Wishing you could quit your day job is the first step on your way to owning your own business. Figuring out what kind of business to start comes next. To get new business ideas flowing, ask yourself what you are good and what you like to do. For example, perhaps you have a hobby you love, or people have suggested you turn your hobby into a business. Could this really work, or is it too good to be true?
Turning a hobby into a business can be the perfect way to launch a new venture.
However, it’s important to do a reality check. Turning a hobby into a business will mean spending 10 percent of your day doing your hobby and 90 percent handling marketing, managing, finances and all the other operational issues related to running a business.
If you’re still willing to go the distance, follow these tips to small business success.
Test the waters. Today transforming your hobby into a business is easier than ever. Online marketplaces like Etsy, eBay and Amazon make it easy and inexpensive to set up an online store and start selling right away. Plus, you get access to fulfillment services. Use these websites to conduct test product launches and get customer feedback before you take your business full time. What if your hobby involves providing a service such as graphic design, photography or building websites? Sign up with a service marketplace like Guru, UpWork or elance to advertise your services and build up a client base.
Take the plunge. Once you have enough sales and customer input to convince you that your hobby has the potential for a full-time business, then start treating it like a real business. File the necessary paperwork, secure your trademark and design a website. Protect your personal assets by creating a separate business entity such as an LLC or corporation. Don’t forget to obtain a Federal Tax ID number and get the necessary permits and business licenses.
Home or away? Today, many startup businesses become successful as virtual operations, with no need to leave the comfort of the home office. On the other hand, if you need to meet with clients regularly, your business requires large-scale operations to expand, or you can’t legally run a business from home due to local zoning laws, it may be better to look for office space. Start by investigating the business zoning laws in your city and talking to a commercial realtor if you need outside space.
Get professional help. You may be an expert on your hobby, but that doesn’t mean you’re an expert at running a business. Many common startup mistakes can be easily avoided by getting solid, professional advice from accountants, lawyers and IT and marketing experts. Creating a few products for friends is a lot different than making products for the public. Get help putting together a comprehensive business plan so you have a clear idea how to reach your business goals and how to attract financing should you need it down the road.
Last, but not least, know that if your new business is classified as a hobby by the IRS, you could run into tax issues. This typically occurs when the business doesn’t earn much money. The IRS will want to know:
- Are you participating in your hobby in order to earn a profit? If you earn any income from your hobby, you must report it on your tax return.
- Are you carrying on the activity in a businesslike manner, such as creating ways to make the activity profitable? If not, the IRS will probably view it as a hobby.
- Do you expect to make a future profit from the appreciation of the assets used in the activity? Even if you don’t make a profit right away, the possibility of future profits can lead the IRS to treat the activity as a business.
The sooner your business can be treated as a business for tax purposes, the better, so take the proper steps to keep careful records of your expenses, sales and profits.