How to Not Lose Your Pants in Your Home-Based Business

After I had my fourth child, I decided to leave my law firm position to stay home. While taking care of four kids is enough to keep a small staff busy, I missed the intellectual stimulation of being a working attorney. And the money. I really missed the money. Catholic schools and college for four kids will keep my husband and I working for a long, long time. I eventually started running my own small legal practice out of my home. I am not alone. According to the Small Business Administration, one in two businesses are home-based businesses.

Running a business out of your home can seem like the perfect solution for a parent trying to meet family responsibilities and make a few extra dollars. There is no office overhead digging into your profits, you can scale your work up and down depending on your family responsibilities, and you can work in your pajamas. However, anyone who has ever watched one of the dozens of courtroom shows on daytime television knows how easy it is to get sued (someone slips and falls on their way into your house/office, a defective product injures someone, etc.). There are steps you should consider taking to protect your personal finances from the liabilities arising from your home-based business.

The easiest way to protect your personal finances from your home-based business’s debts and liabilities is to operate your business as a separate legal entity.

Most people operate their home-based business as a “sole proprietorship,” a business owned and run by one person with no distinction between the business and the owner. You are entitled to all of the business’s profits but you are also responsible for all of the business’s debts, losses, and liabilities. In short, your personal assets like your home, investments, and personal property are totally exposed in the event of a lawsuit involving for home-based business or to cover its debts.

If you structure your home-based business as a separate legal entity, your personal assets are safe from business creditors so long as your actions are within the scope of the business and are properly authorized by the business and you have not signed a personal guarantee.

Some business entity options to consider are a limited liability company (LLC) and a corporation. The process of setting up a business entity is relatively simple in Texas (the filing of a Certificate of Formation with the Secretary of State and paying a $300 filing fee). To determine which type of entity is right for your business, you should consult with an attorney and tax professional.

You also need to keep your business finances and your personal finances separate.  Set up a separate bank account for your business. Deposit all business receipts and pay all business expenses only with the business account. Do not pay for any personal expenses using the business’s account. Use the company’s name on all documents and title any business property in the name of the company. Most importantly, maintain a corporate book and do your annual minutes. Failing to take these steps may expose your personal assets to your business’s liabilities.

Finally, talk to a good insurance agent and get the right insurance coverage for your business. The type of business you are operating (retail, professional practice, real estate) will determine what types of insurance you need.

Best of luck to all of the parents running businesses at our their homes (while keeping an eye on the kids, moving laundry, waiting for the repair man etc.).

Disclaimer: This website is made available for educational purposes only as well as to give general information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and the publisher. The website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

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