D o i n g Y o u r H o m e w o r k :

Joanne H. Pratt, home-based business owner of Joanne H. Pratt Associates (a management consulting firm), defines a home-based business as "self-employed individuals who operate a business or profession primarily from or in a home office."

-- by Emilie Lorditch

Business -- Is it headed home?
Are home-based businesses the answer to our work-place woes? Changes in the economic picture and the realization that the Industrial Revolution hasn't supplied all of life's answers and needs has caused people to rethink issues concerning the separation of home and work life. "Further economic, technological, demographic, social, and political forces have contributed to an increasing number of individuals working at home for pay (Owen et al., 1995)." (1) Pioneers in the returning wave of home-based business were reluctant to reveal their home-based nature because of stigmas attached to working from the home; entrepreneurs of the 1990s are not.

"People are taking home-based businesses much more seriously now than they ever did before," said Patty Rai Smith, a home-based business economic development specialist at the University of Kentucky.

With thirty million home-based business owners estimated in the United States and growth at a rate of over 8,200 people a day (Link Resources, 1996)(2), there's reason to agree. All of this might make one wonder why it has suddenly become acceptable, even vogue, to work at home again.

Acceptance can be attributed partially to advances in communication technology. Computer software, voice mail, and fax machines afford home-based businesses all the advantages of a corporate office. According to Joanne Pratt, most people can't tell the difference between a corporate office and a home-based one. Also, corporate down-sizing and delay in childbearing has created a large pool of technology-wise workers eager for the opportunity to have more control over their lives. The business climate has definitely changed. There are more opportunities and programs available today for entrepreneurs, especially women and minorities.

With the growing trend of home-based business, many people want to know what it takes to start and maintain a successful one.

Starting a Home-Based Business -- Do I Have What it Takes?
First, you need to decide if you are really ready to start a home-based business. Many entrepreneurs formerly worked in the corporate world and concluded that they could be more effective running their own businesses. As Pam Baker, a mother of two, quit her job as a bookkeeper, said, "I'll never work for anyone else again!" Most home-based business owners find that their business skills from working for outside companies contribute greatly to their successful business ventures. In fact, many business experts recommend first working in a business outside the home similar to the one you think you want to start. It also helps to have a good feel for potential markets and the right motivation, namely some type of work that you love.

"Everyday is a lesson," said Jim Lowe, owner of Midwest MicroSystems (Cow SenseSoftware). "I went by the seat of my pants and the gut feeling that there was a market for my business."

"I got tired of working for someone else," said David Jacoby, owner of The Wooden Peg. "I wanted to do something for fun." Jacoby turned wood working into a full-time business. "I love being self employed."

Most home-based business owners share similar stories of being fed up with bosses and tired of their jobs. Many were ready to turn their hobbies into businesses or use their experience in the work force to compete with previous employers. The Home-Based Business Institute says that between 68 and 70 percent of home-based businesses will survive over a three year period (compared to only 29 percent of businesses out of the home).(3) This might make starting a home-based business sound easy. Don't be fooled. It's not. Owning a home-based business is "real" work. Home-based businesses also have "real" reasons for success or failure.

Ann Lastovica, family management specialist at Virginia State University, surveyed and analyzed why people start home-based businesses, why some home-based businesses fail, and why previous home-based business owners would choose to become home-based business owners again if given the chance. Lastovica found that one fourth of all businesses fail within the first three years.(4) Reasons for failure include a lack of business plan, inadequate working capital, no cash flow, no financing, a lack of management skills, errors in judgment, and a lack of motivation.

You need to "Treat it like a 'real' business and not a hobby," said Jan Pendlebury, a promotional products dealer in Citrus Heights, California. "Write a business plan, get an accountant, and management training." (5)

Pendlebury and her husband found that home-based businesses eliminated commuting, dry-cleaning, and lunch expenses, which saved them thousands of dollars. With that kind of freedom also came responsibilities like taxes, health care, and other benefits that were once paid for by their employers. Home-based business owners grapple with business planning that includes the location of their business, being informed about zoning restrictions, deciding how to legally structure their business, and determining how much to invest in technology. With so much to think about, you might wonder where to begin.

Research and Planning -- Yes, you need to.
"I think that people don't do the proper research," said Jane Haskell-Cowles, extension specialist, University of Maine. "You need to find your market. A woman came into my office; she had taken ten to twelve months to start her business and [then] asked, 'Am I taking too long?'. . . she was doing all the research to hone in on what she should do. Many of my clients want to push the technological edge without understanding it. They want to develop a web page without having a computer at home." Here's a list of basic components that you should consider when planning for your home-based business:

Okay so you've developed a business plan, now what? A good next step is examining your business location.

Location -- It could make or break you.
Many home-based business owners don't understand the importance of location until it's too late and the costs are too high. While some would-be home-based business owners would never consider relocating to open up a home-based business, here are a few tips every would-be home-based business owner should know. When you choose your location, you need to be aware of the local zoning laws. Be sure to find out what's permissible and what's not.

In their article, "Zoning for Home Office: Recognizing Reality," (6) Paul and Sarah Edwards, authors of Working From Home and Making It on Your Own, have explored zoning practices in America. "We estimate that currently as many as 10 percent of localities, including major cities like Chicago, effectively prohibit people working from their homes," said the Edwards'. "In Chicago's case, the city simply forbids work involving machines powered by electricity, which would embrace everything from outdated electric typewriters to laptop computers."

Being centrally located where there are flexible laws that make it easier to start a home-based business is the ideal . In an article appearing in Family & Home Office Computing, Kimberly Stansell compiled a ranking of the ten best cities to run a home-based business.(7)

"Certain cities are definitely pro home business, and others are not," said Stansell. "Being in the wrong place can cost you plenty -- in dollars and quality of life. Being in the right place leads to greater profits, growth, and the lifestyle you left the corporate world for." The top ten cities offer affordable housing, permissible zoning regulations, good-quality public schools, an educated or skilled work force, easy access to a major city, leading colleges and universities, and business opportunities:

These cities were judged on the following seven categories: local and state economy, population base, home business environment, accessibility to larger markets, business costs, taxes, and overall livability.

Once you've decided on the location that would best suit you and your business, then you need to make decisions about the legal structure of your business.

Legal structure -- You have a choice.
There are three legal structures from which you can choose to set up your home-based business:
(1) Sole Proprietorship, (2) Partnership, or (3) Corporation.

(1) A Sole Proprietorship is a business that is owned and operated by one person. It's the least costly way (in terms of registering and legal fees) of starting a business.

(2) A Partnership is a business that is formed by two or more people. Since many partnerships dissolve, it's best to have legal agreements drawn up by your attorney to prevent unforeseen business disputes.

(3) A Corporation is a complex business association that becomes a legal entity in itself. Its powers and liabilities are independent from its owners. It's much more likely that your home-based business will take one of the other two forms.

According to Benson Goldstein, Legislative and Tax Counsel for the National Association for the Self-employed, of the 320,000 members that are self-employed, approximately 60 to 70 percent of them are home-based businesses.(8) Here are some of the biggest problems he sees home-based business owners grapple with:

Technology -- Decide for Yourself.
According to David Buchen, most home-based business owners are slowly adding technology into their business. "We just sent out questionnaires to our members who are home-based business owners," said Buchen, director of the Home-based Business project. "Ninety-five percent [of home-based business owners] do not have web sites, and seventy percent don't have e-mail accounts. They are interested in the internet and the technology is out there, and whether they want to use it in their business or not is up to them."

Many home-based business owners are reluctant to invest in technology. Yet, that doesn't mean that they cannot be successful.

"I have always resisted change," said Barbara Brabec, business advisor. Brabec has been working with and writing about the home-based industry since 1971. Two of her books, Homemade Money and Creative Cash, are in their fifth editions and each has achieved 'classic status' with over 100,000 copies in print. "I didn't get a computer until 1986, probably two or three years after most of my peers, and so far I have absolutely no desire to be on the internet. I've read books . . . and articles on it, but the information is more than I could use in ten lifetimes, and three fourths of it is not worth anything. I've gotten to a point where I've had all the technology I need . . . but I think for a lot of people the internet is serving a wonderful purpose."

Carlos and Sheri Frey, owners of Frey Art Studio (makers of Pastel portraits and small fry sculptures) provide a good example of home-based business owners who have embraced technology. The Frey's are taking advantage of electronic technology by using the internet to expand their business. "We are trying to create a market through the internet," said Carlos Frey. The Frey's said that their biggest problem was developing a product and finding the market. "Now we depend on technology quite heavily. Over the last six months, I've created this web page [http://www.freyart.com], and we are real excited about the possibilities on the web."

To get wired or not to get wired, that is the question. Well, that is certainly one of the questions. You already know that you also have to develop a business plan, choose a business location= (check zoning laws), and select a legal structure. Yes, there are a lot of decisions to make when you are an entrepreneur, but the freedom and sense of accomplishment may be worth your effort. Otherwise, why would 90 percent of home-based business owners report that they'd start a home-based business again if given the chance?(9)

Why shouldn't you start one? Well, you should be aware of the common misconceptions about owning a home-based business and be realistic about what your business will require of you.

Common misconceptions -- They can ruin a business.
"People don't realize how much work they are getting into," said Patty Rai Smith. "I've been working with home-based businesses since the early 1980s, and I've seen a big change in the services represented."

"When you operate a home-based business, you literally never walk away from it," said Doug Ververs, small business management specialist, Cornell University. "You're living and breathing it twenty-four hours a day, and there is pressure and stress. Some individuals really need that break to get away from the business."

Never forget that even though the business is moving into your home, your home is not going anywhere. There has to remain some separation between the two, or else your "productivity goes down the drain," according to Greta Harris, a commercial property development consultant from Orangevale, CA.(10) Family and household chores have to be put on hold while you are working, and the entire family must understand that you have a business. This includes your children, who must be taught specific skills such as answering the phone profesionally and taking messages.

"The biggest mistake that people make is underestimating the time and effort it takes to make it work," said Carol Thayer, small scale entrepreneur specialist, University of Nebraska. "Thinking that I can run a business, have a spotless house, and take care of my kids is a common misconception."

"I teach everyone that there are three types of skills that you need to start a business: being self motivated, enthusiastic, and caring about people is important," said Lastovica. "They [home-based business owners] also need management skills and skills for the businesses that they are going into." David Buchen suggests: "Look into working temporarily for someone. Get a job with a temporary service. Work for them three days a week, and start your business on the other two days, and as you start making money, quit the temporary work. Research before you risk. Do the least expensive part first, spend a little time researching your business, talk to [cooperative] extension [service] people, use the free resources out there."

"When I started, I was thirsty for information," said Carol Ripley, home-based business owner of Carol's Country Crafts. "I started going to workshops, borrowing audio cassette tapes, and gathering all the information I could."

Information can be gathered from a number of different sources, some of them are even free!

Resources -- They are out there, use them.
The Home-Based and Micro Business Design Team [http://decit.if.uidaho.edu/HBB/homebus.html] is the driving force behind extension's annual, national home-based business conference. This conference is a major life-line for home-based business owners.

The first conference was held May 1, 1994, in Tulsa, Oklahoma. It focused on the dreams, opportunities, and needs of home-based business entrepreneurs. The major issues then were zoning, financing, and credibility of living and working under the same roof.

The fourth conference was held May 4-7, 1997, in Beaver Creek, Colorado. It focused on technology. The conference showed how new technology (such as the world wide web) has impacted and changed home-based and micro businesses. It also created a forum for home-businesses to discuss their future needs and issues; provided national awareness of the impact of home-based businesses on economies; supplied assistance providers and home-based
businesses with resources to meet the needs of the business community; and provided a national forum for educators, associations, economic development providers, and other assistance providers to discuss and share accomplishments in the field.

The design team has also identified home-based and micro business contacts across the country. It has developed a resource directory as part of the Communities in Economic Transition National Initiative. In its third printing, this directory assists professionals who work with entrepreneurs by providing information on proven programming materials.(11) The design team also established and maintains a mail group for educators and professionals who service and support home-based and micro business owners, as well as for individual entrepreneurs.

There are other professionals and resources that can ease your transition into a home-based business. An accountant can show you how to set up a good bookkeeping system and keep vital records for tax purposes. A lawyer who specializes in small business matters, can legalize your business name (even though you can do this yourself) and can protect yourself and your business from possible lawsuits. A licensed property and casualty agent can evaluate your business insurance needs, and a financial advisor or a home-based business consultant can provide services for individuals and small businesses.

Don't forget about books and magazines. For example, Priscilla Y. Huff's book, 101 Best Home-Based Businesses for Women,(12) offers ideas from balloon decoration to welcoming services that should suit any woman. Magazines such as Business@Home [http://www.gohome.com](13 )offer ideas and tips for the home-based business hopeful.

Of course, you will need to pay for many of these services. By obtaining the right information and skills, however, you can use other people's experience to help make your business a successful one. So who is having success with home-based business?

Success at Home --Women and minorities.
Surprisingly, women and minorities are leading the trend of home-based businesses at a time when up until now white males dominated the frontiers of business. "While owners vary in age and experience, the fastest growing segments include women and minorities," says Lastovica, "Approximately 66 percent of home-based businesses are owned by women." The Bureau of the Census reports that minorities are starting businesses at twice the rate of white males. The number of minority-owned businesses has increased by 64 percent, led by Asians and Hispanics.(14)

Women have been leaders in this home-based business trend from the beginning and are changing the face of America's economy, according to a report released by the Commerce Department's Census Bureau.(15) During fiscal year 1995, women entrepreneurs received loans totaling $1.4 billion, about 24 percent of the Small Business Administration's (SBA) total loan volume that year. SBA projects that there are now over 7 million female-owned businesses in America and that they continue to be created at twice the rate of their male-owned counterparts.

Minorities also are beginning to make an impression in the home-based business industry. The number of black-owned businesses in the United States increased from 424,165 to 620,912 between 1987 and 1992.(16) The receipts for these firms increased by $32.2 billion. The District of Columbia had the largest percentage of black-owned firms, followed by Maryland and Mississippi. In Mississippi the report indicated there were 14,067 black-owned firms, which accounted for 10.4 percent of all firms in the state. Receipts per firm averaged $52,000 for black-owned firms, compared with $193,000 for all United States firms.

Home -- Where it all comes together.
Home-based businesses may be the wave of the future, but to some people they were never out of style. Planning, involving the family, and using technological advances seem to make the transition easier from outside business to home-based business. Also going into the business with realistic expectations, preparing financially, and setting priorities seem to be key factors in successful home-based businesses. It seems to me that somehow when you're doing what you
love the rest falls into place.

Notes:
1. Owen, A.J., Heck, R.K.Z., and Rowe, B.R., 1995, in Home-Based Employment and Family Life. Heck, R.K.Z., Owen, A.J., and Rowe, B.R. eds. Auburn House, Westport, CT, 277 p.

2. LINK Resources, 1996, 1996 Small Business/Home Office Market Update. IDC/LINK Resources.

3. Horner, J., Is a home-based business for you?, Women in Business, March/April 1995, p. 40.

4. Lastovica, A.D., 1997, Home-Based Business Facts and Statistics.Virginia State University Cooperative Extension.

5. Horner, J., p. 40.

6. Edwards, P. and Edwards, S., 1993, Zoning for Home Office: Recognizing Reality, Planning Commissioners Journal, n. 12, p. 12-14.

7. Stansell, K., 1993, The 10 best cities for running a home- based business. Family & Home Office Computing, v. 11, n. 11, p. 58-76.

8. Goldstein, B., personal communication, March 1997.

9. Lastovicia

10. Horner, p. 40.

11. Available from the Southern Rural Development Center, Mississippi State University, Box 9656-6 Montgomery Drive, Mississippi State, MS 39762-9656, phone: 601-325-3207

12. Huff, P.Y., 1995, 101 Best Home-Based Businesses for Women, Prima Publishing, Rocklin, CA, 362 p.

13. Business@Home, call 1-800-995-3590 for subscription information (accompanying web-site, http://www.gohome.com)

14. Census Bureau, 1992, 1992 Black-Owned Businesses, MB92-1. http://www.census.gov/prod1/bus/mb92-1/

15. Census Bureau, 1992, 1992 Women-Owned Businesses, WB92-1. http://www.census.gov/prod1/bus/wb92-1/

16. Census Bureau, Black-Owned Businesses.

Contacts:
Barbara Brabec, business advisor Barbera Brabec Productions PO Box 2137 Naperville, IL 60567 630-717-4188

David Buchen, Director Home-Based Business University of Wisconsin-Whitewater 2000 Carlson Hall Whitewater, WI, 53190 414-472-1917

Paul and Sarah Edwards 2607 Second Street, Suite 3 Santa Monica, CA 90405 310-399-2028 76703.242@CompuServe.COM

Carlos and Sherian Frey, owners of Frey Art Studio Frey Art Studio 620 Logan Wayne, NE 68787 402-375-2395

Benson Goldstein Legislative Tax Counsel National Association for Self Employed 1023 15th St. NW STE 1200 Washington, DC 20005 202-466-2100

Jane Haskell-Cowles, extension educator Waldo County Extension Office RR 4 Box 4645 Belfast, ME 04915 607-272-2292, janehc@umce.umext.maine.edu

Ramona K.Z. Heck Dept. of Consumer Economics and Housing 102 MVR Hall Cornell University Ithica, NY 14853-4401 607-255-2591

David Jacoby, owner of The Wooden Peg. Custom Built Furniture PO Box 1040 Warren, ME 04864 207-273-3150

Ann Lastovica, family management specialist Virginia Cooperative Extension Service Box 9081, Virginia State University Petersburg, VA 23806 804-524-5253

Jim Lowe, owner of Midwest microSystems (Cow Sense Software). Midwest Microsystems 208 East 6th street Ainsworth, NE 69210

Joanne H. Pratt, home-based business owner of Joanne H. Pratt Associates (a management consulting firm 3520 South Street Dallas, TX 75219 214-528-6540 7164.1444@CompuServe.COM

Patty Rai Smith, a home-based business economic development specialist at the University of Kentucky. 205 Scovell Hall University of Kentucky Lexington, KY 40546 psmith@ca.uky.edu

Carol Ripley, home-based business owner of Carol's Country Crafts. RR 2 Box 2100 Sangerville, ME 04479 207-924-3859

Carol Thayer, small scale entrepreneur specialist University of Nebraska. 3108 W Hwy 34 Grand Island, NE 68801 308-385-6420

Doug Ververs, small business management specialist Cornell University 315-963-7286

Please send questions and comments to sen102@psu.edu.

This document was last modified on September 11, 1997.