In the U.S., all cottage industries are regulated by standard small business laws. Most states and counties also have their own cottage industry laws. Finally, the municipality and even your neighborhood association may have their own rules.
Federal
Cottage industries will need to register with the IRS as a self-employed small business. Your purpose is to sell taxable goods or services, so you will need an Employer ID Number (EIN). General assistance with starting a new small business is available here.
State
Some states require cottage industries to have a small business license. This will be asked for as frequently as the EIN when applying for local permits. You may also be required to display the license on your business premises.
= Food cottage industries =
Food-related cottage industries, such as home baking, are often regulated differently from most other types of cottage industries. Most states set out basic licensing and guidelines for cottage food preparation. Alabama, Kentucky, New Jersey, New York, and Tennessee regulate food-related cottage industries particularly tightly.
On the other hand, 11 states have no specific food-related cottage industry laws: Alaska, Connecticut, Delaware, Hawai’i, Idaho, Kansas, Montana, Nebraska, North Dakota, Oklahoma, and Rhode Island. In these states, home food preparation for profit is handled the same way as any other small business.
County
Counties tend to have the most detailed cottage industry laws of all. Food handler cards and labeling may also be required for food-related cottage industries.
The typical broad requirement for a cottage industry is that its presence should not disrupt the local residential character. This may include restrictions on noise, emissions, utilities, traffic, and even the amount of residential space which can be used for the cottage industry. Businesses which are likely to cause disruption may be permissible, but not as a cottage industry and probably not in that location.
Some types of cottage industries are given leeway on some of the restrictions, but other restrictions are absolute. Typical exemptions are for B&Bs and auto repair businesses. However, even these are required to conform to neighborhood standards and not disrupt residential life for other residents.
City and neighborhood
The local municipality is in charge of all zoning. Zoning for cottage industry use is different from zoning for residential or business use. Your city or town may be tolerant on this point or very picky.
Neighborhood associations may have their own opinions on acceptable business practise for a cottage industry in the neighborhood. In most cases, neighborhood associations set strong restrictions on the amount of acceptable signage and traffic. Other restrictions may also apply.