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Is Your Home-Based Business Illegal?

Hey, apartment entrepreneurs: You might be breaking the law. Or several laws. Here's your legal checklist for running a business from home.

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The apartment entrepreneur: If you aren't one, you probably know one. Everybody has a friend writing a screenplay or music, consulting, or trying to turn a hobby into a moneymaker…all from the comfort of residential rental property.  This is not to mention the boom of tech start-ups begun out of living rooms and garages not only in Silicon Valley, but all across the United States.

According to the SBA, home-based businesses make up roughly half of all U.S. businesses. Operating your home-based business under the thumb of a landlord is not always a good thing, however. And on top of possible restrictions in the lease, there may be actual zoning laws that forbid your endeavor.

You might be tempted to ask for forgiveness before permission, but be careful.  Running afoul of your lease or local laws could shut your growing business down for months while you try to break your lease and find a place that allows your apartment-based business.

The first thing you should do is take a look at the situation.  How bad is it?  If you haven't started yet, there are some resources you can tap to see if your business will be on the up-and-up before you spend a lot of time and effort just to see it go to waste.

First, check your lease.

Every lease sets out the dos and don'ts for the lessee. That's you. Sometimes these restrictions are set out in general rules that pertain to the building (often called "Rules and Regulations"). If your lease is silent, that doesn't mean you are in the clear. If your business has the potential to be disturbing to other tenants (teaching drum lessons comes to mind...), it may violate other aspects of the lease.

Another thing: If you are renting a condo unit from the owner, condominium CCRs (Covenants, Codes and Restrictions) are often more restrictive on home-based businesses than apartments.

To be safe, talk to your landlord or the building owner and see if you can get him or her to be reasonable. Provide assurances that once it gets to a certain size or profitability, you will rent separate space. Note that if the property is managed by a conglomerate--which is often the case in larger properties--it will be difficult to get them to waive this restriction.

Next, check all the codes.

There are generally three areas where your business plans might get into in trouble:  Zoning laws, Home-based Business ordinances and Business licensing.

The stated purpose of zoning is to separate incompatible land uses like commercial, residential, agricultural and industrial.  In reality, zoning is a permitting system designed to prevent new development from causing harming existing adjacent land use.  You can check with your local land use department to see what your property is zoned as and what that means for you.  Residential, commercial, and mixed-uses are common and can take many forms.  If you have the time and want to put in the effort, you can request a waiver--often called a "variance"--to allow for an exception to a zoning restriction. Dealing with local government can often be time-consuming and difficult. Many find that it's easier to move to an area that has pre-approval for mixed or commercial uses.

If your local area has an ordinance that covers home-based businesses, take a look at it to make sure that your plans are acceptable. These ordinances can vary widely, but most are logical and prevent you from running a commercial enterprise that would be damaging to the area where you live. For instance, a business that sees a lot of foot or car traffic is not likely to fly on a quiet cul-de-sac. Also, these ordinances often limit the number of employees a home-based business can have.

You should take a trip to your City Hall and check out what business licenses you need, if any. Failing to get a license can result in fines and penalties. Even if you aren't required to get a license, many municipalities require registration, which is less of an onerous process but equally advised.

Then, if all else fails, think about a move!

The last thing you want is to get your business shut down just when it is getting good. If you are truly worried that you are breaking the law and just can't fix it, look into breaking your lease and moving on.  This isn't always easy (or cheap), since an apartment lease is a formal contract.  Breaking it without consent can carry heavy consequences, from the loss of your security deposit to a judgment that requires you to pay for a year of rent--even if you have already moved out!

Legislatures are pretty pro-renter in general, but you still need to know your rights and obligations before you decide to break your lease and start your business in a more favorable area.  Again, check the terms: how much time is left on the lease, what are the penalties and is there any way you can mitigate them by finding a new renter?

So how do you break your current apartment lease so you can move forward with your life? If you find yourself in this situation, there are a few important things to consider if you want to minimize the potential penalties associated:

  • Have you been a model tenant?  If you pay your rent on time and have not been a huge hassle, it is a lot easier to get the ear of a landlord--whether to shorten or break your lease or to allow an exception for your home--based business.
  • Are you close to the end?  If you are close to the end of your term (I'd say at least nine months into a one-year lease), it's more likely that the landlord will let you out early--especially if there are other prospects looking at your place.
  • Can you line up a replacement? If you do some of the legwork (take out an ad or talk to friends and co-workers), going to the landlord with a ready-made replacement renter can get you off the hook. Whether it is a sublet or an outright replacement of the lease, just be sure you know what your continuing obligations are, if any.
  • Are you willing to lose your deposit?  If you don't mind losing your security, you might be able to talk to landlord into letting you out of your lease after agreeing to pay a little for the right.  If the landlord is confident about re-renting, this can be an attractive option.

You might even be tempted to take your chances and just leave.  Don't do it!  You can be on the hook not only for the lease value, but also attorney fees if the landlord sues you.  This can also have a negative effect on your credit and ability to rent in the future!

Of course, if you haven't taken the step of starting your apartment-based business yet, then you are in a much better position.  Taking the steps above can go a long way to ensure that once you start your company, you won't be interrupted with distractions that could shut you down on a technicality.

IMAGE: the tartanpodcast/Flickr
Last updated: May 31, 2012

CHAS RAMPENTHAL is general counsel and vice president of product development at LegalZoom. He's also a former talk radio host (KTLK AM 1150 at Clear Channel) and an entrepreneur himself, as the founder of LegalEndeavor.
@LegalZoom




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