When you start a business, you must decide

Starting and Running a Small Business:

Home-Based Business

Ah, Home Sweet Home. Or is it Home Sweet Workplace? One of the major business trends is the dramatic increase in the number of consultants, artists, craftspeople, therapists, mail order specialists, professionals and others who use their homes as a business base.

One reason for this trend is the amazing array of electronic equipment that makes it possible to be productive and in touch with the rest of the world without leaving the comforts of home. By investing in a computer, a copier, a fax and an extra phone line or two, you can now duplicate conditions that until recently were practical only in leased commercial space.

But the upsurge in home-based businesses also reflects a new emphasis on the quality of life. Working at home gives you the chance to spend more time with your family, to be more flexible in the hours that you work and to avoid the gridlock of the highway.

From a legal standpoint, a home-based business isn’t much different from any other business. You still need to pick a business name; decide whether to be a sole proprietor or to form a partnership or corporation; purchase insurance; pay taxes; sign contracts; and collect from customers. But a few special legal issues are peculiar to the at-home business, including land use restrictions, insurance and special tax provisions.

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A. Zoning Laws

Planned communities and condominiums often have their own detailed rules affecting home-based businesses. Typically, these rules are stricter than local zoning ordinances. Skip ahead to Section B if your home is subject to these rules.

Is it legal to run a business in your home? The answer depends on where you live and what you do. To understand how this works, let’s start with the case of Bob Mullin, (Metropolitan Development Commission v. Mullin, 339 N.E.2d 751 (Ind. App. 1979), whose plight made its way into the lawbooks. Bob ran his insurance business from his two-bedroom home in Indianapolis. He thought he was on safe legal ground. After all, unlike in some cities, the local zoning ordinance allowed people to use their homes for “home occupations.” As long as a home was used primarily as a residence, it could also be used for “professions and domestic occupations, crafts or services.” The ordinance specifically allowed homes to be used for such occupations as law, medicine, dentistry, architecture, engineering, writing, painting, music lessons and photography. Also, people could use their homes for such businesses as dressmaking, tailoring, hair grooming, washing, ironing and cabinetmaking. So why not an insurance business?

Bob Mullin used his living room as a reception room and office, complete with a secretary’s desk and filing cabinet. He put his own desk in the dining room in place of a dining room table. The photocopier stood in the kitchen next to the stove and refrigerator, and he converted one of the bedrooms into an office.

The zoning board took Bob to court, claiming he’d gone too far. The Indiana Court of Appeals agreed. The court ruled that it was okay for Bob to conduct an insurance business at home, but that Bob’s usage was excessive. The business had taken over the house to the point that the primary use was no longer residential. The court told Bob to cut back or close down.

This case demonstrates but one of the many ways that local zoning ordinances can have a devastating effect on a home-based business. The good news is that by learning the law and using discretion, you may find that zoning isn’t a real problem for your business.

1. How Zoning Ordinances Are Organized and Applied

Most cities have zoning ordinances. Areas outside of cities are usually covered by zoning ordinances adopted by county, village or township governments. Zoning ordinances come in many shapes and sizes, but they all do basically the same thing: they divide the area into districts in which various types of activities are allowed or prohibited. For example, there are usually residential districts for single-family and two-family homes and other districts for apartments. Other areas or zones are earmarked for commercial usage. Ordinances often break down the types of commercial usage; in some zoning districts, only offices or retail and service businesses are allowed. Usually some part of town is reserved for manufacturing operations, which are typically broken down into light and heavy industrial.

In some areas, more than one use is allowed in a district; for example, commercial and light industrial, or residential and commercial. Outside of cities, zones allow various types of agricultural activities.

Some zoning ordinances, especially in affluent areas, exclude home-based businesses. More commonly, zoning ordinances restrict—but don’t prohibit—using a home for a business. An ordinance might say, for example, that in general you can’t run a business from your home, but then go on to list several types of business that are permitted. The Indianapolis ordinance mentioned earlier specifically allowed professions such as law, medicine and architecture, as well as painting, music lessons and photography. Some ordinances are vague, simply allowing “customary home occupations”—a term that must be interpreted by a judge if a given use is challenged.

Zoning ordinances that regulate home businesses frequently also limit:

• the amount of car and truck traffic

• outside signs

• on-street parking

• the number of employees

• the percentage of floor space devoted to the business.

It’s not always easy to tell whether or not a particular business is allowed in a home under the zoning ordinance you’re looking at. Some zoning ordinances were written years ago and don’t adequately deal with many contemporary businesses that people wish to operate from home—especially sophisticated businesses that depend on high-tech communications equipment.

The level of enforcement varies widely. In more enlightened communities, zoning officials recognize that residential zoning is intended primarily to preserve the residential character of a neighborhood—not to prohibit low-profile businesses. Officials don’t go out looking for violations but take their cues from the neighbors: If people living near a home-based business don’t complain, why search for a possible technical violation? Even where it’s clear that there’s a violation, these officials work with the business owner to see if changes can be made to make the business conform to the ordinance before ordering the owner to end the business or taking administrative or court action.

On the other hand, you may have the misfortune of living in a community that believes in strict enforcement of all ordinances. In such a community, your home-based business may be at the mercy of fairly rigid bureaucrats—although, as we’ll see, you may fight arbitrary or unreasonable action.

If municipal officials are determined to close down your home-based business, their first step is to write you a cease and desist letter. If you ignore this, you’ll probably get another letter or two followed eventually by a misdemeanor prosecution (seeking a fine or, in an extreme case, a jail term) or a civil lawsuit requesting an injunction—a court order prohibiting future violations of the ordinance. If you violate such an injunction, the judge can fine you for contempt of court or even put you in jail.

2. Investigating Zoning Laws

Before setting up a home-based business, it’s a good idea to learn not only what your local zoning ordinance provides but also to find out about enforcement attitudes. If you’re in a strict enforcement community and you file for a local business license or tax permit, this may trigger an inquiry about whether you comply with the zoning ordinance. Talk to people who run other home-based businesses, local contractors, your city’s business development office, small business advisors and lawyers about how to make the fewest legal waves.

You may find yourself in a gray area. Your planned home-based business may or may not violate a vaguely worded local ordinance—for example, a computerized information searching business in an area that allows traditional home-based businesses. It’s hard to predict whether the local zoning officials will take action against you or not. One approach is to just go ahead and chance it. If you’re simply planning to set up your desk and computer in an unused room in a home you already own, you have little to lose. This approach is far less sensible if you plan to buy or renovate a house to accommodate your business. Before you spend a significant sum to house your business, you want assurance that you won’t be closed down. It’s best to approach the city, explain your plans and ask for an official green light. If a purchase is involved, put a clause in your offer making the deal contingent on getting approval from the zoning authorities. Then, if your use isn’t approved, you’re free to cancel your purchase.

If you plan to operate out of your existing residence and decide that your business is doubtful legally, or that you could be closed down if the ordinance were strictly enforced, you can minimize the risks. Start by being a good neighbor. Make sure that your business has little if any impact on the people who live around you. For example, if all you do is convert one room to an office equipped for a consulting business, it’s unlikely that anyone will complain—as long as you have no employees and see only an occasional client or customer at your home. This is true even if you generate $1 million a year in gross income. You’ll also be in a better position if you cleared your plans with your neighbors or if several of them also have home-based businesses.

What kinds of things are most likely to get you trouble? Anything that a neighbor can see, hear or smell outside of your home that causes inconvenience or smacks of a commercial venture. Increased traffic, parking problems, signs, outside storage of supplies, noises or unpleasant odors emanating from your home—any of these can lead to neighborhood complaints. Pollution is another red flag.

Example: A craftsman who worked at home with stained glass and even taught classes there was doing quite well until he started dumping lead-laced fluids down a storm drain. The neighbors properly insisted that the city attorney put him out of business. Look for alternatives to frequent deliveries. A daily procession of FedEx, UPS and U.S. Post Office trucks making deliveries to your house can annoy the neighbors. Consider having mail and packages sent to a private mailbox service such the one run by Mail Box Etc. or a similar operation—especially if there’s one located nearby.

law in the real world
Get the Neighbors on Your Side

Ted operates a business in his home helping non-lawyers prepare their own divorce and bankruptcy forms. Several customers come and go each day, often in the early evening and on Saturdays. One of Ted’s neighbors, who has no idea of what Ted is doing, jumps to the conclusion that he’s dealing drugs.

She calls a meeting of other neighbors and convinces the others that there can be no other explanation for all the coming and going. They complain to the police and zoning board. When the truth comes out, the police laugh and leave.

The zoning officials are another matter. They cite a local ordinance prohibiting businesses that generate traffic and tell Ted to close down. Eventually, when Ted gets all his chagrined neighbors to sign a statement saying a few cars a day aren’t a problem, the zoning officials reverse their position. Ted could have avoided this time-consuming, anxiety-producing process if he’d simply told folks what was going on when he began his business.

3. Dealing With Zoning Officials

Suppose you receive a complaint from the city. What steps can you take? Start by going to City Hall and talking to the person who administers the zoning law—someone in the Zoning or Planning Department. There are both practical and legal reasons for attempting to resolve zoning matters without filing a lawsuit. On the practical level, administrative (agency) relief is quicker, less expensive and often more flexible than a judicial solution. And the law usually requires you to pursue your available administrative solutions before you go to court; this is known in legal lingo as “exhausting your administrative remedies.”

The kind of response you can hope for at City Hall depends greatly on community attitudes. If some home-based businesses are allowed, you clearly want to show that yours meets the spirit of the criteria for allowing businesses. Emphasize how small and unobtrusive your business is. When faced with the facts, the city may become more reasonable. Or you may be able to negotiate a settlement under which you scale down your operations. For example, you might agree to limit your business to weekdays from 8 a.m. to 5 p.m. and to provide off-street parking for your one employee.

If you can’t negotiate with the city staff, there are more formal approaches. Most places have a planning or zoning board with power to grant exceptions (variances or conditional use permits) if compliance with an ordinance would cause unreasonable hardship. For example, a zoning board might allow a physically handicapped person to operate a therapy practice at home even though some traffic is generated. The board may also have power to overturn a zoning official’s interpretation of an ordinance. If you appeal to a local zoning or planning board, try to get neighbors to attend the hearing to speak on your behalf. If that is too inconvenient, ask as many neighbors as possible to write letters or sign a petition stating that they support your business use. Neighborhood support or opposition is likely to be crucial to the success or failure of your appeal. Also, come to the hearing with any photographs or documents that accurately show the nature and extent of your business.

In many cities, if you’re turned down by a zoning or planning board or commission, you can appeal to a second board—often the city council itself. While it’s less likely that you’ll prevail at this level, it does happen.

Going beyond administrative channels, you may be able to get the zoning ordinance amended by the city council or county legislative body. For example, in some communities moves are afoot to change ordinances that allow “traditional home-based businesses” to include those based on the use of computer and other high-tech equipment—businesses that are unobtrusive, but hardly traditional.

To push through an ordinance change, you’ll probably have to lobby some city council members or planning commissioners. You may also need to enlist the local chamber of commerce and other groups representing business people. With increased use of homes for businesses, the time may be ripe in your community for ordinance revisions of this sort. It’s politically attractive to revamp an archaic ordinance to allow more home-based businesses, especially if the city is struggling with traffic and parking problems.

Also consider trying to get your property rezoned. This works best if your home is on the edge of a commercial district. Ask the city to move the boundary line separating the two zoning districts so that your home falls within the commercial district—which, of course, would give you much greater latitude to run your business out of your home.

4. Going to Court

If you decide municipal officials are being unreasonable in attempting to close down your home-based business and you can’t get administrative relief or an ordinance amendment, you may want to take the matter to court yourself before the city starts a prosecution or requests an injunction. By acting first, you have a chance to frame the factual and legal issues more favorably, putting the municipality on the defensive. At this stage, you’ll probably need a lawyer’s help; zoning cases are relatively complicated and specialized. Consulting and perhaps hiring a lawyer who works in this area regularly will be well worth the fee. Make sure you find a lawyer who’s familiar with zoning practices. You needn’t turn the whole case over to a lawyer—there’s plenty you can do to organize support from neighbors and other home-based businesses as well as researching how courts have decided other similar cases.

You can assert several legal theories in a zoning lawsuit, including the following:

• The city’s legal interpretation of its zoning ordinance was incorrect. For example, you might claim that your word processing business is a “home occupation” even though the zoning officials decided that it isn’t. You’d ask the judge to issue a judgment declaring that your business does qualify as a home occupation.

• The ordinance is invalid because it violates the state statute (called an “enabling law”) that gives cities authority to enact zoning ordinances. For example, you might claim that the zoning ordinance is invalid because it doesn’t permit homeowners to have “reasonable accessory uses” or “home occupations” as required by the state enabling law.

• The ordinance is invalid because the city didn’t use proper procedures in adopting or enforcing it. For example, the city may not have held the necessary public hearings before it amended the zoning ordinance to prohibit certain types of home-based businesses.

• The authorities have acted in a discriminatory manner by enforcing the ordinance against you. For example, they’ve allowed similar home-based businesses for years but now have singled you out for special treatment.

Example: Dr. William Brady lived in Beverly Hills, California. He wrote a syndicated column and, with the help of secretaries, mailed out 150,000 pamphlets a year from his home office. The city tried to close his business because the local zoning ordinance prohibited home businesses that involved the purchase or sale of materials for profit. But the court ruled that the doctor wasn’t violating the zoning ordinance; sending out the pamphlets was basically the same as a person answering his or her mail. City of Beverly Hills v. Brady, 215 P.2d 460 (Cal. 1950).

You aren’t limited to just one legal theory. Your lawsuit can allege as many theories as apply.

Lawsuits are expensive, but yours may be settled before there’s a full-scale hearing or trial. The city may agree on an acceptable compromise to avoid the expense or inconvenience of fighting your lawsuit, or may not want to put its zoning ordinance in jeopardy just for the sake of closing down one in-home business.

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B. Private Land Use Restrictions

Zoning ordinances are not the only source of potential problems for a home-based business. You must also check out private restrictions on your use of your home, condo or co-op unit. Depending on the part of the country and the type of ownership arrangement, use restrictions commonly are found in the following documents:

• property deed (the restrictions are called “restrictive covenants”)

• a subdivision’s declaration of building and use restrictions or covenants, conditions and restrictions (CC&Rs)

• planned unit development (PUD) rules

• condominium regulations

• co-op regulations

• leases.

Language in these and similar documents is likely to restrict or even prohibit business uses. If your residence is covered by a title insurance policy (virtually every piece of real estate is), use restrictions may be identified there. If you’ve lost your deed or your subdivision, condo or co-op restrictions, get a copy from your association or go to the county office where title papers are recorded (usually the county recorder or register of deeds) and purchase a copy.

If your neighbors believe you’re violating these restrictions, they may take action to stop you. Often—especially for condo, co-op or PUD units—they can take you before an owners’ association board empowered to enforce regulations. If you don’t come into compliance, you may lose privileges and face other penalties. Beyond these private sanctions, your neighbors can take you to court and try to stop your business. Judges can be very strict in enforcing these private restrictions. Here are three real-life instances where a judge sided with the neighbors.

Example 1: Salvador, a field manager for a brush manufacturer, supervised a staff of door-to-door salespeople and supplied them from his residence in Metairie, Louisiana. He interviewed prospective salespeople at his home and received stored merchandise in his garage. The court ruled that merely receiving samples wouldn’t violate the restrictive covenants in the deed to Salvador’s property. But Salvador had a problem because he used his home to hire and outfit new employees with samples stored at home. He wasn’t using his home “for residential purposes only” as required by the restrictive covenants. Woolley v. Cinquigranna, 188 So.2d 701 (La. App. 1966).

Example 2: Sheldon and Raye practiced psychotherapy in their home in Illinois. The subdivision restrictions covering their home said that “No lot shall be used except for single residential purposes.” Their neighbors took them to court, claiming a violation of that restrictive rule. The judge ordered Sheldon and Raye to discontinue their professional use of their home even though the exterior appearance of the home as a single-family home hadn’t been altered. Wier v. Isenberg, 420 N.E.2d 790 (Ill. App. 1981).

Example 3: Myrtle operated a part-time beauty parlor in her Sunnyvale, California, home, receiving six customers per day. Myrtle didn’t advertise her services, there was no external evidence of her business, and neighbors weren’t inconvenienced. Still, the judge ruled that Myrtle violated the subdivision restriction that said “No lot shall be used except for residential purposes.” Biagini v. Hyde, 3 Cal. App. 3d 877, 83 Cal. Rptr. 875 (Cal. App. 1970).

If you’re taken to court, you have two main lines of defense. The first is that your neighbors or the condo association are misinterpreting the restrictions and that your business use is allowable. Second, if the neighbors did not object to prior business uses, they have, in legal effect, waived the right to do so now. In other words, their inaction in the past has nullified the restrictions.

Judges are often sympathetic to homeowners seeking to enjoy the use of their property. If neighbors have been lax or the restriction is vague, you have a good chance of getting a favorable ruling if your business use doesn’t really hurt your neighbors or change the residential character of your neighborhood. On the other hand, if the legal restrictions are tightly drafted and your neighbors acted swiftly to enforce them whenever a violation came to their attention, even a sympathetic judge won’t be able to help you.

But slugging it out in court should be a last resort. If you’re both dogged and diplomatic, you may be able to find a way to operate your home-based business. Look first at the rule to see how restrictive it is. Some specifically allow certain types of home-based businesses while others simply adopt the standard in your municipality’s zoning ordinance, which in turn may be fairly permissive. If you don’t qualify under the rules, consider trying to change them. Other people in your subdivision may also feel they are too restrictive. Often the document creating restrictive covenants says that restrictions can be changed if a certain number—say 70%—of the homeowners in the subdivision agree. Similarly, condo regulations can often be changed by agreement of a specified number of owners.

Leases. If you live in a rented house or apartment, read your lease carefully. Your landlord may have the right to evict you if you use the premises for business. It’s best to get clearance in advance and have it written into the lease. Most landlords won’t care if you use the property partly for business as long as you don’t cause any damage or create any problems with your neighbors.

Excerpted from the “Legal Guide for Starting and Running a Small Business”, by Fred S. Steingold