Reference no: EM13868753

Business Licenses and Permits

Compliance is key when starting a business. When you're embroiled in the excitement of starting a new business, it's easy to ignore the need for licenses and permits. Sure, getting licenses and permits is about as fun as visiting the dentist. But failing to do so-and doing it right from the beginning-is one of the most common mistakes new entrepreneurs make.

Following are some of the most common licenses and permits homebased small-business owners may need and where to go for more information.

• Business License
• Fire Department Permit
• Air and Water Pollution Control Permit
• Sign Permit
• County Permits
• State Licenses
• Federal Licenses
• Sales Tax License
• Health Department Permits
• Business Zoning
• Insure Your Business
• Hire an Attorney

Business License

Contact your city's business license department to find out about getting a business license, which essentially grants you the right (after you pay a fee, of course) to operate a business in that city. When you file your license application, the city planning or zoning department will check to make sure your area is zoned for the purpose you want to use it for and that there are enough parking spaces to meet the codes.

You can't operate in an area that is not zoned for your type of business unless you first get a variance or conditional-use permit. To get a variance, you'll need to present your case before your city's planning commission. In many cases, variances are quite easy to get, as long as you can show that your business won't disrupt the character of the neighborhood where you plan to locate.

Because you're planning to start a business in your home, you should investigate zoning ordinances especially carefully. Residential neighborhoods tend to have strict zoning regulations preventing business use of the home. Even so, it's possible to get a variance or conditional-use permit; and in many areas, attitudes toward homebased businesses are becoming more supportive, making it easier to obtain a variance. Visit the Zoning section of this article for more information.

Fire Department Permit

You may need to get a permit from your fire department if your business uses any flammable materials or if your premises will be open to the public. In some cities, you have to get this permit before you open for business. Other areas don't require permits but simply schedule periodic inspections of your business to see if you meet fire safety regulations. If you don't, they'll issue a citation. Businesses  such as restaurants, retirement homes, day-care centers and anywhere else that lots of people congregate are subject to especially close and frequent scrutiny by the fire department.

Air and Water Pollution Control Permit
Many cities now have departments that work to control air and water pollution. If you burn any materials, discharge anything into the sewers or waterways, or use products that produce gas (such as paint sprayers), you may have to get a special permit from this department in your city or county. Environmental protection regulations may also require you to get approval before doing any construction or beginning operation. Check with your state environmental protection agency regarding federal or state regulations that may apply to your business.

Sign Permit
Some cities and suburbs have sign ordinances that restrict the size, location and sometimes the lighting and type of sign you can use outside your business. To avoid costly mistakes, check regulations and secure the written approval of your landlord (if you rent a house or apartment) before you go to the expense of having a sign designed and installed.

County Permits
County governments often require essentially the same types of permits and licenses as cities. If your business is outside any city or town's jurisdiction, these permits apply to you. The good news: County regulations are usually not as strict as those of adjoining cities.

State Licenses
In many states, people in certain occupations must have licenses or occupational permits. Often, they have to pass state examinations before they can get these permits and conduct business. States usually require licensing for auto mechanics, plumbers, electricians, building contractors, collection agents, insurance agents, real estate brokers, repossessors, and anyone who provides personal services (i.e., barbers, cosmetologists, doctors and nurses). Contact your state government offices to get a complete list of occupations that require licensing.

Federal Licenses
In most cases, you won't have to worry about this. However, a few types of businesses do require federal licensing, including meat processors, radio and TV stations, and investment advisory services. The Federal Trade Commission can tell you if your business requires a federal license.

Sales Tax License
There are two reasons you need a certificate of resale (in other states, this may be called a "seller's permit" or a "certificate of authority"). First, any homebased business selling taxable goods and services must pay sales taxes on what it sells. The definition of a taxable service varies from state to state. Depending on individual state rulings, both the parts and labor portions of your bill may be taxable.

Sales taxes vary by state and are imposed at the retail level. It's important to know the rules in the states and localities where you operate your business because if you're a retailer, you must collect state sales tax on each sale you make.

Before you open your doors, be sure to register to collect sales tax by applying for each separate place of business you have in the state. A license or permit is important because in some states it's a criminal offense to undertake sales without one.

Health Department Permits
If you plan to sell food, either directly to customers as in a restaurant or as a wholesaler to other retailers, you'll need a county health department permit. This costs about $25 and varies depending on the size of the business and the amount and type of equipment you have. The health department will want to inspect your facilities before issuing the permit.

Source: Start Your Own Business, Entrepreneur magazine and Biz Start Ups.

Business Zoning

Home is where the business is, and it's also where a lot of regulations are. Make sure you're actually allowed to have a business in your home before you start by investigating your zoning ordinances.

Most cities and many counties have zoning ordinances that limit, to one degree or another, whether you can operate a business from home

While many communities have modernized their zoning ordinances to recognize that a computer-based business isn't like a noisy auto body shop, a malodorous hair salon, or a 6 a.m. gathering point for a construction or cleaning crew, many communities ban certain kinds of businesses and prescribe limitations that may handicap some businesses. Here are some common activities communities don't like and may restrict with their zoning codes:

• Increased vehicular traffic, both moving and parked on the street
• Prominent signs
• Employees not related to you who are working in your home
• Use of the home more for business than as a residence (determined by the percentage of space used for the business)
• Selling retail goods to the public-some communities limit this to specific hours
• Storing dangerous amounts or kinds of materials inside or outside your home

Since you're planning to launch your business from home, the first thing to do is check out what commercial activity your city or county allows in your neighborhood. This is becoming easier to do, as many communities are making their codes available on their Web sites. You just need to know what the zoning classification is for your home (that is, R-1, R-2, R-3, etc.), information that is easily found at your city or county zoning office.

While many people blithely ignore zoning, a complaining neighbor can throw a real kink in your business plan, and you may find yourself with a cease and desist order and have to suddenly move or close down. So find out what you're allowed to do, and get along with your neighbors. With their support, you may be able to get a waiver of restrictions, called a variance or conditional use permit.

Also, some people choose to rent a private mail box with a street address to use as their official business address. If you do that, be sure your city doesn't make a physical inspection of the business premises (because they'll be inspecting the wrong location) before granting a city business license.

While you may not have a zoning problem, if you rent or belong to a homeowner or property owners association (which all condominium and co-op owners do), you may encounter even harsher restrictions on operating a homebased business. Homeowner agreements can be harder to change, but these days so many members are themselves working at home, the restrictions are often not enforced. Still, an angry neighbor can cause problems for your homebased business. So find out where you stand, and if you're moving somewhere new, check out the restrictions before signing a lease or a contract.

How to Investigate Your Local Laws

1. You can find out what your local zoning laws say about your specific home business by researching online, in your city's library or through your city's chamber of commerce.
2. If you can't get a copy through these sources, don't contact city hall directly. Have a friend do it, or call from a telephone other than your home number. (Many direct dial municipal numbers have caller ID.) According to a recent article in a national publication, Tacoma, Washington, has a zoning bounty hunter who tracks down zoning violators and fines them retroactively.
3. When you do get in touch with city hall, ask if there's a home occupation ordinance and if you can get a copy. Tell them you're planning to move into their community, and you have a home occupation. Then wait for their response, which will vary from "no businesses allowed" to "we don't have an ordinance." Some towns even say they have an ordinance but they don't enforce it. Don't believe them.
4. If you find your homebased business is in violation, you have one of three options: Shut down, go undercover or attempt to have the law changed.

Insure Your Business

Think your home insurance covers your new business? Think again, and then read on to find out how to protect your venture.

There are about 18 million homebased businesses in the United States. But some 60 percent of them are gambling with the future of their businesses--and most don't even know it. These homebased entrepreneurs don't have enough business insurance coverage, according to the Independent Insurance Agents of America Inc. (IIAA), an Alexandria, Virginia-based trade group.

Many entrepreneurs mistakenly believe they're covered by their homeowners insurance, but most homeowners policies limit loss of business property to $2,500, don't cover losses away from the home, and exclude liability coverage for business-related activity. Consider these risks:

• A graphic artist can easily have $20,000 in computer equipment and software in the home.
• Sales representatives often take a laptop and cell phone on the road to meet with customers.
• A client could slip and fall during an appointment at a homebased bookkeeping service.
• A homebased manufacturer could be held liable if his or her product injured someone.

Assess Your Needs

Ask a lot of questions to determine the amount and type of insurance your business needs, says Amy Gergely of the IIAA. Start with these:

• What inventory do you have at home? How much equipment? How much would it cost to replace them?
• How many customers come to your home?
• What would happen to your business if a disaster forced you out of your home temporarily?

Read the fine print on your homeowner's policy to find out the restrictions on business property and activity in the home. "Get quotes from a number of companies," says Gergely. "The average independent insurance agent represents eight companies."

Types of Insurance

As a homebased business owner, two types of insurance cry out for your checkbook: liability and property damage. Liability protects you against someone getting injured on your premises or by one of your products. Property damage protects against damage to a host of things, from computers to carpets.

Let's start with the most inclusive type of insurance and work our way down:

• A business owner's policy (BOP) includes both liability and property damage coverage. Typical hazards covered include loss of data, software or income; theft; and general business liability. The structure housing your business is also covered, so this might duplicate your homeowners' coverage. A BOP also provides some off-premises coverage, including liability coverage for products you sell or parts you install. Things like flood protection or insurance for outdoor signs may be optional.
• A home office policy is a step down from a BOP. This policy combines homeowners and business insurance, eliminating duplicate coverage or gaps. This is a good choice for a company with no more than a handful of business visitors each week and quality computer equipment. It covers general business liability, lost income and ongoing expenses like payroll for up to one year if the business can't operate because of damage to your home. Also covered are loss of records, accounts receivable, some off-site business property, fire, theft and personal liability. Many policies don't cover "options" such as floods or earthquakes.
• A "business pursuits" endorsement to your homeowner's policy provides the least protection, and isn't recommended for most homebased businesses that have customers on site or costly equipment.

Examine your business and your assets to determine your net worth, likelihood of business interruption, and liability "red flags." When you've found a policy that's within your budget and covers possible losses, review it yearly to make sure it's still adequate.

One final note: If your business has employees, you need workers' compensation insurance, which covers employees' injuries on the job. Requirements vary from state to state--check with your state's employment office to see what's required.

Cover Your Assets

Just because you have insurance doesn't mean you want to use it. Take steps to protect yourself from losses. "We ask our clients to do common-sense things like installing surge protectors and uninterruptable power supplies for their computers,'" says Brian Haase of Safeware, The Insurance Agency Inc., in Columbus, Ohio. Here are some other steps you can take:

Crime and disaster prevention:

• Install smoke detectors, fire extinguishers and deadbolt locks.
• Install motion-sensitive outside lights.
• Keep your office equipment out of view from the street.
• Keep money and important documents in a fireproof safe.
• Develop a disaster recovery plan to minimize losses and return to normal operations quickly.

Accident prevention:

• Make sure electrical circuits aren't overloaded.
• Keep stairs and walkways free of ice and debris.
• Set and enforce safety rules.
• Practice preventive maintenance on all equipment.

Liability prevention:

• Make clearly labeled backups of important documents and store them at another location.
• Don't accept work assignments you aren't qualified to perform or make promises you can't keep.
• Read the fine print in contracts to avoid assuming someone else's liability. Have an attorney review contracts.

Hire an Attorney

One of the best assets a new business owner can have is a strong team of advisors, and a key player will be your attorney.

Perhaps the most challenging part of starting a small business is covering all your legal bases. "The law increasingly affects every aspect of small-business operation, from relationships with landlords, customers and suppliers to dealings with government agencies over taxes, licenses and zoning," says Fred S. Steingold, an Ann Arbor, Michigan, attorney and the author of Legal Guide for Starting & Running a Small Business.

When do you need a lawyer? Although the answer depends on your business and your particular circumstances, it's generally worthwhile to consult an attorney before making any decision that could have legal ramifications. These include setting up a partnership or corporation, checking for compliance with regulations, negotiating loans, obtaining trademarks or patents, preparing buy-sell agreements, assisting with tax planning, drawing up pension plans, reviewing business forms, negotiating and drawing up documents to buy and sell real estate, reviewing employee contracts, exporting or selling products in other states, and collecting bad debts.

If something goes wrong, you may need an attorney to stand up for your trademark rights, go to court on an employee dispute or defend you in a product liability lawsuit. Some entrepreneurs wait until something goes wrong to consult an attorney, but in today's litigious society, that isn't the smartest idea. "Almost every business, whatever its size, requires a lawyer's advice," says James Blythe Hodge of the law firm Sheppard, Mullin, Richter & Hampton. "Even the smallest business has tax concerns that need to be addressed as early as the planning stages."

In a crisis situation--such as a lawsuit or trademark wrangle--you may not have time to thoroughly research different legal options. More likely, you'll end up flipping through the Yellow Pages in haste . . . and getting stuck with a second-rate lawyer. Better to start off on the right foot from the beginning by choosing a good lawyer now. Many entrepreneurs say their relationship with a lawyer is like a marriage--it takes time to develop. That's why it's important to lay the groundwork for a good partnership early.

How Do You Find the Right Attorney?

Ask for recommendations from business owners in your industry or from professionals such as bankers or accountants you trust. Don't just get names; ask them for the specific strengths and weaknesses of the attorneys they recommend. Then take the process one step further: Ask your business associates' attorneys whom they recommend and why. (Attorneys are more likely to be helpful if you phrase the request as "If for some reason I couldn't use you, who would you recommend and why?") If you still need more prospects, contact your local Bar Association; many of them have referral services.

Next, set up an interview with the top five attorneys you're considering. Tell them you're interested in building a long-term relationship, and find out which ones are willing to meet with you for an initial consultation without charging a fee. Cover the following areas in your interviews of each attorney:

• Experience. Although it's not essential to find an expert in your particular field, it makes sense to look for someone who specializes in small-business problems as opposed to, say, maritime law. Make sure the lawyer is willing to take on small problems; if you're trying to collect on a relatively small invoice, for example, will the lawyer think it's worth his or her time?
• Understanding. Be sure the attorney is willing to learn about your business's goals. You're looking for someone who will be a long-term partner in your business's growth. Sure, you're a startup today, but does the lawyer understand where you want to be tomorrow and share your vision for the future?
• Ability to communicate. If the lawyer speaks in legalese and doesn't bother to explain the terms he or she uses, look for someone else.
• Availability. Will the attorney be available for conferences at your convenience, not his or hers? How quickly can you expect emergency phone calls to be returned?
• Rapport. Is this someone you can get along with? You will be discussing matters close to your heart with this person, so make sure you feel comfortable doing so. Good chemistry will ensure a better relationship and more positive results for your business.
• Reasonable fees. Attorneys charge anywhere from $90 to $300 or more per hour, depending on the location, size and prestige of the firm as well as the lawyer's reputation. Shop around and get quotes from several firms before making your decision. However, beware of comparing one attorney with another on the basis of fees alone. The lowest hourly fees may not indicate the best value in legal work because an inexperienced attorney may take twice as long to complete a project as an experienced one will.
• References. Don't be afraid to ask for references. What types of businesses or cases has the attorney worked with in the past? Get a list of clients or other attorneys you can contact to discuss competence, service and fees.

Legal Savings Strategies

For many entrepreneurs 

, the idea of consulting a lawyer conjures up frightening visions of skyrocketing legal bills. While there's no denying that lawyers are expensive, the good news is there are more ways than ever to keep a lid on costs. Start by learning about the various ways lawyers bill their time:

• Hourly or per diem rate. Most attorneys bill by the hour. If travel is involved, they may bill by the day.
• Flat fee. Some attorneys suggest a flat fee for certain routine matters, such as reviewing a contract or closing a loan.
• Monthly retainer. If you anticipate a lot of routine questions, one option is a monthly fee that entitles you to all the routine legal advice you need.
• Contingent fee. For lawsuits or other complex matters, lawyers often work on a contingency basis. This means that if they succeed, they receive a percentage of the proceeds--usually between 25 percent and 40 percent. If they fail, they receive only out-of-pocket expenses.
• Value billing. Some law firms bill at a higher rate on business matters if the attorneys obtain a favorable result, such as negotiating a contract that saves the client thousands of dollars. Try to avoid lawyers who use this method, which is also sometimes called "partial contingency."

If you think one method will work better for you than another, don't hesitate to bring it up with the attorney; many will offer flexible arrangements to meet your needs. When you hire an attorney, draw up an agreement (called an "engagement letter") detailing the billing method. If more than one attorney works on your file, make sure you specify the hourly rate for each individual so you aren't charged $200 an hour for legal work done by an associate who only charges $75. This agreement should also specify what expenses you're expected to reimburse. Some attorneys expect to be reimbursed for meals, secretarial overtime, postage and photocopies, which many people consider the costs of doing business. If an unexpected charge comes up, will your attorney call you for authorization? Agree to reimburse only reasonable and necessary out-of-pocket expenses.

No matter what type of billing method your attorney uses, here are some steps you can take to control legal costs:

• Have the attorney estimate the cost of each matter in writing, so you can decide whether it's worth pursuing. If the bill comes in over the estimate, ask why. Some attorneys also offer "caps," guaranteeing in writing the maximum cost of a particular service. This helps you budget and gives you more certainty than just getting an estimate.
• Learn what increments of time the firm uses to calculate its bill. Attorneys keep track of their time in increments as short as six minutes or as long as half an hour. Will a five-minute phone call cost you $50?
• Request monthly, itemized bills. Some lawyers wait until a bill gets large before sending an invoice. Ask for monthly invoices instead, and review them. The most obvious red flag is excessive fees; this means too many people--or the wrong people--are working on your file. It's also possible you may be mistakenly billed for work done for another client, so review your invoices carefully.
• See if you can negotiate prompt-payment discounts. Request that your bill be discounted if you pay within 30 days of your invoice date. A 5-percent discount on legal fees can add thousands of dollars to your yearly bottom line.
• Be prepared. Before you meet with or call your lawyer, have the necessary documents with you and know exactly what you want to discuss. Fax needed documents ahead of time so your attorney doesn't have to read them during the conference and can instead get right down to business. And refrain from calling your attorney 100 times a day.