Real Money.Real Opportunities.From Home. 

Early strategies: Don't quit your day job, and focus on tax and benefit plans

If you think coming up with a moneymaking idea was tough, brace yourself. Next up: securing funding, setting up an accounting system and purchasing health, disability and life insurance, perhaps for the first time in your life. That could take months and eat up lots of cash. So unless you've already been pink slipped, "keep your present job and ease your home business into a full-time venture," suggests Carolyn Tice, executive editor of Home Business News, a quarterly magazine of the American Home Business Association in Salt Lake City (free with $39 enrollment fee and $119.76 annual membership; 800-664-2422). Ideally, take these four steps to put your business on solid ground:

• WRITE A DETAILED BUSINESS PLAN

  Describe your business and customer base, a marketing plan, estimated start-up costs, operating expenses and projected income. "More than anything, our five-page business plan forces us to decide how we are going to market our business," says Racioppi. It should also tell you how much money you need to launch your enterprise -- and keep it going until it becomes profitable. John Jagoe, a 59-year-old home-based export agent in Bloomington, Minn., earns $200,000 today, but poor planning made his initial years rough. "My biggest mistake was not having a detailed, three-year plan when I started," says Jagoe, who has been in business at home for more than a decade.

  "Entrepreneurs must know where they're going," says Marvin Garellek, whose software program Plan-a Business Plan provides a prewritten, 90-page business plan you can customize ($69.95; 800-644-4892). "If you ask how much they plan to make this year," continues Garellek, "nine out of 10 new-business owners won't have an answer."

  Need more guidance? Check out How to Prepare and Present a Business Plan by small business expert Joseph Mancuso (Simon & Schuster, $15). A detailed written plan is your best shot at convincing someone you're worth backing. You'll also need six months' worth of living expenses or more, depending on when your enterprise starts paying you enough to live on. (Note: Your business plan should include an estimated and conservative break-even date and six months to five years of projected revenue.)

  Besides your local bank, consider applying for a loan to the Small Business Administration's Microloan Demonstration Program (202-205-6490). These loans of up to $25,000 carry interest rates of about 10.4%, depending on the amount of the loan and the payback schedule. But persuading lenders to finance your start-up is difficult. That's why "people overwhelmingly end up self-financing," explains home-business expert Paul Edwards.

• ALWAYS RUN YOUR BUSINESS LIKE A PRO

  Don't expect to get by with a tiny answering machine and a typewriter. Almost any home start-up requires roughly $3,600 to $8,500 for the basics: a Pentium PC with a modem, fax machine and laser-quality printer. The telephone is critical too. You will need a dedicated phone line so the kids can't pick up while you're talking to a client. Subscribing to the local phone company's voice-mail system can also be a help, advises Aimee Stern, editor of the newsletter the Marketing Report ($264 for 22 issues a year; 800-220-5000). "It's important to make your home-based company look as big as you possibly can," she explains.

  Once you've furnished your digs -- ideally a separate room in your house for privacy and tax-deduction purposes -- get a policy to cover your equipment and inventory ($150 to $225 a year, depending on your business and location for $5,000 on-premises and $1,000 off-premises coverage). Phone your local insurance agent for an in-home business policy.

• PREPARE FOR THE IRS

  The Internal Revenue Service is especially suspicious of small businesses. Audit rates of unincorporated businesses earning less than $25,000 doubled in the past year or so -- from 2.2% in 1993 to 4.4% in 1994. If that's not enough motivation to maintain organized records of your expenses and income, just listen to Tom Wotherspoon, a 43-year-old advertising copywriter in Delray Beach, Fla. whose $6,500-a-month, 10-year-old home business was audited in 1986 and again in 1991. "The agent looked at every page in my mileage log and pointed at random to a trip and asked why I needed to go," he says. Fortunately, Wotherspoon kept a detailed appointment book. "I have a page devoted to each day," he says.

  But Wotherspoon tripped up in one place: He failed to keep separate accounts for business and personal expenses. "In 1991, all my business expenses were written on personal checks," he says. "I needed a better division on paper." Fortunately, the IRS did not penalize him, though the agent strongly suggested that he keep his accounts separate in the future.

  One of the biggest tax advantages to running your business from home is the home-office deduction. To qualify, however, you must 1) use the office regularly and exclusively for business and 2) maintain it as your principal place of business. If you meet these tests, you can deduct a portion of most home expenses, such as flood or casualty insurance, utilities, wages for a house cleaner, maintenance, property taxes and your mortgage interest (or rent).

  To calculate what percentage of these items you can deduct, first figure the square footage of your office and then the percentage that is of your overall home. For instance, if your office occupies 400 square feet in your 2,000-square-foot house, you can deduct 20% of the household expenses listed above. One cautionary note: Congress is considering legislation that would require you to pay taxes on any home-office depreciation expenses you claimed in the past when you sell your house. To keep abreast of legislative proposals affecting your business, you may want to join the Small Business Survival Committee, which offers a bimonthly newsletter ($25 basic annual dues; 800-223-7526; (http://www.sbsc.org).

  Because home-office deductions have become an audit trigger, says Martin Kaplan, an accountant and author of What the IRS Doesn't Want You to Know (Villard Books, $13.95), you may want to incorporate your business. "Owners of a partnership or an S corporation aren't required to fill out a special form to report home-office deductions," says Kaplan. But they can still claim the same expenses. In fact, S corporations are similar to regular corporations in that they have limited liability against creditors, but like sole proprietorships, they receive favorable tax treatment. Yet they boast audit rates of only 1%, compared with as much as 4.4% for unincorporated businesses earning less than $25,000.

  You don't necessarily need a lawyer to incorporate your business. Simply get in touch with your state agency that handles corporations and request a form to incorporate. Once you fill out the form, it can take up to six weeks to become a corporation. That will cost you from $35 to $900, depending on your state. For a more complicated setup, a lawyer can take it on for $250 to $1,000, in addition to state fees.

  But before you make the choice, consider these two disadvantages to incorporating: 1) you'll have to fill out corporate tax returns or have an accountant do it for $500 or so a year and 2) you may have to pay annual state fees -- usually $30 to $800 -- to maintain your corporate status. If you still want to incorporate, says Kaplan, then name your business anything but your own name or initials. If you do, the IRS may assume that you are operating a home business, which is more likely to trigger an audit.

• SECURE YOUR BENEFITS

  Losing health insurance is a major reason people don't want to leave their jobs, says Jeff Smedsrud, executive director of Small Office Home Office/America, a Minneapolis trade group. Unless a spouse or partner can carry you on his or her employer's plan, health insurance takes a big bite. To find affordable coverage, call your chamber of commerce or professional and fraternal associations, many of which offer group plans. Or try calling Wilkinson Benefit Consultants (800-296-3030), which charges $270 to analyze the best three carriers' policies for your needs.

  Then, don't forget about retirement. However much you love working at home, you may want to hit the greens someday. Consider setting up one of the following: a simplified employee pension (SEP) that allows you to stash up to 13% of your net annual earnings but no more than $22,500 (after you've deducted half of your self-employment tax and if you're unincorporated), an Individual Retirement Account, to which you can contribute $2,000 a year, or one of two types of Keoghs. To learn more, check with your accountant.