Chapter 4

Starting a Home-Based Business

IN THIS CHAPTER

Bullet Understanding the basics of home-based businesses

Bullet Looking at the pros and cons of having a home-based business

Bullet Deciding whether you’re ready for a home-based business

Bullet Beginning your business from nothing

Bullet Making the transition

There are nearly 30 million businesses in the United States today. Of these businesses, 99.7 percent are small businesses (which the government defines as businesses with fewer than 500 employees). Of these, a little more than half — 52 percent — are home-based businesses. Now that’s a lot of home-based businesses!

Owning your own home-based business may be the most rewarding experience of your entire life — and not just in a financial sense (although many home-based businesspeople find the financial rewards to be significant). Having your own home-based business is also rewarding in the sense of doing the work you love and having control over your own life.

Of course, every great journey begins with the first step. This chapter looks at the basics of home-based business — including getting started, managing your money, avoiding problems, and moving ahead. It also considers some of the good news — and the bad — about starting your own home-based business and explains how to know when it’s time to make the move. It talks about starting your business from scratch and ends up with some advice on making the transition to working at your home-based business.

Looking at the Basics of Home-Based Business

Not surprisingly, a home-based business is a business based in a home. Whether you do all the work in your home or you do some of it on customers’ or third-party premises, whether you run a franchise, a direct-sales operation, or a business opportunity, if the center of your operations is based in your home, it’s a home-based business.

Determining the kind of business you want to have

After you decide you’re going to start your own home-based business, you have to answer two questions:

  • What kind of home-based business do you want to start?
  • What’s the best way to market your products or services?

You basically have two types of home-based businesses to choose from: businesses you start from scratch and businesses you buy. The latter category is further split into three types: franchises, direct-selling opportunities, and business opportunities. Whether you prefer to march to your own drum and start your business from the ground up or get a business-in-a-box depends on your personal preferences.

The advantage of a business you start from scratch is that you can mold it to fit your preferences and the existing and emerging markets, which provides you with a boundless variety of possibilities. Businesses started from scratch account for the majority of viable, full-time businesses — in other words, they tend to be more successful over the long run than businesses you can buy.

Each type of home business that you can buy, on the other hand, has its own spin. The following sections illustrate how the three types are different from one another.

Franchise

A franchise is an agreement in which one business grants another business the right to distribute its products or services. Some common home-based franchises include the following:

  • Aussie Pet Mobile (mobile pet grooming)
  • Jani-King (commercial cleaning service)
  • Jazzercise (dance/exercise classes)
  • ServiceMaster Clean (cleaning service)
  • Snap-on Tools (professional tools and equipment)

Check out Chapter 5 of Book 1 and Chapter 3 of Book 2, which cover franchising in detail.

Direct selling

Direct selling involves selling consumer products or services in a person-to-person manner, away from a fixed retail location. The two main types of direct-selling opportunities are

  • Single-level marketing: Making money by buying products from a parent company and then selling those products directly to customers
  • Multi-level marketing: Making money through single-level marketing and by sponsoring new direct sellers

Some common home-based direct-selling opportunities include the following:

  • Shaklee (household cleaning products)
  • Pampered Chef (kitchen tools)
  • Green Irene (green products and consulting)
  • Mary Kay (cosmetics)
  • Fuller Brush Company (household and personal-care products)

Business opportunity

A business opportunity is an idea, product, system, or service that someone develops and offers to sell to others to help them start their own, similar businesses. With a business opportunity, your customers and clients pay you directly when you deliver a product or service to them. (Another way to think of a business opportunity is that it’s any business concept you can buy from someone else that isn’t direct selling or franchising.) Here are several examples of business opportunities that you can easily run out of your home:

  • Astro Events of America (inflatable party rentals)
  • Debt Zero LLC (debt settlement)
  • ClosetMaid (storage and organizational products)

Tip Interested in how to find more companies and how to get in touch with them? Entrepreneur Media (www.entrepreneur.com) and www.gosmallbiz.com have extensive information on business opportunities you can buy. You can also do a search on Google or your favorite search engine, using the keywords business opportunity.

After you decide on a business, you have to find the money to get it started (see Book 2, Chapter 2 for more on finding funding). Then you have to market your products or services and persuade people to buy them (the chapters in Book 5 cover the marketing gamut). You can choose conventional methods of promotion, such as advertising and public relations, or you can leverage new selling opportunities, such as the Internet, to your advantage. Or you can (and probably should) do both. It’s your choice — you’re the boss!

Managing your money

Remember Money makes the world go ’round, and because you’re talking about your financial well-being here, it’s very important that you have a handle on your business finances. To get the handle you need, do the following:

  • Find the money you need to start your business. The good news is that many home-based businesses require little or no money to start up. If you decide to buy a franchise or business opportunity from someone else, however, you definitely need some amount of start-up funding. To find this funding, consider all your options, including friends and family, savings, credit cards, bank loans, and more. (See Chapter 2 in Book 2.)
  • Keep track of your money. In most cases, keeping track of your money means using a simple accounting or bookkeeping software package (such as Quicken) to organize and monitor your business finances. Book 3 has the scoop on handling finances.
  • Set the right price for your products and services. If you set your prices too high, you’ll scare customers away; if you set them too low, you’ll be swamped with customers, but you won’t make enough money to stay afloat. Be sure to charge enough to cover your costs while generating a healthy profit.
  • Obtain health insurance, and plan for your retirement. When you have your own business, you’re the one who needs to arrange for health insurance and set up IRAs, 401(k)s, or other retirement plans for the day when you’re ready to hang up your business and stroll off into the sunset.
  • Pay taxes. As someone famous once said, “The only things you can count on in life are death and taxes.” Well, taxes are a definite, so make sure you pay all the taxes you owe for your home-based business.

Avoiding problems

Eventually, every business — home-based or not — runs into problems. Whether the problems are being late on a delivery or hitting a snag with the Internal Revenue Service, as the owner of your own business, you need to avoid problems whenever possible and deal with them quickly and decisively when you can’t avoid them. Some of the problems you may deal with include the following:

  • Legal issues: After a good accountant, the next best friend of any business owner is a good attorney. Keep one handy to help you deal with legal issues when they inevitably arise.
  • Issues with support services: Finding skilled and reliable outside support services — lawyers, accountants, bankers, business consultants, and insurance brokers — isn’t necessarily an easy task, especially if your business is in a small town where you’re pretty much stuck with what’s down the road. See the section “Consult outside professionals,” later in this chapter, for more information on support services.
  • Scams and rip-offs: More and more home-based business scams seem to appear every day, so don’t rush into any business opportunity. Take your time and fully explore every opportunity before you sign on the dotted line. And remember, if it looks too good to be true, it probably is.

Moving ahead

One of the best things about owning your own business is watching it develop, mature, and grow. After all, a growing business is the gift that keeps on giving — all year round, year after year. To keep your business moving ahead, consider doing the following:

  • Make the web work for you. Doing business and generating sales and interest in your business via the Internet is practically a given for any home-based business today. You can make the web work for you in any number of ways, from starting a blog or website (see Chapter 5 in Book 2) to networking with others through online forums or social networking sites, such as Twitter, Facebook, and LinkedIn (see Chapter 6 in Book 5).
  • Maintain a serious business attitude. Just because your business is located at home instead of in a big office building downtown doesn’t mean you shouldn’t treat it like the business it is. Although you can have fun and work all kinds of creative schedules, don’t forget that the business part of your business is important, too; you have to treat your business like a business if you hope to be successful.
  • Look for ways to grow. For many businesses, growth can turn an operation that is doing well financially into an operation that is doing great! Growth allows you to take advantage of economies of scale that may be available only to larger businesses, to serve more customers, and to increase profits. For these reasons and more, growing your business should always be on your agenda.

Leaving your full-time job for your part-time business

An important, basic consideration that many fledgling, part-time home-based business owners face is whether or not to leave a full-time job in favor of a home-based business. Before you give up your full-time job, ask yourself these questions:

  • Has there been a steadily growing flow of new customers in your home-based business?
  • Has your business, even though it’s only been part-time, produced a steady flow of income through seasonal or other cycles typical of the business?
  • Are you turning away business because of limits on your time? If not, do you think business would increase if you had the time to market or take on more customers?

Being able to answer at least two of these questions in the affirmative is a good sign that it would be safe to leave your full-time job. Of course, you should also be aware of any developments that could worsen the outlook for your business to grow, such as pending legislation, new technology, the movement of the kind of work you do outside the U.S. (outsourcing or cloud computing), or the decline of an industry your business depends on.

If your day job has been providing you the contacts you’ve needed to build your part-time business, you need to find ways to replace them before you leave your job.

Tip Breaking the umbilical cord of a paycheck is an uncomfortable step for most people. So the closer the current income from your business is to the amount of money you need to pay your basic business and living expenses, the more confident you can be.

Examining the Good News and the Bad

Anyone can start a home-based business. You can be 10 years old or 100, male or female, rich or poor or somewhere in between, experienced in business — or not. According to a study by the Ewing Marion Kauffman Foundation, the median age of company founders is 40 years old, the majority (69.9 percent) were married when they started their first business, and more than half (51.9 percent) were the first in their families to start a business.

So how do you know whether starting a home-based business is right for you? Like most things in life, starting your own home-based business has both advantages and disadvantages, but the good news is that the advantages probably outweigh the disadvantages for most prospective home-business owners. So in the spirit of putting your best foot forward, start with the good news.

Good reasons to start a home-based business

When you start a home-based business, you may be leaving behind the relative comfort and security of a regular career or 9-to-5 job and venturing out on your own. Or you may be entering the world of work again after devoting many years of your life to raising a family. How far out you venture on your own depends on the kind of home-based business you get involved in. For example, many franchises provide extensive support and training, and franchisees (the people buying the franchise opportunities — you, for example) are able to seek advice from experienced franchisees or from the franchisor (the party selling a franchise opportunity) when they need it. This support can be invaluable if you’re new to the world of home-based business.

At the other end of the spectrum, some business opportunities offer little or no support whatsoever. If you’re a dealer in synthetic motor oil, for example, you may have trouble getting the huge, multinational conglomerate that manufactures the oil to return your calls, much less send you some product brochures. And you won’t find any training or extensive, hands-on support if you run into the inevitable snags, either.

This wide variety of home-based opportunities brings us to the good news about starting and running your own home-based business:

  • You’re the boss. For many owners of home-based businesses, just being their own boss is reason enough to justify making the move out of the 9-to-5 work world.
  • You get all the benefits of your hard work. When you make a profit, it’s all yours. No one is going to try to take it away from you (except, perhaps, the tax man — see Book 3, Chapter 6).
  • You have the flexibility to work when and where you want. Are you a night owl? Perhaps your most productive times don’t coincide with the standard 9-to-5 work schedule that most regular businesses require their employees to adhere to. And you may find that — because interruptions from co-workers are no longer an issue and the days of endless meetings are left far behind — you’re much more productive working in your own workshop than in a regular office. With your own home-based business, you get to decide when and where you work.
  • You get to choose your clients and customers. The customers may always be right, but that doesn’t mean you have to put up with the ones who mistreat you or give you more headaches than they’re worth. When you own your own business, you can fire the clients you don’t want to work with. Sounds like fun, doesn’t it?
  • You can put as much or as little time into your business as you want to. Do you want to work for only a few hours a day or week? No problem. Ready for a full-time schedule or even more? Great! The more effort you put into your business, the more money you can make. As a home-based business owner, you get to decide how much money you want to make and then pick out the kind of schedule that will help you meet your goal.

These reasons to start your own home business are just the tip of the iceberg. But when you add up everything, you’re left with one fundamental reason for owning your own home-based business: freedom.

The pitfalls of owning your own home-based business

Starting a home-based business isn’t the solution to every problem for every person. Although many home-based businesses are successful and the people who started them are happy with the results, more than a few home-based businesses end up causing far more headaches than their owners anticipated. Some home-based business owners even go bankrupt as a direct result of the failure of their businesses. Starting your own business is hard work, and there are no guarantees for its success.

Warning So the next time you’re lying on your sofa, dreaming of starting your own home-based business, don’t forget to consider some of the potential pitfalls:

  • The business is in your home. Depending on your domestic situation, working in your own home — a home filled with any number of distractions, including busy children, whining spouses or significant others, televisions, loaded refrigerators, and more — can be a difficult proposition at best.
  • You’re the boss. Yes, being the boss has its drawbacks, too. When you’re the boss, you’re the one who has to motivate yourself to work hard every day — no one’s standing over your shoulder (except maybe your cat) watching your every move. For some people, focusing on work is very difficult when they are put in the position of being the boss.
  • Health insurance may be unavailable or unaffordable. If you’ve ever been without health insurance for a period of time, or if you’ve been underinsured and had to make large medical or dental payments, you know just how important affordable health insurance is to your health and financial well-being. According to one study, 62.1 percent of all bankruptcies are medical related, and 92 percent of these debtors had medical debts of more than $5,000. Unfortunately, when you work for yourself, finding good health insurance isn’t a given. In fact, it can sometimes be downright difficult, depending on where you live and work.
  • A home-based business is (usually) a very small business. As a small business, you’re likely more exposed to the ups and downs of fickle customers than larger businesses are. And a customer’s decision not to pay could be devastating to you and your business.
  • You may fail or not like it. No one can guarantee that your business is going to be a success or that you’re going to like the business you start. Failure may cost you dearly, including financial ruin (no small number of business owners have had to declare bankruptcy when their businesses failed), destruction of personal relationships, and worse. However, not all small businesses close because of financial problems. The Small Business Administration has found that at the time of closing, one out of three businesses is financially sound.

Regardless of these potential pitfalls, starting a home-based business remains the avenue of choice for an increasing number of people. Are you ready to join them?

Taking the Home-Based Business Quiz

Many people talk about starting home-based businesses, and many dream about becoming their own bosses. Making the transition from a full-time career to self-employment, however, is a big change in anyone’s life. Are you really ready to make the move, or should you put the idea of having your own home-based business on the back burner for a while longer?

Tip To help you decide, take the following home-based business quiz. Circle your answer to each of these questions, add up the results, and find out if you’re ready to take the plunge!

  1. How strong is your drive to succeed in your own home-based business?
    1. I can and will be a success. Period.
    2. I’m fairly confident that if I put my mind to it, I will succeed.
    3. I’m not sure. Let me think about it for a while.
    4. Did I say that I wanted to start my own business? Are you sure that was me?
  2. Are you ready to work as hard as or harder than you have ever worked before?
    1. You bet — I’m ready to do whatever it takes to succeed!
    2. Sure, I don’t mind working hard as long as I get something out of it.
    3. Okay, as long as I still get weekends and evenings off.
    4. What? You mean I’ll still have to work after I start my own business? Isn’t that why I hire employees?
  3. Do you like the idea of controlling your own work instead of having someone else control it for you?
    1. I don’t want anyone controlling my work but me!
    2. That’s certainly my first choice.
    3. It sounds like an interesting idea — can I?
    4. Do I have to control my own work? Can’t someone control it for me?
  4. Have you developed a strong network of potential customers?
    1. Yes, here are their names and numbers.
    2. Yes, I have some pretty strong leads.
    3. Not yet, but I’ve started kicking around some ideas with potential customers.
    4. I’m sure that as soon as I let people know that I’m starting my own business, customers will line up.
  5. Do you have a plan for making the transition into your home-based business?
    1. Here it is — would you like to read the executive summary or the full plan?
    2. Yes, I’ve spent a lot of time considering my options and making plans.
    3. I’m just getting started.
    4. I don’t believe in plans — they crimp my style.
  6. Do you have enough money saved to tide you over while you get your business off the ground?
    1. Will the year’s salary that I have saved be enough?
    2. I have six months’ expenses hidden away for a rainy day.
    3. I have three months’ worth.
    4. I’m still trying to pay off my college student loans.
  7. How strong is your self-image?
    1. I am self-esteem!
    2. I strongly believe in my own self-worth and in my ability to create my own opportunities.
    3. I feel fairly secure with myself; just don’t push too hard.
    4. I don’t know — what do you think?
  8. Do you have the support of your significant other and/or family?
    1. They’re all on board, are an integral part of my plan, and have been assigned responsibilities.
    2. They’re in favor of whatever makes me happy.
    3. I’m pretty sure they’ll support me.
    4. I’m going to tell them about it later.
  9. If it’s a necessary part of your plan, will you be able to start up your home-based business while you remain in your current job?
    1. Sure — in fact, my boss wants in!
    2. If I make a few adjustments in my schedule, I can’t see any other reason why I can’t.
    3. Would you please repeat the question?
    4. Maybe I’ll be able to work on it for a couple of hours a month.
  10. What will you tell friends when they ask why you quit that great job?
    1. I’m free at last!
    2. That the benefits clearly outweigh the potential costs.
    3. I don’t know; maybe they won’t ask.
    4. I’ll pretend that I’m still working for my old organization.

Give yourself 5 points for every A answer, 3 points for every B, –3 for every C, and –5 for every D. Now tally up the numbers, and compare your results with the following ranges of numbers.

By comparing your total points with the points contained in each of the six following categories, you can find out whether you’re ready to jump into your own home-based business:

  • 25 to 50 points: Assuming you were honest with yourself as you answered the preceding questions (you were, weren’t you?), you’re ready! You just need to decide whether to drop your day job or work into your new business gradually.
  • 1 to 24 points: You’re definitely warming up to the idea of starting your own home-based business. Consider starting your own business in the near future, but make sure to keep your day job until you have your venture well under way.
  • 0 points: You can go either way on this one. Why don’t you try taking this test again in another month or two? Read this book in the meantime.
  • –1 to –24 points: Unfortunately, you don’t appear to be quite ready to make the move from career to home-based business. You should read this book and then take this test again in a few months. Maybe working for someone else isn’t the worst thing that can happen to you.
  • –25 to –50: Forget it. You were clearly born to work for someone else.

Are you ready to make the move to starting a home-based business? If the quiz indicates otherwise, don’t worry — you’ll have plenty of opportunities in the future. When you’re ready for them, they’ll be ready for you. If you’re ready now, congratulations!

Starting Something from Scratch

You probably find a certain amount of pleasure in making something out of nothing with your own two hands. It’s the same pleasure a sculptor gets from creating a beautiful piece of art. You may not get it right the first time — after all, it took Thomas Edison hundreds of tries before he hit on the right material for a successful light bulb filament — but when you do find the right formula for success, the feeling of satisfaction you experience is hard to beat.

Perhaps the quickest and least expensive way to start your own home-based business is to do so from scratch. No need to fill out a bunch of applications, save up money to buy into a franchise, or take weeks or months to learn some complex, proprietary way of doing business. If you really want to, there’s no reason why you can’t start your own business from scratch — right now. Your friends, relatives, neighbors, and co-workers are doing it, and you can, too.

When starting a business from scratch, you can use one of two main approaches: Choose to do the same kind of work you’ve been doing in your regular job or career, or choose to do something totally different. This section takes a closer look at each approach and the advantages each one offers you.

Doing what you’ve been doing in a job

As you consider the different options available to you in starting your own business, one of your first thoughts will undoubtedly be to do what you’ve already been doing in your full-time job.

And why not? You know the job, you’re already experienced in the business, and you know exactly what to expect. You also know what your customers want and how to give it to them. You may even have a network of potential customers waiting to sign up for your products and services. Not surprisingly, doing what you’ve been doing has several advantages, including the following:

  • You can start your business more quickly (like right now) and more easily than if you choose to do something you’ve never done before.
  • You don’t have to spend your time or money on training courses or workshops, and you don’t have to worry much about a learning curve.
  • You’ll be much more efficient and effective because you’ve already discovered the best ways to do your job, along with time-saving tricks of the trade.
  • You can capitalize on your good reputation, which may be your most important asset.
  • You can tap in to your network of business contacts, clients, and customers (when ethically appropriate) and generate business more quickly than when you start something new and different.

Tip For many people, doing something they’ve been doing is the best choice. So because doing what you’ve been doing is often the quickest and least expensive avenue for starting your own home-based business, be sure to take a close look at this option before you consider any others.

Doing something new and different

Although doing what you’ve been doing in a job offers many advantages, doing something new and different has its own set of high points. If you’re burned out on your current job and you dream of making radical changes in your career or lifestyle — for example, trading your high-pressure career as an attorney for a much more relaxing home-based massage business — doing something new and different may well be exactly what the doctor ordered.

The following are some key advantages of doing something new and different:

  • Getting a fresh start in your career can be an extremely energizing experience with positive repercussions for every aspect of your life, opening up exciting new possibilities and opportunities for you along the way.
  • Tapping in to new career options allows you to find work that may not have even existed when you first started your career — for example, designing smartphone apps or computer-network consulting.

Remember Many successful home-based business owners have created businesses that have nothing to do whatsoever with what they’d been doing in their full-time jobs. If you’re sufficiently motivated, nothing can stand between you and success, no matter which business you choose. If you’re looking to shake up the status quo or to make a break from the past, doing something completely new may well be the best option for you.

Transitioning into Your Home-Based Business

Starting your own business is exciting. For those people who have spent all their working lives employed by someone else, it’s often the culmination of a dream that’s lasted for years or even decades. Imagine the power and personal satisfaction you’ll feel when you realize you’re the boss and you call the shots — from setting your own work schedule, to deciding how to approach your work, to choosing your computer and office furniture. It’s a feeling you won’t soon forget.

But there’s a right way and a wrong way to make the move. Your goal is to make sure you maintain a sufficient supply of cash to pay the start-up costs of your business while paying for the rest of your life — the mortgage or rent, the car loans, the health insurance, the gas and electric, your daughter’s piano lessons, and the list goes on and on.

Remember The fact is, few businesses — home-based or otherwise — within the first six months of operation bring in all the money necessary to get them off the ground and keep them going for a prolonged period of time. In other words, you need a lot of cash — from a job, your spouse or partner’s job, your savings, or loans from friends, family, or a bank — to keep both your business and your personal life going until the business generates enough revenue to take over.

Although you have to decide for yourself exactly what schedule to follow while transitioning into a home-based business, unless you’re unemployed or retired, it’s best to start your business on a part-time basis while you continue to hold down your regular full-time job. Why? For a number of reasons, including the following:

  • You can develop and test your new business with virtually no risk — you still have your regular job to fall back on if your new business doesn’t work out (and remember, no matter how great your business idea is, there’s a chance it won’t work out).
  • You aren’t under the intense pressure to perform and show the results that you’d have to show if your new business were your only source of income.
  • You can keep your established health insurance, retirement plan, time off, and other benefits. Given the difficulty and expense of securing a decent health care plan when you’re on your own and not under the umbrella of your employer, health care alone may be reason enough to keep your day job while you start your own business.
  • You have a steady source of income you can use to pay your bills while you establish your new business.
  • You may be able to take advantage of tax benefits, like the capability to write off early losses against income.
  • You have a stronger basis for obtaining bank loans and other financing for your new business.

Remember Of course, the decision is ultimately up to you. When starting a home-based business, follow your heart and make sure the transition fits into your schedule and your life.

This section looks at steps you need to take before you leave your regular job to devote all your time and energy to being your own boss. It also walks through the different steps involved in the process of establishing your home-based business.

Knowing what to do before leaving your day job

After you’re consistently earning enough income from your part-time, home-based business to cover your bare-minimum living and business expenses, you’re ready to make the jump to a full-time commitment of your time and attention. Before you turn in your resignation, however, take the following six steps:

  1. Find out when any company benefit plans you have will vest or increase in value.

    If you have a 401(k) or other retirement plan to which your employer has been contributing, it may not be fully available to you until you’ve served a particular number of years of service. Finding out this information may help you determine the best time to resign. It’d be a shame, for example, if you quit two weeks before the value of your retirement benefits was set to jump from 80 to 100 percent of your current salary.

  2. Find out when you can expect to receive any bonus money or profit sharing.

    You may, for example, be slated to receive an annual performance bonus or profit sharing a month after the end of the company fiscal year. This information can help with the financial planning for your home-based business because it lets you know when you’ll have the money available to help you get your business off the ground.

  3. Get all annual health exams, have all routine procedures done, and fill all prescriptions while you and your family are still covered by your medical/dental/vision insurance.

    Check to see whether you can convert your group coverage to an individual policy at favorable rates or what other health coverage options are open to you. (Some group plans can be converted, but be very careful about changes in coverage, co-pays, and deductibles that may actually end up costing you much more money in the long run.)

    Remember Don’t forget that if you work in the United States, you’re likely covered by COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985), which requires your employer to allow you to continue your identical group health coverage for a period of 18 months or more. However, qualified individuals may be required to pay the entire premium for coverage up to 102 percent of the cost to the plan.

    The American Recovery and Reinvestment Act of 2009 (ARRA) provides for premium reductions and additional election opportunities for health benefits under COBRA. Eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the coverage provider through a tax credit.

    Tip The Affordable Care Act, signed into law in 2010, may serve to help make your health insurance more portable and provides a marketplace where you can shop for new insurance on your own. Be sure to find out the latest on the law at www.healthcare.gov.

  4. If you own a house and you need some extra cash to help you through the transition, consider taking out a home equity line of credit or other loan before leaving your current job.

    Having a line of credit or loan to draw upon can be invaluable during the first two years of your new business, and your chances of getting approved for it are much greater while you’re employed in a regular job. That’s right — after you leave your job, you probably won’t qualify for a line of credit or other loans for your business until your business has been successful for two or more years.

  5. Pay off or pay down the balance on your credit cards while you still have a steady job.

    Doing so helps your credit rating (always a good thing) and provides you with another source of potential funds to help you finance various start-up costs (and depending on the nature of your business, you may have plenty of those).

  6. Take advantage of training and educational opportunities, conferences, and meetings that can result in preparation or contacts that will prepare you for your own business.

    Doing so enables you to hit the ground running when you decide it’s time to start your own business.

Warning Don’t make your announcement or submit your resignation until you’re really ready to go. Some companies are (sometimes justifiably) paranoid about soon-to-be former employees stealing ideas, proprietary data, or clients, which can make for a very hasty exit, with a personal escort, when you do resign.

After completing these steps, you’re ready to take what may well be one of the most significant steps forward you’ll ever take in your life: starting your own home-based business.

Understanding what you have to do to start your own home-based business

This section goes through exactly what you need to do to start up your own home-based business.

Develop a business plan

Despite what you may read on many small business websites or blogs, many home-based business owners can get by without drafting a business plan. Indeed, just the thought of having to draft a 50-page tabbed and annotated, multipart business plan is enough to scare many potential home-based business owners away from their dreams. Truth be told, most business owners today use their business plans to obtain financing from third parties, such as banks or investors, and many successful businesses — home-based or not — have been started without one.

That said, the process of drafting a business plan can be very beneficial — both to you as a business owner and to your business. Taking the time to draft a plan helps you do the right things at the right time to get your business off the ground; plus, it forces you to think through what the challenges will be and what you can do about them before they overwhelm you.

In essence, a good business plan

  • Clearly establishes your goals for the business
  • Analyzes the feasibility of a new business and its likelihood of being profitable over the long haul
  • Explores the expansion of an existing business
  • Defines your customers and competitors (very important people to know!) and points out your strengths and weaknesses
  • Details your plans for the future

Remember Even if you think your business is too small to have a business plan, it’s really worth your time to see what it’s all about — the process of developing the plan for your business will produce a clarity of thought that you can’t find any other way. See Book 2, Chapter 1 for details on developing an effective business plan.

Consult outside professionals

As a new home-based businessperson, you need to consider establishing relationships with a number of outside professionals — trained and experienced people who can help you with the aspects of your business in which you may have little or no experience. By no means do you have to hire someone from each category described in this section. But if you run into questions that you can’t easily answer yourself, don’t hesitate to call on outside professionals for help as you go through the business start-up process.

Remember Any professional advice you get at the beginning of your business may well save you heartache and potentially expensive extra work down the road.

Here are just some of the outside professionals you may choose to consult as you start your home-based business:

  • Lawyer: An attorney’s services are an asset not only in the planning stages of your business, but also throughout its life. An attorney can help you choose your legal structure, draw up incorporation or partnership paperwork, draft and review agreements and contracts, and provide information on your legal rights and obligations. Look for an attorney who specializes in working with small businesses and start-ups. See Book 2, Chapter 6 for details on starting your business with the right legal structure.
  • Accountant: Consult an accountant to set up a good bookkeeping system for your business. Inadequate bookkeeping is a principal contributor to the failure of small businesses. Regardless of how boring or intimidating it may seem, make sure you understand basic accounting and the bookkeeping system or software you’re using, and don’t forget to closely review all the regularly produced financial reports related to your business (and make sure you actually receive them!). See Book 3, Chapter 1 for the basics of setting up your books.

  • Banker: The capital requirements of a small business make establishing a good working relationship with a local banker absolutely essential. For example, bankers can approve immediate deposit of checks that would normally be held for ten days. They’re also good sources of financial information — and for obtaining cash to tide you over when times are tough or financing expansion of your business when times are good.

    Tip Establish a relationship with your banker before applying for a loan, not after you decide to initiate the loan process. This relationship may make the difference between getting approved for the loan you need and being turned down.

  • Business consultant: Every person has talents in many areas, but no one can be a master of everything. Consultants are available to assist in the areas where you need expert help. You can use business, management, and marketing consultants; promotion experts; financial planners; and a host of other specialists to help make your business more successful. Don’t hesitate to draw on their expertise when you need it.
  • Insurance agent/broker: Many kinds of insurance options are available for business owners, and some are more necessary than others. An insurance agent or broker can advise you about the type and amount of coverage that’s best for you and your business. The agent may also be able to tailor a package that meets your specific needs at reasonable rates.

Remember The relationships you establish with outside professionals during the start-up phase of your business can last for years and can be of tremendous benefit to your firm. Be sure to choose your relationships wisely. In the case of outside professionals, you often get what you pay for, so be penny-wise but don’t suffer a poor-quality outside professional simply to save a dollar or two.

Choose the best legal structure for your business

Most home-based businesses begin as either sole proprietorships or partnerships because they’re the easiest business structures to run and the least expensive. But as these businesses grow, many explore the transition to another kind of legal entity. Before you decide what kind of business you want yours to be, consider the pros and cons of the following legal structures:

  • Sole proprietorship: A sole proprietorship is the simplest and least regulated form of organization. It also has minimal legal start-up costs, making it the most popular choice for new home-based businesses. In a sole proprietorship, one person owns and operates the business and is responsible for seeking and obtaining financing. The sole proprietor (likely you) has total control and receives all profits, which are taxed as personal income. The major disadvantages include unlimited personal liability for the owner (if the business is sued for some reason, the owner is personally liable to pay any judgments against the company) and potential dissolution of the business upon the owner’s death.

  • Partnership: A partnership is relatively easy to form and can provide additional financial resources. Each partner is an agent for the partnership and can borrow money, hire employees, and operate the business. Profits are taxed as personal income, and the partners are still personally liable for debts and taxes. Personal assets can be attached if the partnership can’t satisfy creditors’ claims. A special arrangement called a limited partnership allows partners to avoid unlimited personal liability. Limited partnerships must be registered and must also pay a tax to the appropriate authorities in their jurisdiction. On the plus side, partnerships allow people to combine their unique talents and assets to create a whole greater than the sum of its parts. On the other hand, though, partnerships can become sheer living hell when partners fail to see eye to eye or when relationships turn sour.

    Remember When entering into any partnership, consult a lawyer, and insist on a written agreement that clearly describes a process for dissolving the partnership as cleanly and fairly as possible.

  • Limited liability company: A limited liability company (LLC) is often the preferred choice for new operations and joint ventures because LLCs have the advantage of being treated as partnerships for U.S. income tax purposes while also providing the limited liability of corporations. However, LLCs have the disadvantage of generally being more expensive to set up than sole proprietorships or partnerships. Owners of limited liability companies, called members, are comparable to stockholders in a corporation or limited partners in a limited partnership. To create a limited liability company, articles of organization are filed with the secretary of state. The members must also execute an operating agreement that defines the relationship between the company and its members. Note that all 50 states and the District of Columbia have enacted LLC statutes.

  • Corporation: As the most complex of business organizations, the corporation (also known as a C Corporation) acts as a legal entity that exists separately from its owners. Although this separation limits the owners from personal liability, it also creates a double taxation on earnings (the corporation pays tax on net taxable income, and the shareholders pay tax on dividends distributed). A corporate structure may be advantageous because it allows the business to raise capital more easily through the sale of stocks or bonds; plus, the business can continue to function even without key individuals. The corporation also enables future employees to participate in various types of insurance and profit-sharing plans. Costs to incorporate vary from state to state — contact your secretary of state for more information.

    A special type of corporation, an S Corporation, allows eligible domestic corporations to overcome the double taxation problem. Qualifying corporations can elect to be treated as an S Corporation under the rules of Subchapter S of the tax code. Making this election allows small corporations to be generally exempt from federal income tax. Similar to partnerships, all items of income, deduction, credit, gain, and loss are passed through on a pro rata basis to the individual S Corporation shareholders. In this way, the S Corporation passes its items of income, loss, deduction, and credits through to its shareholders to be included on their separate returns.

    Warning With C Corporations, you need to be careful you aren’t erroneously classified by the government as a professional service corporation, which is treated much less advantageously than other C Corporations. Professional service corporations are corporations in which the owners (who are licensed professionals) substantially perform certain personal services, including accounting, actuarial science, architecture, consulting, engineering, health, veterinary services, law, and performing arts.

As you set up your new home-based business, take time to carefully think through the ramifications of your business’s legal structure. Each option has many potential advantages and disadvantages for your firm, and each can make a big difference in how you run your business. If you have any questions about which kind of legal structure is right for your business, talk to an accountant or seek advice from an attorney who specializes in small businesses. Book 2, Chapter 6 discusses these legal structures in much more detail.

Decide on a name

Naming your business may well be one of the most enjoyable steps in the process of starting up your own home-based business. Everyone can get in on the action: your friends, your family, and especially your clients-to-be.

Consider your business name carefully — you have to live with it for a long time. Your business name should give people some idea of the nature of your business, it should project the image you want to have, and it should be easy to visualize. Names can be simple, sophisticated, or even silly. Try to pick one that can grow with your business and not limit you in the future.

Tip Along with a name, many businesses develop a logo, which provides a graphic symbol for the business. As with your name, your logo needs to project the image you want, so develop it carefully. Spend a few extra dollars to have a professional graphic artist design your logo for you.

Warning After you come up with a name, register it with your local government to make sure it isn’t already in use. If you don’t check first, you may have to throw out your stationery and business cards and redesign your logo and website when you eventually find out that another company has your name — and registered it 15 years before you did!

Take care of the red tape (and it will take care of you)

Taking care of all the local, state, and federal government legal requirements of starting up a business is something that too many budding home-based entrepreneurs put off or ignore. Unfortunately, ignoring the many legal requirements of going into business may put you and your business at risk.

Getting through the maze of government regulations can certainly be one of the most confusing aspects of starting up and running a business. But even though this process can be intimidating, you have to do it — and do it correctly — because noncompliance can result in costly penalties and perhaps even the loss of your business. Consider this step as one that fortifies the professionalism of your business at the same time that it helps you rest easy at night, knowing that you’re following the rules. Do you want people to take you seriously? Then you need to establish your business in a professional way.

Remember Even very small or part-time businesses have certain requirements. It’s your responsibility to adhere to any and all regulations that apply to your business. Fortunately, a lot of people and organizations — government small business development centers, chambers of commerce, and sometimes lawyers and certified public accountants — are willing and eager to answer questions and help you with this task. For your sake — and the sake of your business — don’t hesitate to ask someone for help when you need it.

Get the insurance you need

In today’s expensive, litigious world of business, insurance isn’t really an option — it’s essential. Without it, all your years of hard work can be lost in a minute because of a catastrophic loss.

So what kinds of insurance do you need for your business? You should talk to an insurance agent and discuss your business and its needs with him or her. Some of the most common kinds of business insurance include the following:

  • Health insurance: Includes medical, dental, vision, and other coverage designed to maintain and promote employee health and wellness and to protect employees against catastrophic loss in case of injury or illness
  • Basic fire insurance: Covers property losses due to fire and sometimes covers loss of business, as well
  • Extended coverage: Protects against conditions not covered by fire insurance, including storms, explosions, smoke damage, and various other disasters
  • Liability insurance: Covers claims against your business for bodily injury incurred on the business’s premises
  • Product liability coverage: Covers liability for products manufactured or sold by your business
  • Professional liability and/or errors-and-omissions insurance: Protects the business against claims for damages incurred by customers as a result of your professional advice or recommendations
  • Vandalism and malicious mischief coverage: Covers against property losses resulting from vandalism and related activities
  • Theft coverage: Protects your business from burglary and robbery
  • Vehicle insurance: Covers collision, liability, and property damage for vehicles used for business
  • Business interruption insurance: Covers payment of business earnings if the business is closed for an insurable cause, such as fire, flood, or other natural disaster
  • Workers’ compensation: Provides disability and death benefits to employees and others who work for you, as defined by your state law, who are injured on the job

Warning A homeowner’s policy isn’t usually enough insurance for a home-based business for a couple of reasons. First, your typical homeowner’s policy provides only limited coverage for business equipment and doesn’t insure you against risks of liability or lost income. Second, your homeowner’s policy may not cover your business activities at all.

Tip Insurance is the kind of thing you don’t think about until you need it. And in the case of insurance, when you need it, chances are you really need it! Take time to set up proper coverage now — before it’s too late. Call your insurance company and talk through the options it may have for your to convert or supplement your homeowner’s policy to cover your business.

Decide on an accounting system

Accounting is one of those topics that makes people nervous (with visions of IRS audits dancing in their heads), but keeping books doesn’t have to be complicated. In fact, simplicity is the key to a good system for home-based businesses. Keep in mind that your records need to be complete and up-to-date so that you have the information you need for business decisions and taxes.

Tip When you establish an accounting system, pick up one of the excellent computer software programs dedicated to this purpose. Programs such as QuickBooks, FreshBooks, and Sage One do everything your home-based business will ever need — and more.

The two basic bookkeeping methods are single entry and double entry. Single entry is simpler, with only one entry required per transaction. This is probably the best method for most home-based businesses, and the vast majority can operate very well with the single-entry system. Book 3, Chapter 1 covers bookkeeping in detail.

You can also choose between two methods to keep track of the money coming in and going out of your business: cash or accrual. Most small businesses use the cash method, in which income is reported in the year it’s received and expenses are deducted in the year they’re paid. Under the accrual method, income is reported when it’s earned, and expenses are deducted when they’re incurred, whether money has changed hands yet or not.

The accounting methods you use depend on your business. You may want to talk to an accountant for help in setting up your system. Even with the support of a professional, however, you need to understand your own system thoroughly.

Remember Many home-based businesses can get by without detailed financial reporting or analysis — after all, if you can keep up with your bills and perhaps have a little bit of money to sock away in your savings account, you must be making money, right? If you really want to understand your business’s financial situation, however, you need some basic financial reports.

The following financial statements are the minimum necessary to understand where your business stands financially. With them in hand, you can review your business’s financial strengths and weaknesses and make accurate plans for the future.

  • Balance sheets: Balance sheets show the worth of your business — the difference between its assets and its liabilities. Your balance sheet can tell you whether or not you’d have any cash left over if you shut down your business today and paid off all your bills and loans and liquidated your assets. See Chapter 3 in Book 3 for more information.
  • Profit-and-loss statements: Profit-and-loss (P&L) statements, also referred to as income statements, show you the difference between how much money your business is bringing in (revenue) and how much money it’s spending (expenses). If you’re bringing in more money than you spend, you have a profit. If you’re spending more money than you bring in, you have a loss. Book 3, Chapter 2 covers P&L in detail.
  • Cash-flow projections: Cash-flow projections tell you where your money is going and whether or not you’re likely to have sufficient money each month to pay your bills and operate the business. For many start-up companies — especially those with employees, rent, and other significant recurring expenses — a cash-flow projection is the most important financial statement of all. Check out Book 3, Chapter 4 for more on staying solvent.

Develop a marketing plan

If you want to be successful, you can’t just start a business and then patiently wait for customers to walk in your door. You have to let potential customers know about your new business, get them in to have a look, and then encourage them to buy your product or service. Marketing is all of this and more. Your specific approach to marketing depends on your business, your finances, your potential client or customer base, and your goals.

Marketing sells your products and services, which brings in the cash you need to run your business. Marketing is so important to the survival (and success) of your business that it deserves a plan of its own. A marketing plan helps evaluate where your business currently is, where you want it to go, and how you can get there. Your marketing plan should also spell out the specific strategies and costs involved in reaching your goals. You can integrate it into your business plan as one comprehensive section. As with the business plan, you should refer to it regularly and update it as necessary.

Successful marketing for a small or home-based business doesn’t happen all by itself. It requires a lot of work and careful analysis and is a terrific opportunity to use your creativity and hone your business sense. For a lot more information on marketing your home-based business, be sure to check out the chapters in Book 5.

Seek assistance when you need it

Tip An almost unlimited number of organizations and agencies — private, public, and not-for-profit — are ready, willing, and able to help you work through the process of starting up your home-based business. Check out the websites of each of the following organizations for an incredible amount of free information and help, and know that this list is only the beginning: