Bringing Your Business Home

In today’s changing economic times, many women are looking for ways to balance their hectic schedules and their checkbooks at the same time. More and more women entrepreneurs are opening their own businesses, many from their homes.

As an entrepreneur, it is so tempting to open the doors now, and figure the rest out as you go along. The excitement of discovering a “hole” in a market, or the idea that propels you out of bed in the middle of the night, can be quite compelling. But, good planning, including preparing a comprehensive business plan and developing relationships with a good business lawyer, accountant and banker, can protect your business and your family from the risks that come with starting any business, especially a home-based one.

If you are thinking of starting, or have already started, a home-based business, the following are a few, but by no means all, of the legal issues you should be considering. Local government dictates the parameters for what businesses can be operated from the home. For example, in the South Bay, the City of El Segundo allows home-based business only if the business serves as the base of operations and does not create any traffic or noise, and no customers come to the home. In the City of Manhattan Beach, a “Home Occupation” is defined as an occupation that is conducted as a “secondary use” of the home by its occupant. In many South Bay cities, a “Home Occupation” business license, as well as a Home Occupation permit, is required. If a business involves food preparation, County Health Requirements will also determine whether the business can be conducted from the home and, if so, under what conditions.

Long-term planning will need to be conducted to determine to what extent the day-today operation of the business will impact the neighborhood. In many cities, business signage on the home is not allowed. Increased traffic and noise from vendors and employees may cause neighbors to complain to the local government about the business operations. If the appropriate licenses and permits have not been obtained, civil and criminal penalties may apply.

For tax purposes, the Internal Revenue Service also takes an interest in home-based business. The IRS specifies that a home-based business must have its own location away from the family living space, devoted exclusively to the business. In other words, the computer in the home office cannot be used for bookkeeping, scrapbooking, and Webkinz World.

Do I need to form a Business Entity before I start conducting business? Yes! So many entrepreneurs try to “save a buck” either by not forming a legal entity from the start of the business, or trying to “do it themselves.” In either case, the money “saved” up front can lead to increased cost later on.

Formation of a business entity, such as a corporation or limited liability company (LLC) before you start transacting business or signing contracts is critical. For liability purposes, a properly formed and maintained business entity can provide protection from personal liability for the debts and obligations of the business.

Women entrepreneurs desiring to supplement the family income by running a homebased business risk exposing hard-earned personal assets, such as your home, to creditors of the business.

In California’s litigious society, it is not a matter of whether you will be sued while conducting your business; in all likelihood, it is a matter of when. If you are sued based upon an occurrence arising during your business operation, a properly formed and maintained business entity can limit exposure to a judgment solely to the assets of the business, and not your family.

A business entity protects the personal assets of the owner of the business only if it is properly formed and maintained. Many business owners mistakenly believe that their personal assets are protected upon the formation of the business entity. However, under the “alter ego” theory of liability, a creditor may “pierce the veil” of liability protection if the business owner fails to maintain a separateness of existence between the entity and the individual owner of the business.

In a corporation, “corporate formalities,” such as annual and special meetings of shareholders and the board of directors, (even if the entity consists of only one person sitting in the dual role of single shareholder and director). The failure to maintain these formalities by the business may allow the entity to be disregarded as a “sham,” and the personal assets of the business owner exposed to judgment.

Formation of the business entity before conducting business also allows for the development of corporate credit. Many business owners defer the formation of a business entity until after they have done business for some time. However, by that time, they have incurred start-up costs and debt that are, unfortunately, reflected on the individual owner’s personal credit. At that point, it is not possible to simply “roll over” the individual debt to a “limited liability” company. And, it is quite difficult to unravel the business assets and obligations from the personal ones.