Operating As A Business Vs. A Hobby

Facebook likes to remind us of where we have been and what we have lived through. I, like most others, receive a notification almost daily, letting me know that I have “memories” with others. The greater the frequency of posting, the more memories Facebook has to share with me. Earlier this week, Facebook reminded me of a milestone that I had forgotten about; I have been a member of the community for 12 years. That struck me as both odd, because I thought I had been on for longer, and intriguing. I distinctly remember when users had a “wall” to write messages to others and wait for what seemed like an eternity for a response because back then, smartphones were primarily Blackberry devices with a few Palm and Windows devices. They were meant for sending and receiving emails, keeping notes, and if you were really glutton for punishment, you could try to access the internet but if you weren’t in a large city, you were left waiting or out of luck. Today, most of us carry tiny computers in our pockets that we happen to call a phone.

In an increasingly digitized world, our options may seem limitless.

Having continuous access to the internet has changed how we live and subsequently, how we do business. Today, I have many people who ask how to make social media work for them. There are individuals out there who are making serious money online, from videos of users playing games to creating their own brand online through tutorials, it can be a very lucrative business. While it is no secret how powerful the internet and social media can be, there can also be a blending of lines between what constitutes a hobby and a business in the eyes of the individual, the consumer, and the IRS. The difference between the two can be striking and it is imperative to understand the difference, especially during tax time.

According to the IRS, the distinction considers your intent and activity toward the operation. While there are nine key questions to ask yourself, from are you operating in a businesslike manner and keeping accurate books and records to are you looking to can you expect a profit from the activities. It can be a bit ambiguous and may be difficult to determine if you are operating as a hobby or a business when you are in the trenches, especially in the first years.

Are you operating as hobby or a business?

While it can be easier than ever to take something you enjoy and make it into a business, actually operating as a business takes a lot more time and effort. If you enjoy making or creating something and just want a little extra money in your pocket, that is a hobby. Hobbies are meant to bring us pleasure, to feed us mentally, spiritually, and yes, even sometimes physically. Operating a business can be draining in ways you may not have even imagined possible, wearing multiple hats that require completely different modes of thought, long hours, and the ever-present stress. The highs can be the highest you have ever felt, and the lows, can be downright dark. Asking yourself and addressing the hard questions is key to operating a business. While there is never a guarantee that your business will succeed, here are some key markers that you will want to ensure are in place to increase your chances of success:

  1. Do some market research first. Market research may sound daunting, but it is as simple as going online and searching for the type of business you want to create. Look to see how many businesses in your field are already in the area. Too many or too few may be red flags. Some competition is a good thing, too much and you may be setting yourself up for failure. Additionally, if what you are looking to provide is new or unknown to the area, it may be because it is not needed or wanted by the general population. Take a greater look at what you are wanting to provide and ask yourself if there is a true need in the area you want to market to. While you are researching, it is also a good idea to look at those in your field in the area that you would consider to be successful. Look at what they have digitally – website, social media, etc., check to see what organizations that company belongs to, and how they present themselves. This information will come in handy later.
  2. File your business name with state and federal government. This may be a DBA (Doing Business As) when working under a fictitious name (any name other than your given name) or an LLC (Limited Liability Company) for the state you reside in. While there are pros and cons of each depending on the state you live in, there will be a cost associated with either. Both can be done independently or with the assistance of an attorney, depending on the complexity of the business you want to create. Additionally, you will want to file your business name with the IRS. This will provide you with your Employer Identification Number which you will need to open a bank account in the business name, file and report taxes, and even apply for business loans or other outside funding.
  3. Create a business plan. Many transitioning between hobby to business see this as an extra step that is not necessary. While the complexity of your business plan highly depends on you and the business you want to create, everyone who is looking to start a business should have a plan. Having a vision of what you want to create is wonderful and you will want to hold onto that vision because running a business is hard work. As time progresses, that vision may become harder to see, seem more difficult to attain as I discussed in last week’s blog. Your plan will help you see where you are currently and help you find the steps needed to get you to where you want to be. Even the most basic of plans should contain your mission (your business why) and vision (where you see your business growing), how your business will operate (what will you offer, will you expect to hire employees, where will it be located), projected financial reporting (estimate expenses to be higher and profits to be lower than expected), and your marketing strategy (how will you let others know about your business). This should be reviewed yearly to compare how your business is operating against what you planned so you are able to adjust and change as necessary. While a business plan can be typed and many pages long, it does not need to be. Some find just putting thoughts to paper helps in seeing the bigger picture. Just be sure to write it out in some way so you can go back and review when needed.
  4. Create a marketing strategy. I cannot express this enough. People need to know about what you are offering to be able to decide on whether to make a purchase. Marketing does not need to be expensive. Social media accounts are free and managing an account only costs your time. Additionally, many platforms allow for the ability to schedule posts on business pages/accounts. We highly recommend spending time monthly on scheduling posts that relate to your specific business and that engage your community. Additionally, go back and review those businesses you found in your marketing research that you felt were successful and see where they focused their marketing efforts. While we may all be at different stages, this will help you with ideas of how you want to present yourself and your business. Keep in mind that the businesses you believe are successful often have the same issues you are facing or have faced similar issues.
  5. Look for opportunities to grow professionally and personally. There are many organizations that will assist your professional growth. SCORE and SBDC are non-profit organizations that assist small business owners with a variety of processes from starting a business to operating a successful business. These organizations have volunteers and mentors in the field who are ready and willing to help. Chambers and other similar organizations offer learning series on specific topics all focused on helping the small business owner succeed. There are webinars, online classes, and even support groups all focused on professional development. While there are many opportunities to grow professionally, personal development is often forgotten or dismissed. To have the mental fortitude to be able to manage a business, personal development must be addressed as well. Your views and attitude will reflect in your business. If you are feeling desperate and uncertain, you are presenting yourself, and your business in the same light. Growth and change are expected in business. The same growth and change should also be expected in your personal life as well. Ask yourself the hard questions and address those issues when they present. These are learning opportunities.

Incorporating Change

No matter where you are in the process of running a business or are looking to take your hobby and create a business, these steps can be taken at any time and will help determine the success of your journey. There are many reasons why a business may fail but having proper steps in place, planning for the unexpected, and ensuring that you are set up through the proper channels will help in the long run. Because that is what running a business is, an endurance run. Anything worth your time, money, and effort is. Treat it as such and when you start to question why you did this, you can look back at everything you have accomplished so far and remember, you’ve done it once. You can do it again. You got this. I believe in you. As always, we are here to help if you need because we firmly believe in your dream and want to see you succeed.

If you enjoyed this blog, be sure to check back next week and every Friday for another topic all focused on you, the small business owner, for more tips, tricks, ideas, and lessons I have learned along the way to help you find opportunities in dark places and find the success you are dreaming of.

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