Many successful businesses began as a hobby and grew to be a business. But some businesses also become hobbies. Why? Because their owners stop treating them like businesses. Are you enjoying a hobby or running a business?
How a Hobby Becomes a Business
First, let’s take a look at how a hobby becomes a business. An example of this is a photographer I know. She started out just taking pictures. Then a friend asked her to take engagement shots for their “save the date” cards. More and more requests came in, so she started charging for her photo shoots. Then she decided to open a studio, set up a website, advertise, and register herself as a business in her state. Now she is a professional photographer, running her own business. But she started out just taking pictures for fun.
Hobby or a Business: How the IRS Decides
The IRS determines if you are a business or a hobby by asking nine questions, a few of which include:
- Do you carry out your activity in a business-like manner (and keep accurate books and records)?
- Do you depend on your income from this activity for your livelihood?
- Have you made a profit in the past and can you expect to make a profit in the future?
No one question is the deciding factor, but it basically boils down to this: Are you operating in a business-like fashion with the intent of making a profit?
Is Your Business in Danger of Becoming a Hobby?
Most people know when their hobbies have become a business. They are working at them, improving their systems, spending time and money on marketing, and seeing sales increase. The more difficult thing to recognize is when your business is in danger of becoming a hobby.
This happens most often with businesses that are run by “solopreneurs” out of their home offices. To see if your business is sliding towards being a hobby, ask yourself these questions:
Are your business and personal funds separated?
Maybe they were at one time, but business slowed down and you stopped being diligent because money was really tight. Keeping business and personal funds separate is a key component of running a business. Business income and expenses should be paid from business accounts, and personal expenses should be paid from personal accounts.
How do you get personal income?
If the answer is that you’re paying yourself on a regular basis from your business, whether it is a set dollar amount or a percentage of your income, that’s a good sign.
Have you set your prices?
When someone asks how much your product or service costs, do you have a ready answer? Or are you just making it up each time? Knowing what you charge and how many sales you need to survive is one of the benchmarks of a business.
Do you know how much your business made, or lost, last year? Last quarter?
Are you using accounting software to keep track of funds brought into the business and the expenses paid out of the business? Or is everything just listed in your checkbook register? Business owners need to be able to access and refer to financial reports on a regular basis so they know what is and isn’t working and to make appropriate changes and adjustments throughout the life of the business.
Do you choose to work or play more often?
When you have a home office, it can become tempting and very easy to say, “Today’s fairly quiet, I think I’ll just read today.” Or perhaps you’ll choose to take an extended lunch, go shopping, or clean the house–almost anything other than work. Of course, one of the benefits of working for yourself and from home is flexibility with your schedule. You don’t have to work 8 hours a day, 5 days a week, in your office to be a business. But you need to make sure that you aren’t playing more often than working. Hobbies can be picked up and discarded as often as we want because they don’t affect our livelihood. Businesses are work and to be successful we need to treat them seriously, and not just work when we feel like it.
Accounting and Bookkeeping Services in NH
Not sure if you are running a business or a hobby? Afraid that your business may be sliding toward the hobby side of things? Contact us today for a free consultation. Fournier Accounting and Business Services can help you improve your systems so that you succeed in your business.