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?
Is it a business or a hobby?
Not every business is run full-time, or for profit. And not every hobby allows you to make money. But when you do start making money from a side hustle, it can become difficult to separate what was originally a hobby from the makings of an actual business.
What’s considered to be a hobby?
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.
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.
What’s considered to be 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. But if you’re treating it like a hobby, you’re only increasing your level of risk.
How to turn your hobby into a business
If you’ve been investing in your hobby with the intention of making a profit or growing your footprint, it’s time to decide if you want to make it into an official business. Without a firm plan in place, or a roadmap for where you hope to take it can quickly cause your investments to spin out of control.
If you like just having a side hustle that makes a bit of money on the side that’s perfectly fine, you don’t need to create a full business. But if you do find yourself spending more and more time on that money-making hobby, here’s how to convert it into a small business.
1. Set goals
You’ve likely been working on this hobby for a while and know what you want from it. Now, it’s time to turn those ideas, desires, and wants into actionable goals. Ask yourself these questions:
- What do you hope to accomplish?
- What does success look like?
- Who is involved?
- What resources do you need?
Are you wanting to make enough to quit your job? Looking to pursue a passion project? Do you want to run a business with friends and family?
Answering these questions will help kickstart the critical thinking necessary to get your business off the ground. And they serve as the first step in developing SMART Goals, which can help ensure that you actually develop strategic steps to make your fledgling business a success.
2. Create a Lean Business Plan
Establishing goals also opens the door to develop a Lean Business Plan. Writing a Lean Plan is the perfect process for those turning a hobby into an actual business. It’s quick and easy to complete, flexible, and doesn’t require you to develop every section of a traditional business plan if you don’t need it.
Since you already have a product or service offering, the Lean Plan helps you outline how that will function as a business. It forces you to consolidate it into a business identity while considering the market you’re entering, potential competitors, and what expenses, revenue streams, and milestones you need to hit.
You’re early on in your business career so don’t worry about getting it all perfectly from the start. The beauty of a Lean Plan is that it’s meant to start as a brief outline of what you expect. You can always come back later to refine and adapt it.
To get started on this step, you can download our free Lean Plan Template or check out LivePlan for a more proficient planning experience.
3. Reach out to current customers
If you’ve been selling your product or services as part of your hobby you actually already have an established customer base. It may be worth reaching out to folks you’ve already sold to fully pitch your business to them and gauge their interest. This can be an inexpensive method to test out your full-fledged idea, gain some initial sales, and even claim positive customer reviews before you’ve even launched.
If you don’t have any customers, that’s perfectly fine. You can always set up other methods to test out your idea before making it official. Run ads, launch a pre-order page, or join forums to pitch your new business. Doing this early on can tell you if your hobby should stay or hobby or if it has real potential to succeed as a business.
4. 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.).
You’ll also need to apply for 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.
5. Get your finances in order
As a business owner, you need to know how much money you are spending, how much money is coming in, and your available cash.
It’s wise to set up your accounting processes right from the beginning. If you can, try to run your accounting yourself (and do it on a regular basis) until your business grows to a point where you can outsource to a professional accountant. When you outsource, make sure you are selecting a modern accountant or bookkeeper that is familiar with advising services and capable of presenting your information digitally to keep you informed.
6. 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.
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 cashback or airline miles to help cover business costs.
If you currently have bad credit and aren’t sure if you actually qualify for a business credit card or loan, check out our guide here.
Additional startup elements to consider
Depending on the size and location of your business, you may need to consider the following.
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 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 can go from hobby to business at any time
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.
The best thing you can do from here is to revisit your Lean Plan and begin to develop a structural plan to grow your business. And also keep in mind that if you find yourself missing just having a hobby that you love, you can always pull back or pivot your business.
Editor’s note: This article was originally published in 2014 and updated for 2021.