Area of Law: Business Law
Answer # 235
Home businessesRegion: Ontario Answer # 235
General business considerations
The term home business generally refers to a business that is run by someone who is self-employed and who operates the business out of their home. There are several legal issues that you should consider if you want to start a home business. Many of these are general issues that are important for all businesses. These include:
1. Form of the business
First, you will have to decide what form of business to use. The three main forms of business are:
- Sole Proprietorships: this applies if you alone own the business and you do not want to form a corporation,
- Partnerships, where two or more people own the business, but they do not want to, or are precluded by law from forming a corporation; and
- Corporations, which can be owned by one or more people, and which is considered in law to be a separate legal entity.
Each form has different legal requirements, and each has several advantages and disadvantages. More information about the three forms of business is available in other Business Law topics.
2. Employment standards and deductions
If your business employs people, you will have to follow general employment standards. For example, you cannot pay your employees less than the legal minimum wage, you cannot fire an employee in a way that violates the laws concerning termination of employment, and you must obey occupational health and safety laws.
You will also have to make deductions, such as Canada Pension Plan contributions and Employment Insurance contributions from the employees’ paycheques, and forward them to the federal government.
You can obtain more information about an employer’s legal responsibilities from both the Business Law and Employment Law sections of this website. More information is also available from the Ministry of Labour.
Depending on the type of business you operate, you may also need a federal, provincial or municipal licence. There are various government licensing requirements, depending on the type of business you plan to operate. A business lawyer can help you determine if any requirements apply in your circumstances.
Special considerations for home businesses
1. Zoning restrictions
One of the main considerations when running a business out of your home is whether you are permitted to do so under your municipal zoning by-laws. Zoning restrictions are particularly important for home business owners because many activities are not allowed in residential areas. Generally, if you are working alone in a home office, there will not be any zoning issues. However, if you are manufacturing a product, for example, and require employees to work out of your home, and/or you are causing pollution, excessive waste or noise, you may have a zoning issue.
2. Tax issues
There are also several additional tax issues that home business owners must consider. For example, working at home means that you may be able to deduct some of your housing costs from your income, which will reduce the amount of personal or business income tax you will have to pay. However, it also means that if you own your home, when you sell it, part of the value will not be considered your principal residence.
In general, if a principal residence is sold, the owner does not have to pay capital gains on the increased value. However, if you have been deducting a portion of the home space as a business expense, it means that you will have to pay tax on capital gains allocated to the office portion of your home. One thing that you should do to minimize the negative tax implications of working at home is to get a letter of opinion about the value of your house from a realtor when you start the business.
Depending on the type of business you operate, you may also have a legal responsibility to collect various provincial and federal taxes. Visit Canada Revenue Agency for more information about the tax implications for home businesses. For assistance with your tax issues, you should contact an accountant.
3. Public perception of home business
Another challenge for home businesses is the general perception of a home business. Sometimes, home businesses are not taken seriously or treated as favourably as businesses which operate out of a commercial or manufacturing facility. It can be more difficult for home businesses to secure a loan and to get sales.
However, the public’s perception is changing because the number of home businesses continues to increase rapidly. Also, if your business is based on services you personally provide, such as website development or graphic design work, it has become generally accepted that many of these types of services are performed from the person’s home. Further, given the global nature of our economy, many people do business over the internet and the location of the business is not relevant, so long as the goods and/or services exchanged meet the standards expected.
You can contact your local municipal authorities to determine if your home business will be affected by local zoning or other business regulations, or licensing requirements. You can also visit ontario.ca for more information about provincial licensing requirements or a listing of Ontario Small Business Enterprise Centre locations where you can go for help to start and grow your business.
Starting a home business can be a risky and rewarding venture. Because the legal issues which arise with a home business can be very complicated and have some unique requirements, it is advisable to consult a lawyer.
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