Bulletin #3007, Home-Based Business Fact Sheet: Starting a Home Business

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Adapted for Maine from Iowa by Jim McConnon, Extension Business and Economics Specialist

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Table of Contents:

A home business is a good way to add to your income and be your own boss. Home businesses are becoming increasingly popular as more and more people are turning their time and talents into profits.

Operating your own home business can give you great satisfaction as you build it into a valuable investment. You will be able to enjoy the independence that comes with making your own management decisions, and your workplace will be conveniently located in your own home.

But starting a home business is not easy, and there are often disadvantages to go along with the freedom and increased income you will have when you run your own home-based concern. A home business can mean long working hours. Because it is located in the home, it can disrupt home and family activities. Also, because you are the boss, your business’ success will depend heavily upon your management skills.

Starting a home business can be rewarding, but it is not for everyone. Before you decide to start a business in your home, here are a few things to consider.

Am I the type?

If you are thinking about starting your own business, you probably already have a pretty good knowledge of the product or service you plan to sell. You know what materials and equipment are required, and you have—or know how to acquire—the special skills you will need.

But what about your management skills? As a home business operator, you’ll have to know more than just how to produce a product or service. You will also be assuming the role of a business manager, one that will require you to draw on certain other skills and personality traits.

Management personality

What does it take to manage your own business? Research has shown that successful business operators tend to be determined and persistent—they’re self-starters. They are able to think creatively and can make quick decisions when necessary. But they are also flexible and able to adapt when business situations require change.

Successful business operators also possess good human relations skills. Their businesses are consumer-oriented. They’re able to get along with all kinds of people and can withstand the strain of trying to satisfy the competing demands of customers, suppliers, family, and self. They also have good interpersonal communication skills.

There is no set combination of personality traits that will assure you success with your home business. The items listed here are present in most people to some degree. It is possible, though not always easy, to improve your skills in any of these areas.

One trait you must possess, however, is a commitment to the success of the business and to making a profit. Your home business must be just that—a business, not a hobby. You must be willing to devote extra time and effort to it, especially as you’re getting established. With a strong commitment to success, you will be better equipped to make your home business both financially and personally rewarding.

Technical business skills

To be a successful business operator, you will also need to know how to do business. Record keeping, financial management, and inventory control will be your responsibility. So will many other decisions and tasks, from designing a marketing and advertising strategy to keep the part of your home where you do business attractive to your customers. All these things will need to be done well if your business is to be profitable.

There are a number of ways to help make sure your business management skills are adequate. One source for management information is the Small Business Administration, which publishes booklets and pamphlets on a broad range of management related topics. Some trade organizations and other business groups also distribute self-help materials. There are several magazines written especially for home business operators. Your local library is a good place to find these and other useful publications.

If you are interested in more formal instruction, check with local colleges, universities or technical schools. These institutions often offer courses or conferences for adults on small business management, as well as on more specialized topics. Some trade organizations sponsor management seminars or workshops, and the University of Maine Cooperative Extension also sponsors business management workshops.

Even with all these resources at your command, experience is still the best teacher of business management skills. In fact, you probably should have some strong second thoughts about starting your own home business if you don’t already have one or two years’ business experience.

Your experience doesn’t have to be as a business manager, but you should have served in a position of some responsibility or decision-making capacity. Your experience probably should be in a line of business closely related to the one you’re thinking of starting. With the right blend of training, study, and experience, you’ll be better able to anticipate and effectively deal with the special needs of your own business.

Is my home the right place?

A second important consideration before you get started is your home’s suitability as a place of business. There are certainly advantages to doing business in your home — low overhead, no transportation costs in getting to work and possibly tax advantages. But you will need to weigh these advantages carefully against the possible negative aspects of having a business operating in the place where you live. By examining these concerns before you start your business, you will help avoid unforeseen problems and expenses later on.

Separating business and home

Probably the first things to look at, regarding your home’s suitability, are the questions of space and privacy. Is room in your home to do business without interfering with family activities? No matter what type of business you are considering, you’ll need space for an office. Do you have such a room?

If you’re planning to sell a product of some kind, you will also need a place to store your inventory and to store materials if you are going to produce or assemble the product at home. If you’re thinking of selling a product in your home, you will need a place to display your merchandise where your customers won’t have to walk through your living area. Also, you will need adequate places for them to park when they come to shop.

Keeping your business separate from your living area is important for two reasons. The first is your family’s privacy. A home business can easily disrupt normal family activities, placing a strain on the family support you will need to make your business a success. Likewise, you’ll want to keep family activities from interfering with your business. The second reason for maintaining a separate business area, even if it is only an office, involves the tax advantages you can realize. The Internal Revenue Service permits the deduction of expenses associated with maintaining your place of business — rent, utility costs, maintenance, furnishing, etc. — from your business’ taxable income. However, these deductions are allowed only for a place that is your principal place of business, and only if it is used strictly for business purposes. You may not automatically be able to deduct these expenses (you probably should consult a lawyer or tax specialist before filing your taxes), but you certainly will not be able to deduct them if you do not keep business and living areas separate.

Arranging for a separate business telephone line may also be advisable, especially if you will be handling many calls or advertising a telephone number. This will keep your business and family telephone needs from conflicting. Business telephone rates are generally higher than residential rates, but you’ll be able to deduct your business phone expenses at tax time.

Checking legal and insurance needs

Other things to consider before you move a business into your home are local zoning ordinances, insurance coverage, and licensing and inspection requirements. Many communities have zoning ordinances or comprehensive plans that restrict the type and size of businesses that may operate in residential areas. These are designed to protect both the business operator and others in the neighborhood from hazards to health and safety, increased traffic flow and parking demands, and other disruptions that may accompany some kinds of business activity.

Your town may also have regulations regarding the type, size, and placement of outdoor advertising. Be sure to check with your city clerk (or your county auditor in rural areas) to find out about any such regulations before you open a business in your home. It is probably also wise to talk with your neighbors about parking and signs if your business will be bringing traffic into your neighborhood.

Before starting your business, check with your insurance agent to see what your insurance needs will be. If you are planning to have only an office and if customers or delivery people won’t be coming into your home, you may not need to make any changes in your coverage. If, on the other hand, you will be storing materials or inventory, producing a product, or displaying and selling merchandise in your home, chances are you’ll need to obtain special, separate coverage for loss, damage, and liability. This is also a good time to ask about product liability coverage to protect you against claims resulting from defective merchandise.

Also, see your city clerk or county auditor about any licensing or inspection regulations that relate to your business. State laws in Maine require operators of some businesses, such as barber and beauty shops and real estate agencies, to be licensed. Some towns and cities may have similar requirements for other establishments. The state and cities may require periodic inspection of certain types of business facilities, especially those where food is stored, prepared, or sold.

Once you have made sure there won’t be any legal or regulatory issues that will restrict your ability to do business in your home, look once more at the compatibility of your business plans and your home and family life. Ask yourself such questions as: “Will I be able to keep my business from getting in the way? Can I start my business without making too many changes in my home? Does my family think a home business is a good idea?” If you still can answer yes to each of these questions, then your chances for success are improved.

How big is my market?

You see a need in your community for goods or services you want to sell. You know there are people who will buy your product. But is that need great enough? Are there enough potential customers to provide you with the income you’ll need to make a profit? Careful consideration of these questions now, before you’ve made a commitment to starting your business, can save you costly frustrations later.

Estimating sales

To estimate your potential sales, you will need to do a little informal market research. First, identify your trade area — the geographic area from which you expect to draw most of your customers. For most home businesses, the trade area is limited to an area very close to the business — a few nearby neighbors in a large city, a single community, and, perhaps, part of the surrounding rural area in small towns and medium-sized cities. For mail order or wholesale operations, the trade area may be much larger, depending upon the kinds of goods sold and the geographic distribution or competing firms.

Now, study the population of the area you’ve identified. Does it contain enough potential customers to support a new business? The type of business you hope to open will have a lot to do with your answer to this question. For example, a rare stamp or coin business will probably need a greater trade area population than a home daycare operation will since there are usually fewer stamp and coin collectors in a given population than families that need child care services. A daycare business, on the other hand, may not succeed in a retirement community, regardless of the size of the population.

Next, examine your competition. Are there any local firms already selling the goods or services you plan to sell? Are they well established, or are several of them new? Are they adequately meeting local demand? Have any firms dealing primarily in your planned line of business gone out of business in the last few years. If so, why? Will you be able to make what you sell appear different (better, less expensive, etc.) enough to attract customers to your business?

Your answers to these questions should play a major part in your decision to start your own home business, for they’ll help tell you how big a share of the local market you can expect to capture. Your new business will be at a disadvantage compared to already established firms, especially if they’re large and few in number. Knowing what business conditions others have faced can warn you of possible pitfalls: if businesses similar to what you have in mind have failed for lack of customers, then perhaps you should seriously reconsider starting one of your own. (See also “Bulletin #3006, Home-Based Business Fact Sheet: Market Potential for Retail Businesses in Maine,” an Extension fact sheet.)

Getting information

You can get information on your business’ trade area and competition from a number of sources. One source is your potential customers — your friends, neighbors, and other people in your community. Find out where people shop for your product and ask them why they do. Ask them about other businesses’ strong and weak points. Then determine how you can make your business and what you sell appear different enough to build a clientele of your own.

Don’t rely on your friends and neighbors, though. You should also contact operators of existing businesses, suppliers, and local business and trade associations to get information about your trade area and competition.

Also, begin thinking about how you will price and market your product or service. SCORE (Service Corps of Retired Executives) is one organization that can provide this kind of assistance. Check with your local Chamber of Commerce for names of SCORE members in your community. Contact the statewide Small Business Development Center office (207) 780-4420 for service near you.

Am I prepared?

Your personality and management skills, your home’s suitability as a place of business, and your likelihood of showing a profit should play a part in your decision about whether to start a business in your home. By doing your research — asking questions, observing how other businesses operate and taking a good, honest look at your abilities — you will be well on your way to making a sound, well-informed decision.

If at this point, it appears that you have a good chance to make your business a successful one, it is time to look once more at how well prepared you are.

The business plan

Draw up a business plan showing your projected starting costs and your projected income and costs for the first two to five years of operation. Will you be able to raise the money for supplies, materials, advertising, and other necessities, before you can generate any revenues? Your plan probably also will show that there will be a lag of several months, or even a year or more before you’ll be able to show a profit. You and your family must be financially sound enough to weather this period. You may have to accept a different standard of living until your business gets established.

Look at your commitment to the business’ success and your family’s support for your decision. If you start a home business, you will need to devote a great deal of time to its operation, including the time you may have to subtract from family and other activities. You’ll need understanding and encouragement from your spouse, children, and friends to help you keep conflicting time demands from becoming a problem.

Looking toward the future

Finally, give some thought to the future, to what your plans and goals are after your business has been going for a year or two. If it is successful, will you still be able or want to keep it a home business? Coping with a growing operation will bring on a new set of decisions to be made; doing some planning now will make the deciding easier later on.

If, on the other hand, your home business doesn’t prove to be profitable, will you be prepared to handle any financial (and, perhaps, personal) setbacks? More than half of all new businesses fail within two years after they’re started. So, unpleasant as it may sound, you shouldn’t overlook the possibility of failure. If you decide to start a business in your home, you will be starting out confident of your chances for success. You must also be confident that your venture is worth the risk of failure.

Included in this bulletin is a short checklist to help you think about yourself and what you need to know before you start your own home business. Use it to help you organize your thoughts, review your situation, and set goals for yourself and your business. (See also Bulletin #4190, Starting a Business in Your Home: Weighing the Pros and Cons.)

What do I do next?

This bulletin has concentrated on four important questions you should answer before you make a decision to go into business. If you’ve decided that a home business is for you, there will be a number of other things to do before you get started.

You’ll need to obtain a sales tax permit and decide what legal form — sole proprietorship, partnership, or corporation—your business will take. You will also need to decide on the record-keeping system you will use. And, you’ll need to understand how you will be affected by federal, state, and local tax laws.

Obtaining professional advice and assistance in these matters will be a worthwhile investment in your business’ success. A lawyer can explain your legal responsibilities and may be able to advise you on tax matters. An accountant can help you set up a record-keeping system. An insurance agent can help you choose the proper coverage for you, your business, and your product. Of course, your banker can give you financial advice and may be able to help you put together your business and marketing plan.

If you have decided to start your own home business, you’ve chosen to embark on a challenging adventure. It may be a risky one, at least for a time, with pitfalls along the way. But sound planning and careful management will help you minimize these risks and make your experience in business a pleasant and profitable one.

Checklist for Starting a Business

The questions in this list are intended to help you think more about your decision to start a home business. There is no score that determines whether you are ready to go into business, but you should be able to check “Yes” for most of the questions before you commit yourself to anything. “No” answers indicate areas where you possibly should do some more thinking or research.

Checklist for Starting a Business

Yes No  
____ ____ I like to do a professional job. I am suspicious of shortcuts. I am able to make decisions quickly and confidently, and I almost always stick with what I’ve decided.
____ ____ I am a good planner, and I pay close attention to details.
____ ____ I am an energetic worker, and I know my home business will require me to work long hours – as many as 12 hours a day, six days a week, and maybe on holidays.
____ ____ I value information, and I can take advice from others.
____ ____ I am adaptable – I will be able to change if the business requires it.
____ ____ My family supports my decision to start a home business and understands that it will demand a great deal of my time and attention.
____ ____ I realize that my customers, suppliers, family, and friends will occasionally have conflicting expectations of me that I’ll have to balance.
____ ____ I have enough room in my home to conduct business without conflicting with my family’s normal activities.
____ ____ Local zoning regulations allow businesses like mine to operate in residential areas. My neighbors know I plan to start a business.
____ ____ I know it is likely my business will not show a profit right away, and I have sufficient financial reserves to cover my business (and family) needs for three to four months.
____ ____ I have determined that there is enough demand for my product in my community to support another business.
____ ____ I have studied my competition’s strengths and weaknesses and know how to make my product or service different or better.
____ ____ I have sought advice about record keeping, taxes, legal matters, and insurance from qualified professionals.
____ ____ I know there is a good chance that my home business will fail, but it is worth the risk for me to try.

The Home-Based Business Fact Sheet Series

This is one of a series of publications designed for the person entering or considering a new business operation. See the University of Maine Cooperative Extension Online Publications Catalog for the complete Home-Based Business fact sheet series.

Information in this publication is provided purely for educational purposes. No responsibility is assumed for any problems associated with the use of products or services mentioned. No endorsement of products or companies is intended, nor is criticism of unnamed products or companies implied.

© 2001, 2008

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