There is a lot of advice out there saying that you should find something you are passionate about “and you won’t work another day in your life.” But if you follow that advice, are you are living your hobby or running a business?
A hobby is something that can probably go away without drastically impacting your lifestyle or income. You could be working full-time on it—it could even be paying your bills—and it still might be a hobby, not a business.
A business is something that requires more skin in the game. You may have put your savings, your kids’ college funds, credit card debt, or borrowed money from a bank or family into it. You have a vested interest in making sure it works. You have a vested interest in making sure it can support your lifestyle, allow you to quit your job and NEVER work for anyone ever again in your life. But if you’re treating it like a hobby, you have a high level of risk.
And if what you have is a hobby, it’s perfectly OK to be where you are now. Things evolve. You can be passionate about a hobby now and turn it into a business later, and you’ll have fun doing something every day that will support you and your family.
But if you have a business, or want a business, then there are some basics that you need to address.
Every business must have goals. Write yours down. Understand your “why”: Why are you doing this? Watch this great TED Talk from Simon Sinek and read his book. Make time to work on your business, not just in your business. This includes reading lots of business books, watching TED talks, and being an entrepreneur and business owner. It is a mindset.
Pick a name and register with the state
You need a name for your business and it needs an identity. This can be your name, your kids’ names, or something you make up. Pick something that works for you; you can always add a DBA (doing business as) name if things evolve.
Next, you need to register with your state. Many people do this themselves by going online and filing themselves. (It’s not complicated, but we recommend you consult with your tax advisor or attorney to develop a plan before considering doing anything like this yourself.) Keep your registration up to date.
You need to determine what type of business structure you want and how you are going to file your taxes. Talk to a CPA and/or an attorney to figure out the best structure for your business (partnership, LLC, S-Corp, etc.).
Get a Federal Employer Identification Number (EIN)
You need a federal EIN to identify your business to the IRS. Sorry, but you definitely have to pay taxes and report your revenue to the IRS.
Get a sales tax license
If you are selling a taxable product or providing a taxable service in your state, it is your responsibility to collect the sales tax at the time of sale, file sales tax returns, and remit the funds you have collected. You will be required to file and remit the money either annually, quarterly, or monthly depending on the amount of sales tax collected; the state will tell you what your business is required to do when you register.
There is more to sales tax if you are an e-commerce seller, so if you sell online, be sure to talk to a sales tax expert or e-commerce accountant.
Get a business bank account
You need a business bank account to keep your personal finances and business finances separate. Even if you decide your “business” is a hobby, it is a good idea to keep the costs separate so you know how much your hobby is costing you (even if you don’t tell your significant other).
You should also make sure you understand the “Hobby Loss Rules” so legitimate deductions don’t inadvertently get disallowed. Again, talk to your tax advisor.
I also recommend getting business credit cards—not to rack up debt, but so you can charge the business expenses that come up and manage your cash flow by paying those expenses just once a month. Another benefit of credit cards are rewards points. Your business could rack up tons of points that you can convert to cash back or airline miles to help cover business costs.
(We don’t recommend business debit cards because if there is a fraudulent charge, the money comes right out of your business bank account and immediately impacts your business’s cash flow. Then it could day days or weeks to challenge the charge and get the money back.)
Understand your accounting
As a business owner, you need to know how much money you are spending, how much money is coming in, and your available cash.
You have a number of options. The best are the new cloud accounting tools like Xero, FreshBooks, and a number of other online cloud accounting applications. There are a range of cloud accounting tools that will help you with invoicing, paying bills, inventory, customer management, etc.
Get advice from someone on how to set up your accounting right from the beginning, but run your accounting yourself (and do it on a regular basis) until your business grows to a point where you can outsource the accounting. When you outsource, make sure you are selecting a modern accountant or bookkeeper that is familiar with the latest cloud accounting technologies—it’s the future, and you don’t want to waste your time learning (or tangling up your business’s finances in) a soon-to-be obsolete desktop system.
Get a Business Operating Policy (BOP) insurance policy
You need business insurance to protect your business and your assets. Most small business owners put in a significant amount of time and money into their businesses—don’t risk your time, effort, and money by not having the right insurance in place.
A Business Operating Policy (or BOP) is the basic coverage for any business. They are consistently about $500 for a year of coverage, so they’re not a significant cost. This will cover the basics for your business, including a home-based business. There shouldn’t be any reason your business doesn’t have a BOP.
You also need to take the time to talk to a business insurance broker to determine if you need any other insurance. If you are providing services like consulting services, you might need Errors & Omissions insurance to protect you and your business. If you are an online or e-commerce business you should have Cyber Liability insurance that covers a wide range of cyber threats.
Now you know
Now you have the basics of what makes a business a business. There is a lot more that you need to do to make your business successful, but if you cover these basics, you aren’t missing anything fundamental.