Franchise

A franchise is an agreement in which one business grants another business the right to distribute its products or services. Some common home-based franchises include the following:

• Aussie Pet Mobile (mobile pet grooming)
• Jani-King (commercial cleaning service)
• Jazzercise (dance/exercise classes)
• ServiceMaster Clean (cleaning service)
• Snap-on Tools (professional tools and equipment)

Check out Chapter 5 of Book 1 and Chapter 3 of Book 2, which cover franchising in detail.

Direct selling

Direct selling involves selling consumer products or services in a person-to-person manner, away from a fixed retail location. The two main types of direct-selling opportunities are

• Single-level marketing: Making money by buying products from a parent company and then selling those products directly to customers
• Multi-level marketing: Making money through single-level marketing and by sponsoring new direct sellers

Some common home-based direct-selling opportunities include the following:

• Shaklee (household cleaning products)
• Pampered Chef (kitchen tools)
• Green Irene (green products and consulting)
• Mary Kay (cosmetics)
• Fuller Brush Company (household and personal-care products)

Business opportunity

A business opportunity is an idea, product, system, or service that someone develops and offers to sell to others to help them start their own, similar businesses. With a business opportunity, your customers and clients pay you directly when you deliver a product or service to them. (Another way to think of a business opportunity is that it’s any business concept you can buy from someone else that isn’t direct selling or franchising.) Here are several examples of business opportunities that you can easily run out of your home:

• Astro Events of America (inflatable party rentals)
• Debt Zero LLC (debt settlement)
• ClosetMaid (storage and organizational products)

Interested in how to find more companies and how to get in touch with them? Entrepreneur Media (www.entrepreneur.com) and www.gosmallbiz.com have extensive information on business opportunities you can buy. You can also do a search on Google or your favorite search engine, using the keywords business opportunity.

After you decide on a business, you have to find the money to get it started (see Book 2, Chapter 2 for more on finding funding). Then you have to market your products or services and persuade people to buy them (the chapters in Book 5 cover the marketing gamut). You can choose conventional methods of promotion, such as advertising and public relations, or you can leverage new selling opportunities, such as the Internet, to your advantage. Or you can (and probably should) do both. It’s your choice — you’re the boss!

Develop a business plan

Despite what you may read on many small business websites or blogs, many home-based business owners can get by without drafting a business plan. Indeed, just the thought of having to draft a 50-page tabbed and annotated, multipart business plan is enough to scare many potential home-based business owners away from their dreams. Truth be told, most business owners today use their business plans to obtain financing from third parties, such as banks or investors, and many successful businesses — home-based or not — have been started without one.

That said, the process of drafting a business plan can be very beneficial — both to you as a business owner and to your business. Taking the time to draft a plan helps you do the right things at the right time to get your business off the ground; plus, it forces you to think through what the challenges will be and what you can do about them before they overwhelm you.

In essence, a good business plan

• Clearly establishes your goals for the business
• Analyzes the feasibility of a new business and its likelihood of being profitable over the long haul
• Explores the expansion of an existing business
• Defines your customers and competitors (very important people to know!) and points out your strengths and weaknesses
• Details your plans for the future

Even if you think your business is too small to have a business plan, it’s really worth your time to see what it’s all about — the process of developing the plan for your business will produce a clarity of thought that you can’t find any other way. See Book 2, Chapter 1 for details on developing an effective business plan.

Consult outside professionals

As a new home-based businessperson, you need to consider establishing relationships with a number of outside professionals — trained and experienced people who can help you with the aspects of your business in which you may have little or no experience. By no means do you have to hire someone from each category described in this section. But if you run into questions that you can’t easily answer yourself, don’t hesitate to call on outside professionals for help as you go through the business start-up process.

Any professional advice you get at the beginning of your business may well save you heartache and potentially expensive extra work down the road.

Here are just some of the outside professionals you may choose to consult as you start your home-based business:

• Lawyer: An attorney’s services are an asset not only in the planning stages of your business, but also throughout its life. An attorney can help you choose your legal structure, draw up incorporation or partnership paperwork, draft and review agreements and contracts, and provide information on your legal rights and obligations. Look for an attorney who specializes in working with small businesses and start-ups. See Book 2, Chapter 6 for details on starting your business with the right legal structure.
• Accountant: Consult an accountant to set up a good bookkeeping system for your business. Inadequate bookkeeping is a principal contributor to the failure of small businesses. Regardless of how boring or intimidating it may seem, make sure you understand basic accounting and the bookkeeping system or software you’re using, and don’t forget to closely review all the regularly produced financial reports related to your business (and make sure you actually receive them!). See Book 3, Chapter 1 for the basics of setting up your books.

• Banker: The capital requirements of a small business make establishing a good working relationship with a local banker absolutely essential. For example, bankers can approve immediate deposit of checks that would normally be held for ten days. They’re also good sources of financial information — and for obtaining cash to tide you over when times are tough or financing expansion of your business when times are good.

  Establish a relationship with your banker before applying for a loan, not after you decide to initiate the loan process. This relationship may make the difference between getting approved for the loan you need and being turned down.

• Business consultant: Every person has talents in many areas, but no one can be a master of everything. Consultants are available to assist in the areas where you need expert help. You can use business, management, and marketing consultants; promotion experts; financial planners; and a host of other specialists to help make your business more successful. Don’t hesitate to draw on their expertise when you need it.
• Insurance agent/broker: Many kinds of insurance options are available for business owners, and some are more necessary than others. An insurance agent or broker can advise you about the type and amount of coverage that’s best for you and your business. The agent may also be able to tailor a package that meets your specific needs at reasonable rates.

The relationships you establish with outside professionals during the start-up phase of your business can last for years and can be of tremendous benefit to your firm. Be sure to choose your relationships wisely. In the case of outside professionals, you often get what you pay for, so be penny-wise but don’t suffer a poor-quality outside professional simply to save a dollar or two.

Choose the best legal structure for your business

Most home-based businesses begin as either sole proprietorships or partnerships because they’re the easiest business structures to run and the least expensive. But as these businesses grow, many explore the transition to another kind of legal entity. Before you decide what kind of business you want yours to be, consider the pros and cons of the following legal structures:

• Sole proprietorship: A sole proprietorship is the simplest and least regulated form of organization. It also has minimal legal start-up costs, making it the most popular choice for new home-based businesses. In a sole proprietorship, one person owns and operates the business and is responsible for seeking and obtaining financing. The sole proprietor (likely you) has total control and receives all profits, which are taxed as personal income. The major disadvantages include unlimited personal liability for the owner (if the business is sued for some reason, the owner is personally liable to pay any judgments against the company) and potential dissolution of the business upon the owner’s death.

• Partnership: A partnership is relatively easy to form and can provide additional financial resources. Each partner is an agent for the partnership and can borrow money, hire employees, and operate the business. Profits are taxed as personal income, and the partners are still personally liable for debts and taxes. Personal assets can be attached if the partnership can’t satisfy creditors’ claims. A special arrangement called a limited partnership allows partners to avoid unlimited personal liability. Limited partnerships must be registered and must also pay a tax to the appropriate authorities in their jurisdiction. On the plus side, partnerships allow people to combine their unique talents and assets to create a whole greater than the sum of its parts. On the other hand, though, partnerships can become sheer living hell when partners fail to see eye to eye or when relationships turn sour.

  When entering into any partnership, consult a lawyer, and insist on a written agreement that clearly describes a process for dissolving the partnership as cleanly and fairly as possible.

• Limited liability company: A limited liability company (LLC) is often the preferred choice for new operations and joint ventures because LLCs have the advantage of being treated as partnerships for U.S. income tax purposes while also providing the limited liability of corporations. However, LLCs have the disadvantage of generally being more expensive to set up than sole proprietorships or partnerships. Owners of limited liability companies, called members, are comparable to stockholders in a corporation or limited partners in a limited partnership. To create a limited liability company, articles of organization are filed with the secretary of state. The members must also execute an operating agreement that defines the relationship between the company and its members. Note that all 50 states and the District of Columbia have enacted LLC statutes.

• Corporation: As the most complex of business organizations, the corporation (also known as a C Corporation) acts as a legal entity that exists separately from its owners. Although this separation limits the owners from personal liability, it also creates a double taxation on earnings (the corporation pays tax on net taxable income, and the shareholders pay tax on dividends distributed). A corporate structure may be advantageous because it allows the business to raise capital more easily through the sale of stocks or bonds; plus, the business can continue to function even without key individuals. The corporation also enables future employees to participate in various types of insurance and profit-sharing plans. Costs to incorporate vary from state to state — contact your secretary of state for more information.

  A special type of corporation, an S Corporation, allows eligible domestic corporations to overcome the double taxation problem. Qualifying corporations can elect to be treated as an S Corporation under the rules of Subchapter S of the tax code. Making this election allows small corporations to be generally exempt from federal income tax. Similar to partnerships, all items of income, deduction, credit, gain, and loss are passed through on a pro rata basis to the individual S Corporation shareholders. In this way, the S Corporation passes its items of income, loss, deduction, and credits through to its shareholders to be included on their separate returns.

  With C Corporations, you need to be careful you aren’t erroneously classified by the government as a professional service corporation, which is treated much less advantageously than other C Corporations. Professional service corporations are corporations in which the owners (who are licensed professionals) substantially perform certain personal services, including accounting, actuarial science, architecture, consulting, engineering, health, veterinary services, law, and performing arts.

As you set up your new home-based business, take time to carefully think through the ramifications of your business’s legal structure. Each option has many potential advantages and disadvantages for your firm, and each can make a big difference in how you run your business. If you have any questions about which kind of legal structure is right for your business, talk to an accountant or seek advice from an attorney who specializes in small businesses. Book 2, Chapter 6 discusses these legal structures in much more detail.

Decide on a name

Naming your business may well be one of the most enjoyable steps in the process of starting up your own home-based business. Everyone can get in on the action: your friends, your family, and especially your clients-to-be.

Consider your business name carefully — you have to live with it for a long time. Your business name should give people some idea of the nature of your business, it should project the image you want to have, and it should be easy to visualize. Names can be simple, sophisticated, or even silly. Try to pick one that can grow with your business and not limit you in the future.

Along with a name, many businesses develop a logo, which provides a graphic symbol for the business. As with your name, your logo needs to project the image you want, so develop it carefully. Spend a few extra dollars to have a professional graphic artist design your logo for you.

After you come up with a name, register it with your local government to make sure it isn’t already in use. If you don’t check first, you may have to throw out your stationery and business cards and redesign your logo and website when you eventually find out that another company has your name — and registered it 15 years before you did!

Take care of the red tape (and it will take care of you)

Taking care of all the local, state, and federal government legal requirements of starting up a business is something that too many budding home-based entrepreneurs put off or ignore. Unfortunately, ignoring the many legal requirements of going into business may put you and your business at risk.

Getting through the maze of government regulations can certainly be one of the most confusing aspects of starting up and running a business. But even though this process can be intimidating, you have to do it — and do it correctly — because noncompliance can result in costly penalties and perhaps even the loss of your business. Consider this step as one that fortifies the professionalism of your business at the same time that it helps you rest easy at night, knowing that you’re following the rules. Do you want people to take you seriously? Then you need to establish your business in a professional way.

Even very small or part-time businesses have certain requirements. It’s your responsibility to adhere to any and all regulations that apply to your business. Fortunately, a lot of people and organizations — government small business development centers, chambers of commerce, and sometimes lawyers and certified public accountants — are willing and eager to answer questions and help you with this task. For your sake — and the sake of your business — don’t hesitate to ask someone for help when you need it.

Get the insurance you need

In today’s expensive, litigious world of business, insurance isn’t really an option — it’s essential. Without it, all your years of hard work can be lost in a minute because of a catastrophic loss.

So what kinds of insurance do you need for your business? You should talk to an insurance agent and discuss your business and its needs with him or her. Some of the most common kinds of business insurance include the following:

• Health insurance: Includes medical, dental, vision, and other coverage designed to maintain and promote employee health and wellness and to protect employees against catastrophic loss in case of injury or illness
• Basic fire insurance: Covers property losses due to fire and sometimes covers loss of business, as well
• Extended coverage: Protects against conditions not covered by fire insurance, including storms, explosions, smoke damage, and various other disasters
• Liability insurance: Covers claims against your business for bodily injury incurred on the business’s premises
• Product liability coverage: Covers liability for products manufactured or sold by your business
• Professional liability and/or errors-and-omissions insurance: Protects the business against claims for damages incurred by customers as a result of your professional advice or recommendations
• Vandalism and malicious mischief coverage: Covers against property losses resulting from vandalism and related activities
• Theft coverage: Protects your business from burglary and robbery
• Vehicle insurance: Covers collision, liability, and property damage for vehicles used for business
• Business interruption insurance: Covers payment of business earnings if the business is closed for an insurable cause, such as fire, flood, or other natural disaster
• Workers’ compensation: Provides disability and death benefits to employees and others who work for you, as defined by your state law, who are injured on the job

A homeowner’s policy isn’t usually enough insurance for a home-based business for a couple of reasons. First, your typical homeowner’s policy provides only limited coverage for business equipment and doesn’t insure you against risks of liability or lost income. Second, your homeowner’s policy may not cover your business activities at all.

Insurance is the kind of thing you don’t think about until you need it. And in the case of insurance, when you need it, chances are you really need it! Take time to set up proper coverage now — before it’s too late. Call your insurance company and talk through the options it may have for your to convert or supplement your homeowner’s policy to cover your business.

Decide on an accounting system

Accounting is one of those topics that makes people nervous (with visions of IRS audits dancing in their heads), but keeping books doesn’t have to be complicated. In fact, simplicity is the key to a good system for home-based businesses. Keep in mind that your records need to be complete and up-to-date so that you have the information you need for business decisions and taxes.

When you establish an accounting system, pick up one of the excellent computer software programs dedicated to this purpose. Programs such as QuickBooks, FreshBooks, and Sage One do everything your home-based business will ever need — and more.

The two basic bookkeeping methods are single entry and double entry. Single entry is simpler, with only one entry required per transaction. This is probably the best method for most home-based businesses, and the vast majority can operate very well with the single-entry system. Book 3, Chapter 1 covers bookkeeping in detail.

You can also choose between two methods to keep track of the money coming in and going out of your business: cash or accrual. Most small businesses use the cash method, in which income is reported in the year it’s received and expenses are deducted in the year they’re paid. Under the accrual method, income is reported when it’s earned, and expenses are deducted when they’re incurred, whether money has changed hands yet or not.

The accounting methods you use depend on your business. You may want to talk to an accountant for help in setting up your system. Even with the support of a professional, however, you need to understand your own system thoroughly.

Many home-based businesses can get by without detailed financial reporting or analysis — after all, if you can keep up with your bills and perhaps have a little bit of money to sock away in your savings account, you must be making money, right? If you really want to understand your business’s financial situation, however, you need some basic financial reports.

The following financial statements are the minimum necessary to understand where your business stands financially. With them in hand, you can review your business’s financial strengths and weaknesses and make accurate plans for the future.

• Balance sheets: Balance sheets show the worth of your business — the difference between its assets and its liabilities. Your balance sheet can tell you whether or not you’d have any cash left over if you shut down your business today and paid off all your bills and loans and liquidated your assets. See Chapter 3 in Book 3 for more information.
• Profit-and-loss statements: Profit-and-loss (P&L) statements, also referred to as income statements, show you the difference between how much money your business is bringing in (revenue) and how much money it’s spending (expenses). If you’re bringing in more money than you spend, you have a profit. If you’re spending more money than you bring in, you have a loss. Book 3, Chapter 2 covers P&L in detail.
• Cash-flow projections: Cash-flow projections tell you where your money is going and whether or not you’re likely to have sufficient money each month to pay your bills and operate the business. For many start-up companies — especially those with employees, rent, and other significant recurring expenses — a cash-flow projection is the most important financial statement of all. Check out Book 3, Chapter 4 for more on staying solvent.

Develop a marketing plan

If you want to be successful, you can’t just start a business and then patiently wait for customers to walk in your door. You have to let potential customers know about your new business, get them in to have a look, and then encourage them to buy your product or service. Marketing is all of this and more. Your specific approach to marketing depends on your business, your finances, your potential client or customer base, and your goals.

Marketing sells your products and services, which brings in the cash you need to run your business. Marketing is so important to the survival (and success) of your business that it deserves a plan of its own. A marketing plan helps evaluate where your business currently is, where you want it to go, and how you can get there. Your marketing plan should also spell out the specific strategies and costs involved in reaching your goals. You can integrate it into your business plan as one comprehensive section. As with the business plan, you should refer to it regularly and update it as necessary.

Successful marketing for a small or home-based business doesn’t happen all by itself. It requires a lot of work and careful analysis and is a terrific opportunity to use your creativity and hone your business sense. For a lot more information on marketing your home-based business, be sure to check out the chapters in Book 5.

Seek assistance when you need it

An almost unlimited number of organizations and agencies — private, public, and not-for-profit — are ready, willing, and able to help you work through the process of starting up your home-based business. Check out the websites of each of the following organizations for an incredible amount of free information and help, and know that this list is only the beginning:

• Small Business Development Centers: https://www.sba.gov/tools/local-assistance/sbdc
• Service Corps of Retired Executives (SCORE): www.score.org
• U.S. Chamber of Commerce: www.uschamber.com
• Minority Business Development Agency: www.mbda.gov
• Federal Business Opportunities: www.fbo.gov
• International Business Innovation Association: https://inbia.org/
• U.S. Patent and Trademark Office: www.uspto.gov