Home Business Legal Issues To Consider

by WorkFromHome on November 23, 2011

Whether you are working from home as an independent contractor or building a home based business, there are several legal issues that need to be considered. Even though your business or job is based out of a house, both local municipalities and the IRS will still classify your income and activities as they would any other type of business structure. In order to protect both your income and legitimacy it is important to keep the following legal issues in mind.

Choosing The Right Business Structure

For most people who have a home business the question ultimately arises about whether to structure the business as a sole proprietorship or a corporation. The answer to this question depends on the type of business that is being conducted. The purpose of declaring any business as a corporation is mainly to protect personal assets from creditors and to shield the owners against liability. If you have the type of home business that could possibly become entangled in a lawsuit, you should definitely consider incorporating. Here is an overview of the different structures most commonly used by work at home professionals.

Sole Proprietorship: This is the simplest form of operation because there are no legal forms to file and no additional tax returns required by the IRS. You, personally, are the business and retain full control of the business operations. Any profits you earn will be included on your tax return as Schedule C income. The down side of this structure is that your personal assets will not be shielded in the event that adverse legal judgments arise from faulty products, shoddy service or copyright infringement.

Limited Liability Corporation (LLC): In most states, an LLC is the simplest and least expensive way to incorporate a business. This structure offers liability protection to owners against personal assets and all profits or losses of the business are passed through the owner’s individual tax returns. This structure will also allow you to sell shares for raising capitol and more easily transfer ownership of the business.

S Corporation: This is the most common type of small business structure because it protects the shareholders, who are usually the owners, against the debts of the corporation. The corporation is managed by a board of directors that usually include the owners and immediate family members. The big advantage of this type of structure is that the profits or losses pass through to the shareholders directly instead of being taxed as both corporate dividends and personal income.

Different states have different incorporation procedures and tax laws, so it is important for you to thoroughly research the regulations in your state to determine the best structure for your home business. You can always start out as a sole proprietorship and incorporate at a later date. Just be sure to fully protect your personal assets as much as possible.

Zoning Laws

All major municipalities have zoning laws governing where and how a business can be operated. These laws in your area could have a major impact on your home business. This is especially true if you have clients coming and going from your home on a regular or if your business requires additional employees. The last thing you need for a successful home business is having neighbors upset about traffic and other disruptions in the neighborhood.

If your home business is just you working from an office on a computer this should not be a problem, but it is always wise to check local zoning laws and determine how they might impact your operations in the future. In many areas, laws require that home-based entrepreneurs must obtain a business permit or license. With the rapid growth in home businesses and work from home jobs, experts expect to see local municipalities more carefully scrutinize where zoning laws are being violated and how they should be adjusted to better meet the emerging home business market.

Insurance Coverage

Your homeowners insurance policy is a legally binding contract between you and your insurance provider. While this policy will cover you as a homeowner, it may not cover you in certain areas as a business owner working from home. It is always better to clarify these differences in coverage up-front than to discover them after it is too late. For instance, your business hires one part-time employee for customer service. If that employee slips in the bathroom during working hours, would you be covered and how does workman’s compensation factor in? Depending upon the type of business you are conducting, it may be necessary to purchase a business insurance policy to fully protect your assets and employee obligations in the event of an injury on the work site.

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