Home Business Success

Record Keeping, Taxes, Insurance And Permits

Record keeping

Keeping accurate and up-to-date business records is, for many people, the most difficult and uninteresting aspect of operating a home-based business. If this area of business management is one that you anticipate will be hard for you, plan now how you will cope. Don't wait until tax time or until you are totally confused. Take a course at the local community college, ask a volunteer SCORE (Service Corps of Retired Executives) representative from the Small Business Administration to help you in the beginning, or hire an accountant to advise you on setting up and maintaining a recordkeeping system.

Your records will be used to prepare tax returns, make business decisions, and apply for loans. Set aside a special time each day to update your records. It will pay off in the long run with more deductions and fewer headaches.

If your business is small or related to an activity that is usually considered a hobby, it's even more important that you keep good records. The IRS may decide that what you are doing is only a hobby, and you won't be allowed to deduct expenses or losses from your home-produced income at tax time. So keep records of all transactions in which you spend or bring in money. Pick a name for your business and register it with local or state regulatory authorities. Call your city hall or county courthouse to find out how.

Your records should tell you these three facts:

* How much cash you owe,
* How much cash you are due, and
* How much cash you have on hand.

You should keep five basic journals:

1. Check register--Shows each check disbursed, the date of disbursement, number of the check, to whom it was made out (payee), the amount of money disbursed, and for what purpose.

2. Cash receipts--Shows the amount of money received, from whom, and for what.

3. Sales journal--Shows the business transaction, date, for whom it was performed, the amount of the invoice, and the sales tax, if applicable. it may be divided to indicate labor and goods.

4. Voucher register--A record of bills, money owed, the date of the bill, to whom it is owed, the amount, and the service.

5. General journal--A means of adjusting some entries in the other four journals.

Choosing a Recordkeeping System

Even though you may be small and just beginning, it is probably wise to consult an accountant to help you decide which recordkeeping system is best for your business. Once it is set up, you can record the daily transactions or periodically have a bookkeeper post your daily transactions in your General Ledger and prepare your financial statements.

Be sure to establish a separate bank account for your business--even before the first sale. Then you will have a complete and distinct record of your income and expenditures for tax purposes, and you won't have to remember which expenses were business and which were personal.

It is important to choose a recordkeeping system that you understand and will use. It will help you see how well the business is doing and is the first step in responsible financial management.

Tax Obligations And Benefits

Significant tax savings are available to the home-based businessowner in the form of deductions, credits, and depreciation allowances. The time, money, and energy you put into keeping good records and keeping current on tax laws will be worthwhile and ensure that you operate within the law. You will need to plan for income tax, social security (all self-employed persons must pay a federal self-employment tax), employees' taxes (if you hire anyone), property tax on your home and business-related taxes, such as sales tax, gross-receipts or inventory tax (in some states and localities), and excise or individual item taxes (on certain commodities).

The Internal Revenue Service supplies the following free booklets (and runs free workshops) to give you details on your specific obligations:

* Your Federal Income Tax (Publication 17)
* Tax Guide for Small Business (Publication 334)
* Business Use of Your Home (Publication 587)
* Employer's Tax Guide (Circular E)
* Self-Employment Tax (Publication 533)
* Tax Information on Retirement Plans for the Self-Employed (Publication 560)
* Tax Information on Depreciation (Publication 534)
* Information on Excise Taxes (Publication 510)
* Tax Withholding and Estimated Tax (Publication 505)

There are various federal and state forms you will need to fill out to start a small business. The federal government requires you to fill out several forms including the following:

* Application for Employer Identification Number (Form SS-4) (If you have employees or are subject to excise tax)
* Employer's Annual Unemployment Tax Return (Form 940)
* Employer's Quarterly Federal Tax Return (Form 941)
* Employee's Withholding Allowance Certificate (W-4)
* Employer's Wage and Tax Statement (W-2)
* Reconciliation/Transmittal of Income and Tax Statements (W-3)

As a home-based business owner you should be aware that every business decision--each purchase and transaction you make--has tax implications or built-in tax advantages or disadvantages. Deductions may be available for home maintenance and improvements; automobile expenses; telephone expenses; office and work space; inventory space; major purchases, such as a computer; and a wide variety of other items such as uniforms, coffee service, trademarks, a safe deposit box, credit bureau fees, and business cards.

Each business situation is different and tax laws change, so consult up-to-date references, a trusted attorney, and an accountant who can advise you on your particular obligations and benefits.

Insurance

Insurance helps to safeguard your business against losses from fire, illness, and injury. You cannot operate without it. Talk with an insurance
representative about your business needs. Check with the insurance carriers on your home policy and make sure business use of your home is compatible with your homeowner's policy. In addition to a homeowner's policy (personal plan), now that you have a business, you will need a commercial policy for full protection. Discuss these other possible needs with your agent:

* Product Liability Coverage--to protect you in case your product causes injury to the user
* Auto Liability and "Non-owned" Auto Liability Insurance--if a car is ever used to support the business in any way
* Medical Payments Insurance--payable if someone is injured in your home whether or not it was your fault
* Worker's Compensation--if you have employees
* Business Interruption Insurance or Earnings Insurance--in case your business is damaged by fire
or some other cause and you must totally or partially suspend operations
* Disability Income Protection--a form of health insurance in case you become disabled
* Business Life Insurance--to provide funds for transition if you die

Be sure to keep all your insurance records and policies in a safe place--either with your accountant or in a safe deposit box. If you keep them at home for convenience sake, then give your policy numbers and insurance company names to your accountant or lawyer or put it in your safe deposit box.

Final advice for the wise business person is to read and understand the fine print in all policies and to reevaluate business insurance needs about
every six months.

Other Considerations

Another aspect of planning is sheltering tax dollars through a Keogh Plan or corporate pension and profit-sharing plans, if your business is incorporated, or a retirement plan.

If you have a partnership, consider making a Buy and Sell Agreement with your partner(s). This agreement requires the surviving partner(s) to buy, and the heirs to sell, the deceased partner's interest. The surviving
partner(s) then becomes the sole owner(s) and the heirs receive cash for their share of the business.

Dealing With Laws: Zoning, Licensing, Permits, and Others

Unfortunately, many home-based business people try to "slide" into business, saying "I'll just try it for a few months and see how things go" or "It's not really a business. I have only ten clients." This attitude can
lead to a lack of planning and big disappointments. If you set up your studio, print business cards and flyers announcing classes, and then find that regulations make it illegal to operate out of your home, you may have to start all over.

Zoning

Before you start your home-based business, do a thorough investigation of the zoning laws in your community. Zoning regulations spell out activities permitted and prohibited in specific portions of a city or county. Call your town hall, zoning office, or local library to get a copy of zoning laws. Find out the structure of your local zoning groups. Most areas have Planning, Zoning, and Appeals Boards.

If the home business you are planning conforms to zoning regulations, then all you need to do is keep abreast of new proposals that may affect your situation. It's a good idea to stay in touch with others operating from their homes by joining business organizations or neighborhood groups in case you ever need to band together to propose or oppose new regulations. Maintaining a low profile and friendly relations with your neighbors will result in more support from them should adverse regulations affecting your business ever be proposed.

If through your research you discover that the home business you are planning would violate the zoning code, there are several possible ways to
proceed. You might wish to check with an attorney who specializes in zoning law to look for a legal way around the regulation. You might decide to apply to the Zoning Board for a variance or exception. Or you may be able to change your business enough to make the operation fit the law. If the regulation outlaws businesses that employ people other than the owner at home, maybe you can have employees take work to their own homes. If your business will create too much traffic, consider another strategy for product distribution. If your business will create too much noise, maybe you can soundproof your house. At last resort, ask yourself "Is it worth it to organize a drive to change the law?" Considering the rapid growth in the number of home-based businesses, you just might find other entrepreneurs who are also interested in submitting a change in the regulations to the Zoning Board. Go to meetings of the Board and try to identify the person who appears most active and most sympathetic to your position.

In the unfortunate and unlikely (most zoning officers don't have time to chase people who aren't bothering anybody) event that you are issued a "cease and desist" order, you should: 1) file an appeal immediately with the Appeals Board (if you interpret the regulations differently than they do); or 2) submit a change in the regulation to the Zoning Board to allow your business, which may enable you to continue to operate without fines until the Board reaches a decision. You may need a lawyer if you are not entirely familiar with the regulations and the workings of the Board.

Cultural and national trends point in the direction of zoning regulations that allow quiet, nonpolluting, low-traffic kinds of home businesses. More
and more corporations are employing people to work at home. Most neighborhoods will adopt a "live and let live" attitude if you keep your premises neat and quiet and don't create traffic and parking problems.

Keeping Up With Zoning Legislation

There are two ways to keep up with zoning legislation in your community (and with other topics of interest to home-based entrepreneurs). One way is to read local newspapers, especially the business section and the local or "neighborhood" sections. Be sure you notice local items about such things as proposed subway stations or the county's plan for revitalization. Changes like these could eventually influence zoning in your area. The other way to keep abreast of trends and zoning issues is to join the local chapter of a business group, such as the Rotary Club, the National Association of Women Business Owners, the National Family Business Council, or a Business and Professional Women's Club. Through newsletters, meetings, and friendships that develop, you will hear all the latest local (and national) issues discussed while you learn valuable business skills and make useful contacts.