Are Home Businesses Legal?
Running a home business gives you the best of both worlds. You can then enjoy the perks of having a home business like any other business owner. And not just that, you can also have flexible working hours, not face the hassle of commute and enjoy some tax advantages.
Because of all these advantages, people often wonder is it legal to operate a business out of your home? In today’s article, we will be discussing this topic in detail. And hopefully, by the end of this write-up, you will have an answer. So, without further ado, let’s get straight to the specifics.
Can You Run a Business From Your Home?
Short Answer: No, it is not legal to run a business from your home unless you have the approval of the concerned authorities. Federal and state laws all over the developed world put limits on the location and conditions of the operation of a business. If your business doesn’t fulfill these requirements (which most home businesses don’t), your home business can be termed illegal.
However, (and this is where the long answer starts) people still run home businesses. If the government of America shuts down all the illegal businesses operating from home, then the economy will grind to a halt. Millions of businesses will be impacted, and hundreds of thousands of the population will go unemployed. Hence, the country will fall into a massive economic recession.
In the US, most of the localities allow home businesses if you have a specific variance. But, getting the variance to run a business from a residential area is a very excruciating task. It’s allowed after extensive public hearings, attended by people from the neighborhood who may have any objections about the business.
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Moreover, most cities have their own laws about the type of businesses and homes. In my town, plenty of businesses received variances that gave them an exception. However, several others never received the permit and still continued to run their business. Still, others had to agree to make certain changes in their mode of operation (such as no business after 9, smaller building, fewer employees, etc.) to continue their business.
Is It Legal to Run Your Business From Home?
Therefore, you should plan ahead about whether your business can be legally operated from home. If your local laws don’t permit it, then you have to make a decision. Look into the option of applying for variance if your local authorities are lenient about it and your neighborhood won’t have any problem with your business. Otherwise, you can operate quietly under the radar. But, if you want to take chances, weigh all the pros and cons beforehand.
Local authorities don’t inspect people’s homes to check whether they’re hiding an office in their basement or a corner of their home. But, if a neighbor complains about it, then they are obliged to enforce the zoning laws. Besides, hanging out a public sign, getting some commercial traffic on your property, or putting in extra parking spaces can trigger a complaint even if you have a friendly neighborhood.
Furthermore, if your business idea involves a lot of traffic, then you should also consider the neighbor’s safety and security. I was once approached by a client selling their business. Even though they had a commercial variance, I refused to purchase their business because the variance proscribed any vehicle traffic after 2 PM because of the potential safety hazard to children of a nearby elementary school.
The 5 Licenses and Permits You May Need for Your Home-Based Business
It’s best not to take your chances and get proper legal permission before you venture into any home business idea. You don’t want to struggle so hard to make your business successful and then get it shut down by local authorities for non-compliance to the local laws. Below are the five basic licenses and permits you may need depending on your locality. These basic requirements are pretty consistent from state to state.
1. General Business License
Any business – Whether home-based or otherwise -0 must obtain a general business license. This is necessary to engage in commercial activities within the local jurisdictions. Get information from your local tax office about it. Depending on your area, it may be called a tax certificate, business license, or reseller’s certificate.
At the same time, check whether your business complies with the local zoning ordinances. Double-check with your country’s zoning department. Some neighborhood councils also restrict the operation of home businesses if your business does not meet neighborhood requirements. You need to go through proper channel to get a variance.
2. Professional License
Some businesses like the daycare centers, hairstyling, hairdressing, salon & spa, legal services, real estate, or financial advisory services need professional federal or state licenses. Without a proper certification/license, these home-based businesses are deemed illegal.
So, you should contact your local/state business office or visit their website to get a comprehensive list of all the occupations that need professional certification. Check whether your business falls in that category or not. If it does, then you have to comply with the laws and get a certification. Otherwise, you may get into trouble.
3. Health and Safety Permits
Sometimes, you may have to get a safety inspection and permit from the local fire department. This is most common in cases if clients have to visit your place to conduct business or your business involves dealing with potentially flammable products. There’s no need for a health and safety permit if your business provides services or goods online.
Then there are health and environmental licenses. Such permits are common if your business is involved in the retail or wholesale of food and beverages. In this case, you can easily check with your state environmental protection agencies or health department to check whether any of your product requires a permit.
4. Sign Permit
Sometimes businesses need to put up a public sign to advertise their products. As all cities have specific sign ordinances regarding the size, type, and location, you should check with them to comply with the laws. There may also be some restrictions, like lighting up the signs at night.
Besides state laws, many neighborhood associations and apartment complexes have their own limits on commercial signs. In that case, check with your local association and look over your house deed. In case you rent your house, you have to obtain the go-ahead from the owner.
5. Sales Tax License
Usually, a sales tax license is part of the general business license, but not always. Sometimes, you may have to get a separate sales tax license to operate a business. You can get more information about it from your local tax department or the department from where you obtain your general business license. They can provide accurate details about whether it’s part of the general license or you need to obtain it separately.
Because you have to pay sales tax for any business you operate, the sales tax license becomes absolutely necessary. Make sure that you have it covered before starting your home business.
Four things you need when you run a business from your home
Still, confused about whether your home business is legal or illegal? We hope the answers to these four most commonly asked questions will help clear your doubts. Read on!
1. Do I Really need permission to set up my business from home?
Consider your particular circumstances. If your business has the following characteristics, then it will require permission, whether it’s from the owner, neighborhood council, city council, or state authorities. These are:
- When you are renting a property
- When your home is on mortgage
- When your business increases footfall in the area
- When your business requires additional parking spaces
- When your business requires an advertising sign
- When your business requires storage space outside the premises
- When your business requires making any structural changes
These are just some of the instances we listed. There may be many more. So, depending on your locality and business, you may require permission. We have also seen cases where no permission is needed at all.
2. How does working from home affect tax returns?
In case a part of your home is used for business, you have to pay business/commercial tax rates on that part. For instance, if you are using a part of your home as a shop, you have to give business rates on that property. Then there is the Capital Gains Tax. You have to pay CGT if you ever sell this property. For example, if your business area makes up 30 percent of your property and you sell that property, then you have to pay 30 percent CGT on the total amount you gain by this trade. The reason behind the CGT is that that all homeowners get Private Residence Relief from CGT in case their sell their home (if it’s their primary residence).
But, keep in mind such taxes are only applicable if you are using a part of your home for business. If you are running a business from your bedroom, living room, or computer, you need not pay these taxes.
3. How does home business affect my self-assessment tax return?
Working from home can directly affect your self-assessment tax returns. Whether you are part of a partnership or work as a sole trader, you can utilize simplified expenses provided you work for 25+ hours. It means you can pay a flat rate instead of going through the chore of calculating all the business expenses.
Therefore, you can easily claim a refund of your house costs like internet bills, heating or cooling bills, council taxes, etc., on the basis of how many hours did you spend working from home every month. This way, you can further reduce your business expenses.
4. What insurance do I need?
Remember, your car, home, or any other content’s insurance will not cover your home business. Particularly, if you store a large amount of inventory on your premises or clients/customers are entering your home, you will need specialized public liability insurance.
Likewise, if you have employees working with you, you will have to get the employer’s liability insurance. For an inventory, we suggest getting the business contents cover to protect any equipment or contents. For further details, you can contact your insurance broker.
Running Your Business From Home: Takeaways You Can Use
Running a business out of your home is not illegal if you have the right permit and license of the concerned department. Millions of Americans run businesses out of their homes. In fact, it’s one of the greatest last bastions of US free enterprise. Companies like Apple and Hewlett-Packard started out of home garages. So, if you want to start your home business, go ahead. And if you are unsure about which certification to get, simply check with a real estate attorney about the specifics of commercial activity in your area. We hope the information provided here will prove useful in your journey to becoming a fully independent small business owner. All the best and have a great day.