If you're starting a family business or a home business, you must choose a business form. The basic forms are sole proprietorship, partnership and corporation. If just one person will own the business, you should choose a sole proprietorship. If more than one person will own the business, choose a partnership or a corporation.

A home business can be a cheap and easy way to start your business. There are several legal issues to check out before you start.

Comparing Business Organizations

There are advantages and disadvantages to each organizational form.

  • A sole proprietor owns the business and its assets. You make all the decisions. However, you are liable personally for the business' debts. The business ends when you die
  • In a partnership you and your partners share profits and losses. You have to make business decisions with your partners
  • A corporation can continue after the death of the original owners. The owners have limited liability. The corporate form is more complicated than the other forms

You will need an attorney to set up a partnership or a corporation. It's a good idea to talk with an attorney before starting any business.

Zoning Restrictions

Your town or city may have restrictions on home-based businesses. You should read your local ordinances to find out. Ordinances may list specific types of businesses you can operate from home. If you have any doubts contact your zoning officer.

If the zoning board rejects your application to have a home business, you can  appeal. It helps if you can show the approval and support of neighbors who might be affected by noise or extra traffic from your business.

If you live in a subdivision, or a condominium or planned unit developments, you'll need to check the covenants. These are rules inserted in your deed or contract. They may prohibit or regulate home businesses too.

Insurance Coverage

You'll want your homeowners' or renters' insurance to cover your business equipment and property. Most homeowners' insurance policies ordinarily don't cover business property or liability. You must disclose these risks and get a rider to your policy. You'll have to pay extra premium for the coverage.

Licenses and Local Taxes

You'll probably need to get a business license from your city or town. You'll also have to register your business and pay local or state business and occupational taxes. If you don't pay these taxes as you go, you could be subject to penalties and interest in addition to taxes.

Federal Income Tax Considerations

You can potentially save money on your taxes by taking a deduction for business use of your home. You'll be able to deduct some of the costs of utilities, rent, depreciation, home insurance and repairs of your home if you meet these requirements:

  • You must regularly use part of your home exclusively for a trade or business. "Regularly" means on a continuing basis, not just once in a while. "Exclusively" means that you use that portion of your home only for business purposes, not for personal or family use
  • You must use your home as your principal place of business. That means you must conduct all of your business from your home, or conduct the administrative or management activities of your business at home and have no other fixed location where you do such work 

If you sell products and store your inventory at home, you can deduct expenses for the business use of your home. To do so you can't have an office or business location away from home. You must store the products in a particular area of your home. You can use the space for other purposes as long as you regularly store products there.

Even if your home isn't your principal place of business, you may still deduct expenses for the business use of your home or a separate building if you consistently use part of your home just for meeting with customers.

Questions for Your Attorney

  • What kind of organizational form can my family business have?
  • How do I find out if my home business will comply with my town's zoning ordinances?
  • Can I take a federal deduction for the business use of my home if I conduct my business there part of the time?