10 Legal Considerations Before Starting a Home-Based Business in Wisconsin
Starting a home-based business can be cost-effective, convenient, and rewarding for entrepreneurs who plan appropriately. Low overhead, no commute time, and flexible work hours are among the many benefits of running a business from your home. Conversely, poor business planning can have profoundly negative financial and personal consequences.
Before starting your home-based business in Wisconsin, be sure to address the following legal issues:
1. Legal Structure
Selecting an appropriate structure for a new business is crucial. While a sole proprietorship is a simple and flexible business form, it offers no protection for the individual’s personal assets.
A popular business form for home-based businesses is a limited liability company (LLC). The entity, formed by filing Articles of Organization with the Department of Financial Institutions, protects members (owners) from personal liability for company debts. Further, a LLC with a single member does not need to file a separate tax return for the entity. Rather, the company’s tax obligations may be reported on Schedule C to the member’s personal tax return. This option is also available to married couples who solely own a LLC.
2. Governing Documents
Once an appropriate legal structure is chosen, it is important for the business to have the necessary governing documents created. Documents such as bylaws or operating agreements set forth the operational guidelines for a business. In certain cases, the absence of governing documents may prevent a business from getting a loan, bidding on a project, or even protecting its owners from personal liability.
3. Business Records
Find a centralized method to organize your business records. Easy access to documents such as governing documents, financial records, and copies of federal and state filings will help your operations to run smoothly.
New entrepreneurs tend to underestimate the capital required to get their business off the ground. Don’t allow this to happen with your business. If possible, establish a good banking relationship prior to starting the business. If a banking relationship is not possible, have a plan for other means to raise money to operate the business.
Grants, government-backed loans, venture capital, crowdfunding, and private investment are alternative financing options that may provide a new business with the capital it needs to be successful.
Explore the need for additional insurance to protect the business from risks such as customers on the premises or catastrophic losses. If your business has employees, worker’s compensation insurance may be necessary.
If you do not already have health insurance, you can turn to www.Healthcare.gov or an independent insurance broker to apply for health insurance that meets your small business needs.
6. Business Licenses and Permits
Seller’s permits and withholding permits are common permits necessary to operate a business in Wisconsin. Investigating the permit requirements and associated fees is highly recommended.
Confirm that zoning codes and deed restrictions permit the operation of a home-based business. Some local zoning codes require home-based businesses to obtain a conductional use permit from the local zoning board prior to the operation of the business.
A new business will likely affect your tax situation. A common tax question for new business owners has to do with the deduction for the business use of a home.
In January 2013, the IRS offered a simplified option for home-based entrepreneurs to calculate the deduction associated with the business use of a home. The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, reduces the paperwork and recordkeeping burden on small businesses.
The enactment of the 2017 Tax Cuts and Jobs Act also affected home-based businesses. Before the Act went into effect, an employee could deduct unreimbursed job expenses that exceeded two percent of their adjusted gross income on their tax return. Now, an employee who works at home, even for their employer’s convenience, can no longer deduct their out-of-pocket expenses. However, if you are self-employed, you can still claim the home office deduction for qualifying costs. A business or tax lawyer at Murphy Desmond can help with questions regarding the ways in which the 2017 Tax Cuts and Jobs Act affects home-based business.
In addition to business tax issues, your income from the business and business investments can affect your tax situation. Be aware of taxes withheld from your pay, household deductions, credits, and other tax matters for proper tax planning that meets your needs.
Most new businesses will need some type of standardized contract for use with customers, vendors, suppliers, or other parties. Although you will incur legal fees to create such contracts, being proactive can save your business significant expenses when trying to collect from a delinquent party down the road.
10. Employer Responsibilities
If your business will have any employees (including contract employees), you must learn the rules and responsibilities of being an employer.
Ask yourself questions such as: What criteria may an employer use in its hiring, firing or disciplinary decisions? Should employees sign employment agreements, including non-compete agreements? How can a business prevent employees from disclosing confidential business information? Are there required forms to be filed with the U.S. Government, like a Form I-9 or IRS forms?
Knowing the answers to these questions (and others) allows the business to protect itself from unwelcomed liability.
Consider our Business Start-Up Program for cost-effective entrepreneurial legal services
If you plan to start a new business, Murphy Desmond offers a discounted legal program for new and young businesses, which starts with a free one-hour consultation and five additional hours with an experienced business start-up lawyer for only $750. (Regular rates apply after the initial hours are completed.)
Contact the business lawyers at Murphy Desmond S.C. in Madison, Janesville and Appleton, Wisconsin.
Published April 11, 2019