No matter what field you’re in, you may reach a point where your after-hours hobby evolves into a bona fide business. Let’s say you bake cupcakes for fun. You made batches for friends’ birthdays and for the occasional treat at the office. People loved your work — and recently started offering to pay you to cater. All of the sudden, you’re an entrepreneur. Or are you? Here’s how to tell.
- You have a reputation. People within your industry or region are taking note of who you are and what you’re selling. If, while you’re displaying your confections at a farmer’s market, someone comes up to tell you that her sister was raving about your chocolate cherry cupcakes to everyone at her son’s party, it’s a sign that you have a good thing going.
- You’re getting more orders than you have time to fill. Once word begins to spread, you’ll probably realize that you don’t have enough time to fill every cupcake order on your own. That may mean it’s time to quit your day job and focus on your business full-time. Or, if you aren’t ready to cut ties with the corporate world, consider enlisting a helper or two to assist with production until you are ready to make the move.
- You’re making a profit — or expect that you will in the future. Just because your operation isn’t profitable doesn’t mean you’re not a business. If you’ve just gone into debt (perhaps to purchase a commercial kitchen with the expectation of ramping up cupcake production) and aim to recoup the investment within a few years, the IRS will consider you a business. There’s good news in this: It means that you’re eligible for all the tax deductions that mere hobbyists aren’t.
- You have a master plan. Instead of thinking about individual sales, are you considering larger steps, such as hiring full-time employees, renting a shop, and maybe even franchising? Then, whether or not you’re making money, you have a full-fledged business on your hands.
Once your hobby has become a business, don’t neglect formalizing the operation. Talk with both a lawyer and an accountant about the best strategies for incorporating and setting up a tax-payment plan. And take a vacation before you go into overdrive setting up your new business — you may not get another one for a long, long time.