How to Protect Yourself When Running a Home-based Business

We live in a time when starting and running a home-based business is easier than ever. With a little bit of ingenuity, some seed money and a good internet connection, you can start and run all kinds of home-based businesses. From drop shipping to freelance graphic design to making and selling crafts, it’s all possible.

But there are risks involved with home-based businesses that a lot of people are blithely unaware of. Running even a simple home-based business can endanger your assets unless you take steps to protect yourself.

Common Home-Based Businesses

Some common home-based businesses that people operate include:

selling handmade items on Etsy
selling home baked goods at local farmer’s markets
selling digital services online
providing local lawn and landscaping services
providing moving help

These are all very simple little home-based businesses that can be considered innocent and low-key. They can even be considered as doing the community a favor by providing needed services.

Then there are the more advanced home-based businesses that are run by professionals who are licensed in a particular field, or who have years of professional experience. These are services that may be done by people who have semi-retired and now work part-time out of their home, like:

hairdressing
massage therapy
makeup sessions
portrait/event photography
computer repair
business consulting
sewing
etc.

All of the examples above, including many other kinds of home-based business, need the protections outlined here. No matter how simple or innocuous your home-based business may be, you need to protect yourself and your assets.

Make it Official

Talk to your CPA about your home-based business plans. It’s likely that they’ll recommend setting up a business entity so that you’re protected. Even if you’re just running a very modest business with modest returns, it’s worth it to set it up as an official business entity of some sort. For a small business, a sole proprietorship, LLC or corporation are viable options. You and your CPA can discuss which one makes the most sense for your situation.

Sole Proprietorship

This is the simplest form of business organization where a single person owns and operates the business. It’s easy to set up and has low start-up costs.

Limited Liability Company (LLC)

An LLC is a business entity that combines the benefits of a partnership and a corporation.

Corporation

A corporation is a legal entity that’s separate from its owners. It has perpetual existence, limited liability for owners, and can raise capital through the sale of stocks.

Separate Your Business and Personal Finances

This is an easy one to miss, especially when you’re starting out so simply. One day, you decide to open an Etsy shop. Etsy asks for your bank account information so they can take their 20 cents for every item you list, and so they can directly deposit your sales money. Not thinking much of it, you give them your personal checking routing number and account number. The next thing you know, you’ve just risked your personal assets. Mixing business and personal finances can have serious legal and liability consequences. What if your Etsy product causes harm and your Etsy business is sued? If you’ve mixed your personal and business finances, the court may “pierce the corporate veil” and hold you personally liable for any damages. To protect your business and personal assets, it’s crucial to keep these finances separate and maintain accurate records.

Protect Your Work Space

When running a home-based business, it’s important to protect your physical space. This includes keeping your office secure and safe for you and your customers. Let’s say you offer consultation services in your home office. You need to make sure your workspace is well-lit, with no trip hazards, and secure from unauthorized access. Whenever you have customers visiting your home, ensure that your home insurance covers this type of activity. You may need a rider or addendum to cover business activities.

Obtain Proper Insurance Coverage

Even if you operate your business from home, you still need insurance coverage. This may include general liability insurance, professional liability insurance, and business property insurance. General liability insurance covers damages caused by your business to third parties, such as a customer who slips and falls on your property. Professional liability insurance protects you against claims of negligence or errors made while providing professional services. Business property insurance covers damage or loss to your business property caused by events such as fire, theft or natural disasters. There may be some overlap between business insurance and your homeowner’s insurance, and you don’t want to pay for anything you don’t need. Talk to your insurance representative to determine which insurance policies make the most sense for your needs.

Protect Data

Finally, there’s the issue of data protection. Businesses can be sued for not protecting customers’ information. If you’re taking customers’ payment information yourself (not through a third-party payment processor), you need to take every possible precaution to protect that data, because you have a responsibility to do so. Your business insurance may cover you for data loss, but the best course of action is prevention. Put some protocols in place that help you make a routine out of handling customers’ data. For example, if you accept checks from clients, put them inside a lockbox or locked drawer until you make the deposit. Invest in a cross-cut shredder to dispose of customer information you no longer need. Set up passwords on your computer and phone so others can access data.

Working from home is increasingly popular in recent years. It’s never been easier to start a home-based business. Whether you’re a freelancer, consultant, or entrepreneur, running a business from home can offer flexibility, freedom and convenience. However, with this new found freedom comes certain risks and responsibilities. Protect yourself with the advice mentioned here and the advice offered by your CPA.