The greatest problem with running a home-based business lies in the fact that things often look so simple and straightforward that it becomes quite easy for you to underestimate them. This results in an overconfidence that can potentially get you in a lot of trouble or even bring your business to a premature demise. Luckily, in the age of the internet and free information, you don’t have to learn from your own mistakes, seeing as how you have the privilege of learning from the mistakes of others. Here are five mistakes that most commonly get home businesses in trouble.
Starting as a sole proprietorship
Even though it is true that a sole proprietorship files taxes under a simpler scheme, there is a dark side to this ‘advantage’ that a lot of people are completely unaware of. You see, as a sole proprietor, you have no means to separate your private and your business-related assets. In other words, if you overinvest or make a wrong move, you stand to lose a lot more than your business. You might even lose your home alongside all that you own. In order to protect your assets, you should probably register as a limited liability corporation.
Mistaking friends for business partners
Another problem that home-based businesses make is turning their close group of friends into a workgroup. Don’t get us wrong, a partnership between friends can still work, however, you need to set some clear boundaries from day one. For starters, you can make everyone sign a contract or a shareholders’ agreement in which every single role is described in detail. Of course, this isn’t a 100 percent reliable guarantee either; however, it can be a useful tool for settling future disputes. In most cases, it might be a better idea to keep your private life and your business practices apart from each other.
Underestimating the costs of running a home-based business
While running a home-based business may cost less than running a traditional company, the expenses that come into this are still not to be underestimated. Simply registering a company can cost between $500 and several thousand dollars, not to mention the cost of equipment and supplies (even for a home office). Moreover, it might take months until your business is self-sustainable. In other words, you need to ensure that you have enough cash flow for operational expenses, not just that you have enough money to launch. Here, you can go for anything from crowdsourcing to applying for another loan. Even in a situation where your credit rating is not that great, you can still find convenient bad credit loans.
Forgetting you’re eligible for tax deductions
As a home-based business, you are eligible for certain tax deductions that people often tend to forget about. For instance, you can deduct a part of your utilities as a cost of running a business. In a situation where your home office takes about 10 percent of your entire home, you can ask for a 10 percent deduction off your utility bill. The problem, however, lies in the fact that this room cannot have a dual function or be used for purposes other than work. Still, with proper organization, this can make quite a difference in your future budgeting efforts.
Failing to protect your intellectual property
Finally, due to the fact that they commonly don’t have a traditional business structure, it is a frequent occurrence that a home business fails to protect their intellectual property. In turn, others can copy your business and profit from your ideas. Moreover, seeing as how most of them are your direct competitors, this puts your entire business in an even worse spot than it originally appeared.
To make a long story short, preparing for the worst-case scenario is your best protection. Now, while a lot of people might react negatively to this kind of advice, we need to make one thing abundantly clear – preparing for the worst is not pessimism, it’s common sense. Of course, no one enters the business world expecting to fail, neither should you, but there’s nothing wrong with taking an extra step of precaution every now and then.