Home Grown

Once seen as quaint, home businesses are now run by sophisticated and ambitious company builders. Here's what you need to know to start growing a home business of your own.

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These days some of the most ambitious company builders are starting serious growth businesses from home. Think that gives them a credibility problem? Not to worry

You know -- and we know -- that there are misperceptions in the marketplace about home-based businesses. At an estimated 14 million strong, and with about half a million more starting up each year, this is a far more sophisticated and ambitious entrepreneurial crowd than the part-time hobbyists, stay-at-home parents, and laid-off executives that some people still consider to be the norm. As evidence, look no further than the Inc. 500 class of 1999: a whopping 48.5% reported starting their companies in their homes.

Several recent trends have combined to encourage even the most growth-minded business owners to be stay-at-homes. Thanks to technological developments, especially the Internet, home-based companies have greatly increased their capabilities. Also, recent changes in tax laws provide financial incentives to keep start-ups and young companies at home. And new resources aimed at small growing companies make it easier than ever to take care of essentials in a cost- and time-effective manner while allowing founders to focus on their chief priority: jump-starting their companies' growth.

Still, home-based-business owners face plenty of challenges, including combating the clichéd preconceptions in order to establish credibility in the marketplace. The key is to mind your p's and q's: stay abreast of technical, financial, and legal issues, and remember that the important thing isn't where your business is located -- it's how well positioned it is in the marketplace.

Complying with local and state laws
The CEO of a financial-planning firm declined to discuss her company on the record because her co-op board doesn't know that she meets clients and performs almost all business activities from her New York City apartment. Some financial planning, that! Such subterfuge can come back to haunt an entrepreneur in many ways, from financial penalties or city-government-imposed business closures to ill will within the community.

Robert Tarutis, by contrast, investigated local and state regulations before he started his company, in December 1995, out of a spare bedroom in his Waltham, Mass., home. Tarutis, the president of Tarutis Communications Group Inc., a public-relations and film- and video-production company with 1999 revenues of about $250,000, confides, "My biggest fear was that I'd be getting ready to set out from home to produce a film for a client when some guy with a truck would back up over the curb and squash a camera. Then, suddenly, someone from the city would appear and ask, 'What was a filmmaking business doing here?'" Instead, he explains, "I wanted to present myself to my community as the owner of a business that was real and serious and deserving of respect. Before I even had my business stationery printed, I wanted to be sure that my company would be in compliance with all the rules."

Some cities require home-based-business owners to fill out special forms. And some of the requirements depend on the nature of the business. Tarutis, for example, learned by a call to city hall that he didn't need a business permit. If he'd had customers trooping in and out, however, he would have been required to apply for a zoning variance.

Before John W. Nelson III opened the Capital Connection, his financial- consulting firm, out of his home in Newport, R.I., he went to City Hall. He wanted to make sure that it was all right to start a home-based business and that his neighborhood's zoning regulations allowed it. Nelson found out that he needed to get a certificate of approval from the city, which involved filling out a one-page form and submitting a document (available at office-supply stores) specifying that as a business owner he formally leased office space from himself as a homeowner. "I needed this package to be approved by the city's tax and zoning offices, and then I paid $10," says Nelson. The whole procedure, he adds, took half an hour.

Deciding when to incorporate
The issue of incorporation is important for any business owner. Whether you're based at home or someplace else, you have to examine the tax, legal, and estate-planning implications. For Tarutis, that was the most complicated legal matter he faced. He decided, in the end, to incorporate at a very early stage. "After consulting my attorney and my accountant, I decided to switch from sole-proprietor status to an S corporation because I wanted to combine tax advantages with limited liability," he says. Changing to an S corporation made things tougher for Tarutis, because "suddenly there were all kinds of state requirements that I needed to worry about, like getting workers' compensation insurance."

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