Step-by-step Guide for Setting Up Your Business Legally

Operating a business out of your home can be a money and time saving venture, but there will also be some legalities to which the business must conform to stay on the right side of the law. If you are planning to operate a home-based business, it pays to look into the legal requirements before hanging your shingle outside your door.

In nearly every business, there will be requirements for taxes, and in many communities, there are restrictions to the business use of the home. Even the sign you hang outside may be governed by size, color and style and knowing this ahead of time can prevent the zoning inspector from paying you a visit, requiring you to change the type of size you use for advertising your business. Some of the issues that need to be researched include:

  • Community zoning laws
  • Permits needed for a home business
  • State vendor's license
  • Sales tax collection

While it may take some led work on your part, getting all of this out of the way before opening your business will make the transition from employee to business owner much easier.

Stay on top of current business laws

There are two areas in which most business owners often find themselves in violation of the law. Business use of the home and a misunderstanding of buying wholesale without paying sales tax on the products. The Internal Revenue Service is quite clear on what constitutes getting a tax break from setting up an office in the home, as well as how much of the home's expenses can be deducted for using it for your business.

If your business qualifies for the home deduction, the square footage of the home used strictly for business use is used to calculate the percentage of expense that can be charged for the business. However, using the kitchen table to hold your computer for your internet business probably won't qualify for the deduction. Be sure you check with the IRS before claiming this deduction. Other areas that can cause problems for a new business owner include:

  • Not collecting sales tax
  • Not paying sales tax on personal use items
  • Understanding the difference

Nearly every state requires businesses to collect sales tax on most items. This also pertains to provided services. Failure to collect the tax will make the business liable for any taxes due. Items used in conjunction with business operations may be available to purchase from a wholesale outlet without the need to pay for tax, but if the items are converted to personal use, taxes will need to be paid.

Not all items eligible for tax break

There are items used in the direct manufacture of a product or service that can be purchased tax-free. However, simply using your business license to obtain a tax advantage can lead to legal troubles if you don't understand the difference in how those items are used. For example, if you use toilet tissue to make crafts for sale, it can be purchased tax-free. However, if you use any of those roles in the home you will be required to pay taxes on those roles. To stay out of trouble you will need to:

  • Keep accurate records
  • Document everything you do for the business
  • Never be late with any filing requirements

By researching all of the legal aspects of operating a business from your home before you even start the business can save a lot of time an aggravation later. Time saved from the start will be well worth the effort if it saves you from spending a lot of time researching your spending habits to meet the requirements of an audit by a taxing authority.

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Mark Cruz
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Posted on Mar 12, 2012