What is a home-based business?
When defining a home-based business, the important element is the office location. A home-based business has a primary office that’s based out of the owner’s home.
That doesn’t mean all activity happens in the home. Some of the actual work can take place at other locations based on the business. For example, a home-based interior decorating business has its main office at the owner’s home, but the owner will likely go to clients’ homes for consultations and to carry out the work. A handyman might run the business out of a home office, but the repairs are done at various locations.
Benefits of running a business from home
Deciding to run a business from home makes entrepreneurship an attainable option for people who don’t have the resources to open a traditional brick-and-mortar business. When starting a fully remote business, looking at the benefits can give you the encouragement you need to start.
Here are some benefits of running a business from home:
- No commute: Working from your home office means you’re already at work, so you save time and money on the commute.
- Lower start-up costs: A home-based business still has start-up costs for equipment, marketing, supplies and other expenses, but you eliminate the cost of leasing or buying a commercial space. That lower overhead makes starting a business more feasible and can increase profitability.
- Income tax benefits: If you have a dedicated office space used exclusively for your business, you can get income tax breaks on the space.
- Schedule flexibility: Eliminating your commute gives you more time to work. Since your office is always accessible, you can schedule your work time around your family commitments. It’s easier to balance family commitments, such as school drop-off or cooking dinner, with running your business.
- No office politics: When you’re the only one in the office, you don’t have to worry about gossip at the water cooler or office politics that can affect the work environment.
- Potential to expand: A home-based business makes starting a business attainable for people who don’t have the financial resources for a brick-and-mortar business. You can start the business profitably and eventually expand to a brick-and-mortar location.
- Ideal for a side business: Starting your business at home is ideal if you’re starting small. You can run a side business in addition to your full-time job or while raising your kids. Since the expenses are lower and it’s more flexible, you can afford to move slowly.
- Be a role model: If you’re a parent, running a business from home lets your kids see you following your dreams and working hard for your success. It can teach them to be entrepreneurial from a young age.
Drawbacks of running a business from home
Despite the many benefits of running a home business, the drawbacks can interfere with your home business’s success. Considering the drawbacks helps you be realistic about starting a business from home. You can anticipate those drawbacks and create a plan to reduce the negatives.
Here are some potential drawbacks to consider when starting a home business:
- Difficult to separate work and home: When you run your business from home, you never fully disconnect from either your home life or your business. While working, you might get distracted by chores or family members. When spending time with your family, you might be tempted to sneak away and do a little more work.
- Limited space: Dividing the physical space between home and business use becomes a problem in many homes. You’re likely already filling most of your home, so claiming space for your office cramps the lifestyle you’re used to living. If you have a business with inventory or large equipment, the inconvenience can be more pronounced.
- Isolating: Working by yourself at home gets lonely. If you thrive on interacting with coworkers, you might find the isolation makes it difficult to work.
- No change of scenery: A similar drawback for some home business owners is being at home all the time. Going to an office gives you a change of scenery that can be motivating and enjoyable. Even if you love your home, it can get old being there all the time.
- More difficult to scale: Limited physical space can make it difficult to scale a home-based business. You can recruit remote employees to take on responsibilities and increase how much work you can accept, but you’re still more limited than you would be with a commercial space.
- No foot traffic: Running a home business eliminates the walk-in traffic you sometimes get with a brick-and-mortar business. A commercial location with highly visible signage can help people learn about your business if they’ve never heard of it before.
- Less professional: Some clients might view a home-based business as less professional than a brick-and-mortar business. No matter how great you are at your craft, some people might question your legitimacy.
- Legal limitations: Your local or state government might restrict the type of businesses you can run from home. Those restrictions could impact your growth or the direction of your business.
Tips for successfully running a home business
Whether you’re the only employee or managing remote employees who work for your new business, having a plan helps you avoid common pitfalls and increase success. Check out these tips to start your business on a solid foundation.
Research legal issues
State and local regulations on running a home business vary significantly, so it’s your responsibility to research all the restrictions and requirements in your area. Ignoring those regulations can result in legal action against your business even if you didn’t know about them. Handle licensing, registration, insurance and other requirements before you start running your business.
Treat it like a real business
From the beginning, treat your home-based business like a business, not just a fun side gig or hobby. Create a business plan and set a schedule to give yourself dedicated work time. Set up a separate business bank account, and track your business expenses accurately.
Separate home and business life
If possible, claim a room as your home business base so you can shut the door and keep your business physically separated. If you can’t take an entire room, set up a dedicated office space in another room. Set boundaries for yourself to keep work and home life separate. Make yourself stop working by a particular time each night, for example, to have dedicated family time.
Running a business from home means you’re surrounded by distractions, from kids demanding your attention to dirty laundry that needs to be done. You can’t eliminate all distractions, but you can reduce them by moving them out of your space or creating buffers to reduce noise in your office.
Create a remote work policy
If you’re starting a home-based business with employees, establish a remote work policy to define your expectations. Include guidelines for required work hours, availability, and frequency and method of communication.
Running a home business FAQs
Is it legal to run a business from home?
It’s legal to run a business from home in most areas, but the legal requirements, zoning restrictions and business regulations vary by state and local area. If you live in a community with an HOA, it could restrict home-based businesses. Some leases prohibit running a business from a rental property, so review your lease terms if you’re a renter.
What kind of business can I run from home?
You can run almost any type of business from home as long as your state and local laws allow it. Some types of businesses might be restricted or regulated. For example, some states limit how many children can be in your care if you start a home day care center. Home bakeries are prohibited in some states; instead, they require you to make your sweet treats in a commercial kitchen. Service-based businesses work well because you only need office space and not room for extensive inventory.
What can I claim for a home-based business?
If you qualify, the IRS allows you to deduct business use expenses for part of your home. The portion of your home that you claim for the deduction has to be used exclusively and regularly for your business to qualify. You can also take normal deductions available to any business, which might include the cost of goods sold, capital expenses, business use of your car, employees’ pay, insurance and other ordinary and necessary expenses. Consult with your tax preparation professional before starting a home business to determine how it might impact your income taxes.