Don't Forget The Red Tape When Starting A Home-based Business

You've started a home-based business, avoiding the red tape and expense of a traditional brick-and-mortar business. Right? Not so fast.

Even though you're operating your business from your home, even if all your business is conducted via the Internet, you absolutely must deal with some issues and consider others before you find yourself in hot water.

---Taxes---The time to start thinking about paying Uncle Sam is before you receive a dime from your customers. A general rule of thumb is to put away 20 percent of your income aside to pay taxes. Of course, much depends upon how much money you make---or you project to make. When you're starting a home business, it can be difficult to know how much money you're going to owe at the end of the year. What starts as a trickle can end up as a waterfall of profits, and suddenly you owe tons of money in taxes that you simply didn't expect.

This can happen especially if your home business is a supplement to your "day job." The danger is treating the extra cash you're making from your home business as "fun" money that you can spend any way you want. Have fun, but make sure you put aside that 20 percent or you'll find yourself working for Uncle Sam full time. In other words, if you unexpectedly make more money than you thought you would and haven't put aside that 20 percent you could find that every dime you make toward the end of the year will go toward taxes. You absolutely must start an escrow account and fill out a 1040-ES form for estimated taxes and pay those quarterly projected taxes. And don't think for a moment that the IRS isn't going to find out how much money you've made. You may get away with not paying taxes for a while, but eventually you must pay the government what you owe. The last thing a new business owner needs is to face penalties for not having paid your taxes on time.

---Incorporation---You're doing well, you're business is thriving, you're making money hand over foot. Should you start considering formally structuring your business? Much depends upon the type of business you have, the amount of money you're making, and whether or not you have any employees. In general, you probably won't see any tax benefits if you're earning less than six figures. However, if your business is one that could leave you open to a lawsuit from a customer, vendor, or employee, you might want to consider forming a limited liability company, or LLC. As an LLC, you have limited the liability you face should someone sue you over a business issue. If you are not an LLC, someone could sue you and go after your private assets, such as your home or private savings.

---Insurance---You should look at getting business insurance if you have clients visiting your home office, if your equipment or inventory exceeds what is allowable in your home owners insurance, or if your home owner's insurance will not cover losses incurred because you operate a business from your home. Business insurance is relatively inexpensive, but can save you thousands should disaster happen.