Deciding whether to stay home
It is often easy for entrepreneurs to see why it makes sense to start their companies at home. But figuring out if it's time to relocate is a tougher call. (See "Start a Business at Home? You've Got to Be Kidding," below.)
For Jon Feld of Navigator Systems, the push to relocate was his need to expand staffing beyond a group of close friends. "It seemed a little ridiculous to interview total strangers in the living room," he says. "It was hard enough to get people to join a company of 25-year-olds, no matter how strong our business seemed."
But the impetus to leave home may come from any number of directions. Products, not people, crowded out Terri Alpert, the founder and CEO of Professional Cutlery Direct LLC, a mail-order and E-commerce company in North Branford, Conn. Alpert spent nearly two years operating from home. "My business plan called for one year at home, since it was the only way that I would be able to bootstrap my initial $8,000 investment," she says. But after a while, her laptop computer, five phone lines, and warehouse (oops, we mean basement) full of inventory could scarcely keep up with the company's growth. "We were packed to the rafters. And then, one season, I was forced to make a decision not to add new products because there wouldn't be room for them. That was a very strong signal that it was time to move."
Alpert has advice for other home-based-business owners who might be considering the switch. "You've got to consider the financial issues," she says. "For us the question was pretty straightforward: could we afford the $700-a-month rent we'd have to pay, as well as the extra cost of utilities? When I looked at our cash flow, I was certain we could -- and that our pattern of growth was such that we wouldn't experience unexpected cash shortfalls and need to move back home." Because of her determination to remain fiscally conservative, though, she at first rented a small space, which she left only when it became evident that the company was going to keep growing.
Jeffrey S. Levine, a partner with the CPA firm Alkon & Levine PC, in Newton, Mass., suggests that home-based-business owners draw up two columns. "In one, consider all the financial advantages of being at home -- no office rent, lower telephone and utility costs, and so on," he says. "In the other, project your increased costs -- office rent, changes in insurance, extra utilities, office cleaning, real estate taxes, additional supplies or furniture, commuting, and, of course, whatever home-office deduction you'll be losing." It also makes sense to estimate the benefit of the corporate tax deductions you'll be able to earn owing to higher operating expenses. Levine warns that "an initial cash-flow hit is almost inevitable because of the costs of the move, possible requirements for deposits on utilities or office rentals, and the likelihood of needing new furniture and equipment." Setting up a credit-line arrangement in advance can be a big help.
But don't be afraid to leave home just because the decision-making process can be complicated. "Our sales were nearly $5 million last year, and I have absolutely no doubt that this kind of growth would have been impossible if we had stayed at home," says Alpert, who currently employs 44 people. "It was the right place to start, but we needed to move on."
Jill Andresky Fraser is Inc.'s finance editor.
When you're no longer home alone
Once you begin hiring people to help you out in your home business, questions will arise about taxes, insurance, and other employee-related regulations. It's a good idea to think them through ahead of time.
Q: If I hire other people, will that affect my home-office tax deduction?
A: Not at all.
Q: If my employees work out of their homes, will they be able to claim their own tax deductions for the costs of that space?
A: That's less certain. They should be able to, so long as they are independent contractors whose work operations are based primarily in their homes. (Then they need to meet the guidelines described in "Taxing Matters," page 98.) But if they are regular employees of your company, in most cases they will not qualify for their own deductions and should consult an accountant before trying.
Q: Are the general business rules regarding payroll taxes, employee benefits, and other human-resources matters different for home-based companies?
A: Not at all. So it is essential to comply with all federal and state guidelines, as well as any municipal ones that may exist. That's an area in which you should definitely rely on qualified legal and accounting advisers instead of trying to wing it.
Q: Will my insurance needs change if I hire employees?
A: Probably. Among other things, your state will likely insist that you pay for workers' compensation insurance and may even require a minimum level of liability coverage. You'll also need to inform your current insurer, who may insist that you amend your policy or seek coverage elsewhere. Seek guidance from your lawyer or accountant.
Q: How should I handle the issue of family members who get involved with the business?
A: If you hire them as employees or independent contractors, the tax, insurance, and other rules are the same as those for your other hires. But if you use them on a more informal basis, you may be setting yourself up for insurance problems if unexpected injuries or other work-related problems occur. Check with your insurance carrier to make certain that your homeowner's policy or endorsement would cover such situations.
