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Starting a home-based business is an attractive alternative for people who may not want a traditional full-time job but who want to earn extra money. In fact, 75 percent of those who run home businesses do so part time and use the earnings to supplement other income, according to a report commissioned by the U.S. Small Business Association (SBA).
Home-based businesses give people the opportunity to be their own boss, work the hours of their choice and keep a hand in the working world. They are often easier to start than a typical small business for several reasons. Owner’s don’t have to rent outside office space and they usually don’t hire employees. These features make working from home a compelling business option for people transitioning into retirement and for people who need to be at home for family or other reasons.
The different types of home-based businesses reflect the expertise of their owners, and range from consultants to trade contractors to bed-and-breakfast proprietors to sellers of personalized cufflinks that make great groomsmen gifts. Of the countless types of home-based business owners, many are professional consultants, such as accountants, architects and computer experts. Consultants, as a separate category, earn an average of $42,000 in net income, which is higher than the net income of all home-based businesses averaged together, which is $22,569, according to the SBA report.
Do your homework to plan a home-based business
One of the first steps in starting a home-based business is to identify your financial needs. List the kind of equipment, space and inventory you may require and consider sources of financing. This is the start of a sound business plan, which may protect you from endangering your family’s financial security or straining personal relationships, according to a report from the SCORE Association, a non-profit small-business counseling group.
Consider enlisting the help of a professional financial advisor, who can help you evaluate how the costs of your home-based business fit into your overall financial plan. If you find you need start-up cash you may want to investigate different types of loans, including those from the SBA and from commercial banks. Using personal savings or tapping into retirement accounts may not be your best option; a financial advisor can help you examine the consequences of withdrawing money from these accounts, which may include penalties and fees.
Track home-business expenses for taxes
You can deduct expenses related to your business from your taxes – but only those costs related to the part of your home used exclusively and regularly for business. These may include a portion of your mortgage or rent, utilities and furnishings. For more details, consult a financial advisor or Internal Revenue Service Publication 587, Business Use of Your Home, which is available at www.irs.gov.
Some homes may require refurbishing to make them ready for business. You may need to add electrical outlets, heat or air conditioning ducts or telephone access. Keep track of these expenses, including costs for hiring labor, which may also be tax-deductible.
Make it work to your advantage
With a home-based business, you can avoid congested commutes and cramped cubicles. But to gain the time and efficiency of a home office, organize your space before you start. Choose a room with good lighting, ventilation and storage. Dedicate the area to your business, and make sure kids and pets know it’s not the playroom. Keep household records and belongings separated from business items.
Measure your space and choose furnishings and equipment that fit your room and your budget. Browse catalogs, Internet sites and stores. A desk chair that looks good in the showroom may not be practical for a home office. Organize your files and avoid moving them out of your home; find extra storage in a closet or basement so you’ll have them when needed.
Having a home office means you may be able to save on rent and labor costs associated with running a business elsewhere. Because of this, home-based business owners typically earn a higher return on gross revenues (36 percent) than owners who operate outside of the home (21 percent), according to the SBA.
Lastly, after that business is profitable, consider setting up a business retirement plan. For a solo practitioner, a SEP IRA or solo 401(k) plan can be an easy way to set aside money for retirement, while also lowering your taxes. If your business grows and you hire employees, you will need to make that retirement plan available to them as well. For this reason, it pays to consult a financial advisor who is experienced in setting up and designing retirement plans. They can help you determine if a particular plan is cost effective, and ensure that it is designed properly so that you benefit financially from it.
Running your own business is a part of the American dream and can be your ticket to more flexibility and freedom.
The views expressed represent the opinions of Benedetti, Gucer & Associates and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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Tonyalee is an avid reader, gym junkie, coffee addicted workaholic and blogger. Be sure to follow on Twitter, Facebook & Instagram for random shenanigans.