by Harry E. Thorsteinson
In this article, Harry E. Thorsteinson explores the legal implications of operating a business out of one’s home.
These words conjure up the image of McCauley Culkin in the movie by the same name, screaming with his eyes and mouth wide open, clutching his head with his hands. This was his reaction when he came to the realization that his family had left him behind and he was HOME ALONE! Those of us in business, often feel the same way and frequently react (or feel like reacting) in the same fashion as McCauley Culkin did in the movie. This is particularly so for people carrying on business at home ALONE!
Powerful, affordable computers have made the ability to work out of one’s home more and more possible and attractive. Email, electronic banking, and access to the Internet have also contributed to this phenomena and actually challenged the “alone” aspect of working out of one’s house. Faith Popcorn, in her best selling book, The Popcorn Report, refers to this as “cocooning” and, in fact, the lack of social interaction is a most serious concern as we look to a future where most of us either will, or could, work from our homes. Real estate professionals tell us that office towers may become a thing of the past if the trend away from offices continues.
If one is contemplating carrying on a business out of their home, there are certain legal considerations which should be taken into account. One of the initial concerns would be the applicable municipal zoning for your area. Will you be violating the zoning provisions if you carry on a business? It may be that no one will be the wiser if you operate from your home address, but if your business involves a reasonable amount of coming and going, your neighbours may not be thrilled with this extra commotion and complaints may be filed. It would be wise to determine whether or not you can carry on business from your home from a zoning perspective before you commence.
There are certain financial advantages with a home based business, the lack of overhead for floor space being one of them, and the savings on transportation to and from the office being another. You may be able and elect to “write-off” some of your housing costs, as well, and this is particularly attractive. At the same time, remember if you are using part of your home as an office, the downside is that when you sell the property, it may no longer be totally exempt from a capital gains point of view as a personal residence, since it was used, in part, for a commercial purpose. It would be wise to seek accounting advice in this regard, at the outset. Further, a letter of opinion as to the value of your residence from a realtor at the commencement of your business would be sound.
All of the considerations that affect anyone in business must be taken into account as well. Are you carrying on a sole proprietorship or in a partnership? Should you incorporate?
In a sole proprietorship, you operate strictly on your own and this would be the most likely format for a home based business. It is necessary to register your business name under the Business Names Act, R.S.O. 1990 c. B.18 unless you are carrying on under your own personal name. This is a simple and inexpensive procedure but it must be done. Other than keeping proper bookkeeping records, you are free to carry on your activity and hopefully you will generate more income than expenses! Before commencement, it would be wise to seek the advice of a lawyer and an accountant.
If you are operating in association with one or more other people, the likelihood is that you will be carrying on in a partnership. Since more people are involved, life becomes more complicated. Again, the name of the business must be registered under the Business Names Act. It would also be advisable to set out the terms of your partnership in a formal Partnership Agreement. Without such an agreement in place, the terms of the Partnership Act, R.S.O. 1990 c. P.5 will apply and this may not be appropriate in your partnership situation. The agreement usually addresses such matters as financial involvement, responsibilities and duties of each of the partners. It will also establish the banking arrangements and the manner in which a partner can leave the partnership if so desired, or on the case of death. Again, legal and accounting advice should be sought if partnership is contemplated.
Both the sole proprietor and the partnership have a common problem associated with them. All of your personal assets are at risk to satisfy the debts of the business and in the case of the partnership, each partner is responsible for all of the business debts as far as the outside world is concerned. In other words, even though the partners have agreed to share debts equally, the partner with assets is responsible for debts if the other partners are bankrupt! Since all of your personal assets are at risk, you can see that this is a risky manner in which to carry on business.
For this reason, and for the certain income tax considerations, business people will often choose to incorporate their sole proprietorship or partnership and carry on business as an incorporated company. When this is done, the corporation is an actual new separate legal entity and the business people will simply own shares in the business. In theory, the company is responsible and all of one’s personal assets are not at risk. What are at risk are the funds you have placed into the business. The words “in theory” are used since the largest creditor of the business will probably be the bank with an operating line of credit and most banks will seek personal guarantees from the principals until the business is well established. One can incorporate under a firm name and add the words “Incorporated”, “Limited”, “inc.” or “Ltd.” after the name to indicate incorporation status. Since there are so many companies incorporated in the Province, it is becoming harder and harder to find a suitable name that is not already being used. For this reason, many business people use a “numbered company” format and use the next available consequential number. The “numbered company” will then usually carry on business under a trade name. As stated earlier, proper legal and accounting advice should be sought before incorporating.
It is certainly possible to carry on a business from home and there are many advantages. But don’t be fooled by the relaxed and informal atmosphere – proper advice should be sought to determine the possibility and advisability of such a business and further, the best style of operation. With such advice, McCauley Culkin’s screaming sessions may be kept to a minimum.