Home-Based Business and Government Regulation

Home-Based Business and

Government Regulation

by

Henry B. R. Beale, Microeconomic Applications, Inc. Washington, D.C.

for

under contract number SBA-HQ-02-M-0464

Release Date: February 2004

The statements, findings, conclusions, and recommendations found in this study are those of the authors and do not necessarily reflect the views of the Office of Advocacy, the United States Small Business Administration, or the United States Government.

TABLE OF CONTENTS

Page EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . ES-1 I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . 1 II. CHARACTERISTICS OF HOME-BASED BUSINESSES . . . . . . . . . 8 III. FEDERAL REGULATIONS . . . . . . . . . . . . . . . . . 21 IV. STATE AND LOCAL TAXES . . . . . . . . . . . . . . . . 42 V. STATE AND LOCAL REGULATIONS . . . . . . . . . . . . . . 57 VI. ZONING . . . . . . . . . . . . . . . . . . . . . . 71 VII. POTENTIAL BENEFICIAL STATE INTERVENTIONS . . . . . . . . . 89 VIII. CONCLUSIONS . . . . . . . . . . . . . . . . . . . 94 REFERENCES . . . . . . . . . . . . . . . . . . . . . 96

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LIST OF EXHIBITS

Page EXHIBIT 1: DISTRIBUTION OF HOME-BASED BUSINESSES, BY MAJOR SECTOR . 9 EXHIBIT 2: INDUSTRY DISTRIBUTIONS OF HOME-BASED BUSINESSES. . . . 10 EXHIBIT 3: INDUSTRY CONCENTRATIONS OF HOME-BASED BUSINESSES BY

NUMBER AND PERCENT OF ALL HOME-BASED BUSINESSES . . . . . 15 EXHIBIT 4: DISTRIBUTION OF HOME-BASED BUSINESSES BY SECTOR . . . . 16 EXHIBIT 5: BUSINESS ORGANIZATION OF HOME-BASED BUSINESSES . . . . 17 EXHIBIT 6: DISTRIBUTION OF HOME-BASED BUSINESSES BY

TYPE OF BUSINESS ORGANIZATION . . . . . . . . . . . . 17 EXHIBIT 7: EMPLOYMENT OF HOME-BASED BUSINESSES. . . . . . . . 18 EXHIBIT 8: DISTRIBUTION OF HOME-BASED BUSINESSES BY

EMPLOYMENT SIZE . . . . . . . . . . . . . . . . . 18 EXHIBIT 9: DISTRIBUTION OF HOME-BASED BUSINESSES BY

ANNUAL RECEIPTS . . . . . . . . . . . . . . . . . 19 EXHIBIT 10: PRIMARY INCOME OF OWNERS AND WEEKS OF OPERATION OF

HOME-BASED BUSINESSES . . . . . . . . . . . . . . . 20 EXHIBIT 11: IRS FORMS RELATED TO HOME-BASED BUSINESSES . . . . . 22 EXHIBIT 12: TIME BURDEN ESTIMATES FOR A SOLE PROPRIETORSHIP

WITHOUT AND WITH EMPLOYEES . . . . . . . . . . . . . 23 EXHIBIT 13: CHARACTERISTICS OF BUSINESS PERSONAL PROPERTY TAX IN

CASE STUDIES . . . . . . . . . . . . . . . . . . . 51 EXHIBIT 14: LOCAL BUSINESS TAXES . . . . . . . . . . . . . . 56 EXHIBIT 15: TYPE OF APPROVAL FOR HOME-BASED BUSINESS USES . . . . 87

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APPENDICES

APPENDIX A: INDUSTRY DISTRIBUTIONS OF HOME-BASED AND NON-HOMEBASED BUSINESSES

APPENDIX B: REVIEW OF FEDERAL AGENCIES APPENDIX C: REVIEW OF SPECIFIC LAWS APPENDIX D: AREAS OF STATE REGULATION APPENDIX E: REGULATIONS REVIEWED IN SIX STATES APPENDIX F: STATE REGULATION OF PROFESSIONS APPENDIX G: INDUSTRIAL HOMEWORK LAWS IN CALIFORNIA AND ILLINOIS

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EXECUTIVE SUMMARY

INTRODUCTION

Government regulations typically have a disproportionately large impact on very small businesses. Studies using various methodologies have found that unit costs of complying with regulations are consistently higher for businesses with fewer than 20 employees than for businesses with over 500 employees that use similar compliance measures. Very little is known about size differences below 20 employees or other aspects of very small businesses that may influence the size and nature of regulatory impacts.

Home-based businesses, which make up roughly half of all U.S. businesses, are of particular interest because of their potential as a wellspring of economic activity. Homes are, in effect, do-it-yourself business incubators, which collectively provide start-ups with an entry point into the business world. Home-based businesses as a group have been characterized, but little more has been done in the way of analysis. A general goal of this study is to advance the understanding of regulatory burdens on home-based businesses, as opposed to non-home-based very small businesses.

CHARACTERISTICS OF HOME-BASED BUSINESSES

Home-based businesses are the predominant form of small business. Over two-thirds of all sole proprietorships, partnerships, and S corporations are home-based. Home-based businesses are concentrated in relatively few industries. Over 60 percent of home-based businesses are in the service and construction sectors; over 80 percent are in fifteen 2-digit SIC industries; and one quarter are in just six 3-digit SIC industries.

Over 90 percent of home-based businesses are sole proprietorships. Home-based businesses are also quite small. At the time data were last collected (1992):

? In terms of employment: Over 90 percent of home-based businesses had no employees, 7.2 percent of all home-based businesses reported fewer than five employees, Just over 1 percent reported 5 to 19 employees, and About 0.2 percent reported 20 or more employees.

? In terms of income: Over three quarters (77 percent) had gross receipts of less than $25,000, 96 percent had gross receipts of less than $50,000, 3.5 percent had gross receipts of $100,000 or more, and Less than 1.0 percent had gross receipts of $500,000 or more.

ES - 1

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