A home-based or online business often requires the same level of compliance as a traditional bricks-and-mortar commercial establishment.

Because a home-based or online business operates with the goal generating revenue by selling goods or services to the public, most of the rules designed to guard the public and collect tax revenue apply. This includes obtaining an array of business licenses, permits, and zoning approvals, as well as incorporating or forming an LLC to operate your business legally, protect your personal assets, avoid fines and penalties, and boost your business credibility.

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If you are considering a home-based or online business, then it is important to do your research well in advance. Obtaining the business licenses, permits, and zoning approvals can be a time-consuming process. If you don't allow enough lead time, you may have to delay your business launch.

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This article will explore some of the obvious—and not-so-obvious—rules and regulations that are frequently imposed on home or online businesses. It will also touch on considerations that are specific to operating a commercial enterprise in a residential area, such as zoning restrictions.

Licenses Required by Most Businesses

The types of required permits depend upon a number of factors: type of business, business structure, number of employees, and geographic location of the business. The following licenses are not home-business specific—they are just part of the cost of opening any business. (While few businesses will require each of the permits, each business will require some of them.)

• General business license. The jurisdiction where your home is located is likely to require a general business license. This license serves a two-fold purpose. First, licensing protects the residents of the city or county by identifying businesses operating in its jurisdiction. Second, licensing raises revenue for the local government. For this reason, most general business licenses must be renewed annually.

   
• Sales tax registration. If you sell tangible goods—even online—you may need to collect sales tax from your customers. Plus, many states tax a wider variety of services than they have in the past, so you may need to collect sales tax if your business is a service business. If you are required to collect sales tax, you will need to apply for a tax permit. (In most states, you must have registered before your first sale is made.) You can obtain more information from your state’s department of revenue website.

   
• Professional/occupation licenses. In addition to the licensing requirements imposed on businesses, states require certain professions, such as attorneys, architects, hair stylists and tattoo artists, to have state-issued licenses or certificates. Every state has its own list of licensed occupations, so it is essential to know your state’s laws.

   
• Unemployment and worker’s compensation registration. In some states, you must register even if you are the only employee.

   
• Weights & measures registration. If you weigh items for sale, your state may require that you have this type of permit.

   
• Alarm permit. You may need a permit from a “fire protection district” or the local government if you plan to install a commercial fire alarm system. If you provide home-based child care, you may have to have your home inspected by the local fire department prior to receiving a permit to operate your business.

   
• Health inspection certification. If you prepare any type of food products, you may be required to obtain permits and undergo inspections. In fact, you may find you need both state and local permits.

Licenses Specific to Home-Based Businesses

The list given above applies to any business. However, there are licensing rules that are triggered when a business is operated from a home (or in an area zoned as residential) and special considerations that come into play for the general type of permits.

• Home Occupation Permit. Many city or county governments require home-based businesses to have a “Home Occupation Permit.” These permits are designed to prevent a business from adding significant traffic, noise or other environmental conditions such as dust or odors that would interfere with the surrounding homeowners’ use and enjoyment of their property. As a result, most local ordinances describe the types of home-based occupations or businesses are permitted and the limitations imposed on the operations. These restrictions often include: the amount of space that can be used within the home; the number of clients or customers that can visit the home each day; the number of vehicles that can be at the home; the modifications that can be made to the property; and, the number of employees the business can have.

   
• Signage. Most localities have signage restrictions. However, if your business is in a residential area, you are likely to face very strict limits on the size, number, and placement of signs on your property. You need to verify what you can and cannot display before ordering any type of signage.

Zoning Restrictions and Variances

If you plan to operate a business in an area that is zoned “residential,” you need to become familiar with the zoning ordinances. Certain business activities are prohibited completely in residential areas. For example, operating a website design company is likely to be permitted, but an auto repair shop may be prohibited.

Your first step is to contact your zoning office. It may be possible to comply with the restrictions with only minor tweaks to your business plan. However, if your business doesn’t fall within the zoning laws, then you may need to obtain a variance before you can open your doors. Although there are some arguments you can make if If you feel you must go the variance route, keep in mind that it might be better to tweak your business plan to fit the zoning requirements because it can be a time-consuming, expensive, and difficult process.

CT Tip: Even if your planned business does not run afoul of your local government's zoning restrictions, you might be violating the terms of your Home Owner’s Association (HOA) agreement. Originally confined to condominiums and cooperatives, many single-family communities now have HOAs that govern what residents can, and cannot, do on or to their property. It may be necessary to get an exception or waiver of the rules.

Online Business Also Require Licenses

What about an online business? Many of the principles discussed above apply to a business that operates solely online. For example, an online business with employees will need to register with the workers' compensation and unemployment departments. While an online-only business is unlikely to run afoul of zoning laws or signage restrictions, the online proprietor must grapple with sales tax on certain transactions. In fact, the sales tax rules for online sales are often more complex, idiosyncratic, and ambiguous than those that apply to in-store or traditional mail order transactions. Therefore, a conversation with your accountant is advised before you start taking orders.

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Information in this article has been updated for 2018.