What Is a Small Office/Home Office (SOHO)?

The term small office/home office (SOHO) refers to a small business that is often run out of small office spaces, homes, or even virtually. These businesses are commonly considered microenterprises. Their owners are commonly self-employed who don't need large office spaces to conduct their day-to-day operations. Most use small office spaces or run their businesses from home. As such, SOHOs generally employ fewer than 10 people.

Key Takeaways

  • A small office/home office is a small business.
  • SOHOs are often run out of small office spaces, homes, or virtually.
  • Business owners are usually self-employed individuals who hire fewer than 10 people.
  • SOHOs cut out or reduce costs related to expenses like rent and leases, equipment, and utilities.
  • Half of the firms in the U.S. are home-based while the majority of the workforce teleworks on a regular basis.

How Small Offices/Home Offices (SOHOs) Work

As noted above, small offices/home offices (SOHOs) are a form of microenterprise. This type of business is typically run by self-employed individuals who use a small amount of capital to start and run their day-to-day operations. This can be their own money or funds advanced from banks or other lenders.

Most of these enterprises provide specialty goods or services to individuals in their own local area. As such, SOHOs are usually run by white-collar professionals, such as entrepreneurs, lawyers, consultants, accountants, bookkeepers, and financial advisors, who may not need a formal office to meet clients or who have a dedicated formal office within their home, hence the reason for home office in the term.

These businesses commonly employ a small number of people. Many have 10 employees or less, although the majority tend to have between one and four. In the knowledge economy, an increasing number of these businesses now operate out of virtual offices. They may have no physical premises at all or employ coworking arrangements, where self-employed people share office space and services like phone answering, meeting rooms, and video conferencing.

Sharing office spaces with others or running their operations out of their homes allows business owners to cut out or reduce the costs of certain overhead expenses related to business operations, including:

The Internal Revenue Service allows individuals to take deductions for home offices, as long as expenses aren't provided by a larger, corporate entity.

Special Considerations

Workers began to telecommute in the 1980s, after the rise of the personal computer. Thanks to cloud computing, the opportunity for office workers to work from home took off after the invention of the internet and has come of age.

Working from home is now increasingly popular, for both employees and employers. Employers are taking advantage of a much bigger pool of potential workers. According to the Small Business Administration (SBA), there are 31.7 million small businesses in the United States. This number includes independent operations with 500 employees or less. Out of these companies, 25.7 million (81%) have no employees. Half of the firms in the United States are home-based and a big chunk of the workforce teleworks on a regular basis. This is especially true in the information and construction industries.

Example of a Small Office/Home Office (SOHO)

Here's a hypothetical example to show how SOHOs work. Let's say Joe is a construction worker who wants to start his own small business. Rather than rent out a retail location, which can be fairly expensive, he decides to run his small construction business out of his home.

Once Joe sets up his small business corporation with the state, he may designate a certain area of his home as office space. He can run his day-to-day operations from this area, including taking calls and setting up appointments.

In order to save on costs, Joe may have to do everything on his own. But as his business builds up, he may be able to hire an assistant to help him run the home office, an apprentice who accompanies him to jobs.