% of certain home expenses, including rent or mortgage payments, insurance (homeowners or renters) and utilities.
If your company is structured as an LLC, S Corp or C Corp, the corporation can reimburse the shareholder for the home office costs on a monthly basis under an accountable expense reimbursement plan. This becomes a deductible business expense for the corporation. Talk to an accountant to determine the most favorable solution for both the corporation and shareholder.
Get Your Legal Ducks in a Row
When running a business from your home, you need to take your legal obligations seriously. Getting your legal ducks in a row right from the start will help you avoid any pitfalls down the road as you scale up and move out of the garage.
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