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Date Created: 10/05/15
CHAPTER 7 HOMEBASED BUSINESSES CHAPTER OVERVIEW This chapter reviews the history of homebased businesses their recent resurgence and the reasons for the increase It also outlines the personality characteristics necessary to be a homebased entrepreneur the new homebased franchises and legal factors of sta1ting a homebased business LEARNING OBJECTIVES To realize that homebased businesses were very common before the Industrial Revolution To be able to identify the reasons for the increase in the number of homebased businesses To A J the J and J39 J ofhomebased businesses To be aware of the legal insurance and tax issues applicable to homebased businesses CHAPTER OUTLINE I The Rebirth of Cottage Industries A The Past 1 Before the development of the railroads and communication systems in the United States the economy depended on people working at home 2 These cottage industries decreased over the past hundred years B The Present 1 The trend has now come full circle and the number of homebased businesses is increasing 2 Homebased businesses are not distributed evenly across the United States but are most common in rural areas of Arkansas New Hampshire Washington and Vermont II Reasons for Growth A Increasing Use of the Internet 1 Because of the Internet homebased businesses can now market globally 2 It is estimated that more than 430000 Americans make a substantial part of their income by selling on eBay B Corporate Downsizing 1 Whenever a recession occurs some who are laid off decide to start a business 2 Others want to establish a business before they are laid off and leave voluntarily C Greater Concern for Family Issues 1 Many studies have shown that the new generation of workers is not willing to work long hours at a company at the expense of family time 2 Some people work at home so children do not have to be placed in fulltime day care D Improving Image of HomeBased Businesses 1 Homebased businesses are no longer seen as secondclass businesses 2 Many people now envy those who operate homebased businesses III Advantages and Disadvantages of HomeBased Businesses A Advantages l The time and expense of commuting to the of ce is eliminated 2 Wardrobe costs decrease because fewer out ts are needed 3 Work hours are more exible B Disadvantages l Losing the structure of the daily routine of a job is often difficult 2 The entrepreneur must be able to tolerate isolation and be self disciplined 3 The lack of separation between work and home makes it easier to become a workaholic C Family Interruptions l Balancing working time and time with family is one of the biggest issues faced by home workers 2 Entrepreneurs cannot expect children to play quietly all day without interrupting them IV HomeBased Franchises A New Franchises 1 New homebased franchises are being developed as franchisers hope to capitalize on the home business trend 2 Homebased franchises are generally less expensive than those that are locationbased are sometimes simpler to operate and are almost always more accommodating to the entrepreneur s lifestyle B The Franchisee l The ideal homebased franchisee loves sales and is selfmotivated is able to work alone and is committed and disciplined 2 The franchisee must also be willing to follow the franchiser s plan V Is Your HomeBased Business Legal A Community Zoning Laws 1 Community zoning laws have not kept pace with the interest in homebased businesses 2 Some communities ban homebased businesses 3 Other communities restrict the amount of space that can be devoted VI to the business or the number of employees Some cities require homebased businesses to ll out special forms and some of the requirements depend on the business B Zoning of Property 1 Property is usually zoned in one of four ways residential commercial industrial or agricultural A homebased business is usually legal in all but the residential areas If homebased businesses are not legal in the residential area a variance must be obtained Condominiums apartments townhouses and private subdivisions may have restrictions concerning homebased businesses Utilities Insurance and Taxes A Utilities 1 Many homes are not equipped to handle the utility needs of a home of ce 2 The power needed by of ce equipment may be too great for the existing wiring B Insurance l Homebased businesses are usually not covered by existing homeowner s insurance 2 Some insurers are willing to issue an endorsement that will extend home coverage to the home business 3 A recent survey found many homebased entrepreneurs were underinsured C Taxes 1 Entrepreneurs may take a tax deduction for the space that is used in the home 2 Prior to the Taxpayer Relief Act of 1997 a key issue in VII determining eligibility for the deduction was where the entrepreneur spent most of his time 3 Because of the Taxpayer Relief Act entrepreneurs will qualify for the deduction even if they use their office mainly for administrative tasks and do the bulk of their work on the road 4 If the home is sold at a pro t taxes on the portion used and deducted from taxes for the business may be due The Growth Decision A Concerns with Employees 1 Lack of privacy is a factor if employees are using spare bedrooms 2 Employees may stop by at offhours leaving little time to be alone B Helpful Strategies 1 It is possible to limit growth by increasing prices or outsourcing 2 Some entrepreneurs keep one office at home while opening another location SUGGESTED RESPONSES TO DISCUSSION QUESTIONS 1 Identify the factors that have led to the increase in homebased businesses The increase in the number of homebased businesses is a result of the electronic revolution corporate layoffs and the number of babyboomers seeking independence Identify the advantages and disadvantages that should be considered when starting a homebased business Advantages include less time and expense commuting less wardrobe costs and exible hours Disadvantages include the loss of structure in daily routines the isolation and lack of interaction and no separation between work and home Why do some communities prohibit homebased businesses For a community what are the advantages and disadvantages of allowing homebased businesses Some communities prohibit homebased businesses because they are concerned with maintaining a good image and quality of life in the residential areas The advantage of allowing homebased businesses is that it improves the economy creating jobs and an increased tax base The disadvantage may be that neighborhoods are disrupted by business activity LINK TO THE BUSINESS PLAN When writing the business plan a homebased business must explain the reason the home location was chosen how that will bene t the company and whether there are any potential drawbacks Issues such as zoning licensing and insurance must be discussed so the nancial institution knows that these issues have been researched and that the business is legal The home of ce should be described so that the nancial institution has a clear picture of how company operations will be completed The business plan should answer Where will the business be operated Homeof ce basement garage second oor etc What is the square footage Will this be totally separate from living space Will customers come to your home or will you meet them at a public location If you will meet at a public location where will that be Do you need additional insurance to cover the business Are current utilities adequate or do they need to be upgraded Do you need a business license Have you checked zoning requirements and all restrictions that might apply HELPFUL WEBSITES wwwaahbborg This site includes resources for homebased entrepreneurs information about insurance zoning and frequently asked questions wwwusahomebusinesscom Homebased entrepreneurs will nd a wealth of resources on many homebased business topics as well as links to other helpful websites wwwsmallbusinessoutpostcom Homebased entrepreneurs will nd free information a free online newsletter and help ll articles on a variety of business management topics wwwmnhomebizorg The American Association of Microbusinesses operates this website to provide education and networking opportunities for homebased entrepreneurs The Association has regular meetings mailings and bene ts for its members