If there is one nearly universal statement you can make about home business entrepreneurs it’s that they give little or no thought to the legal requirements of running their companies, opening themselves up to a world of hurt. Follow these seven legal steps and stay on the right side of the law:
- Learn to love records – No, not your 33 rpm vinyl Pink Floyd collection, but the archived tracking of every penny that flows into and out of your business. The rule is “if it has a $ sign on it, you have to keep the record of it for a minimum of seven years.” Remember that electrons are fleeting, so just stuffing the record of your income and expenses into a folder on your desktop is a dangerous prospect. Back up all your record data religiously and store it offsite, preferably on a USB flash drive in your bank’s safety deposit box.
- Determine your legal entity – Most home office workers never give a second thought to legal entities as they receive payments in their names and just plunk them in their personal bank account. This can be a reasonable choice if you’re a consultant or writer, but if you’re trying to portray the image of a “solid” company to your clients you’ll want to operate as a Doing Business As (DBA) fictitious business name. If you plan to get into some fairly heavy duty financial situations then there is no choice but to incorporate your company. It can save your home, assets and life savings if it all goes pear-shaped.
- Review your zoning – Simply because you have figured out a way to work from home doesn’t necessarily mean that it’s legal. Every square inch of your town is zoned by the municipality and there are some activities allowed on one street which are verboten on the next. Regulations vary from municipality to municipality, but generally if you’re working by yourself on your computer all day then you’re likely not in violation of your residential zoning. When you graduate to bringing customers to your home, hiring employees, manufacturing materials, larger scale shipping and receiving, and other more “advanced” functions, you are likely violating the zoning restrictions and opening yourself up to massive fines.
- Get the permits – Some home offices which are allowed by zoning are still technically businesses and therefore may have to be licensed and permitted accordingly. Take whatever steps are necessary in your jurisdiction to ensure that you’re operating 100% within the law.
- Use an EIN – An Employer ID Number (EIN) is necessary to identify a business entity. Yes, you can use your Social Security Number if you’re not incorporated and have no employees, but do you really want those personal digits floating around on all those business forms?
- Obtain a business address – No matter what your residential zoning, it’s generally a bad idea to release your home address in conjunction with your business dealings. If you’re going the DBA route you can rent a post office or private business mailbox, but if you’re incorporating you need to contract a registered agent to receive your company’s legal notices.
- Pay your taxes – This might seem like the ultimate no-brainer until you consider that a staggering number of home office workers understate their taxable income (if they claim it at all). Millions of Americans are under the complete illusion that if they receive payments for work done via PayPal and then they buy something with that PayPal money without it ever hitting their bank accounts, that “income” never really existed. Your local friendly neighborhood IRS auditor didn’t just fall off the turnip truck, so unless you’re getting paid cash under the table by your cousin, the Feds can track down income you’ve made anywhere, no matter how you obtained it. So do the smart thing and be scrupulously honest at tax time. You’ll sleep better… mostly because jail cots are really hard, small and uncomfortable!
You don’t have to pay $400 an hour on attorneys… just follow these seven common-sense legal steps and get down to business!
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