Start Here November '21

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94 S T A R T H E R E 2 0 2 1 Hobby vs. Business A hobby is something you do at your leisure. When you make it a business, you must show up for work (have established operating hours and dress and act the part). Think of your hobby turned business as your "second job" and make it a priority in your life. Still, the hobby versus business question boils down to how you handle your expenses and what to do if your activity loses money. For example, let's say you sell custom gifts and promotional items to the country club crowd — you know, golf, tennis, and swim- ming enthusiasts — in your spare time. If you actually lose money from this endeavor, when you factor in all the related expenses like sub-contracted goods, materials and marketing, the IRS will let you deduct this loss to offset your other income (i.e., your regular day job), if your "budding enterprise" is considered a business. You cannot deduct a loss if it's a hobby. According to the IRS, an activity is a "business" if it has made a profit in three of five consecutive years. Until you have five years under your belt, the IRS will look to see if you're taking the activity seriously and treating it like a business with the primary goal of making a profit. For example: • Do you keep financial records for your business? • Do you have a separate bank account for your business? • Do you have a business name? • Do you invest in advertising and marketing? If you are interested in learning more about how the IRS deter- mines a profit motive for a business, you can go to the IRS website and search for the article "Tips for taxpayers who make money from a hobby." Nobody's Business But Your Own Let's say you've come this far in reading this article and either you haven't been dissuaded or you are now more fired up than ever to get started. When you're ready to move your activity beyond a fun pastime, you need to get serious about managing it. Here are six key steps toward launch- ing an official business: Pick a business name: It marks the beginning of your new brand. You'll want to choose something that's easy to remember and reflects what exactly you are all about. Conduct a search to see if a domain website address is available and claim it. Be sure to per- form a free business name search with your Secretary of State to make sure your proposed name is available and not taken by a business in a similar industry. Determine your business entity: If you prefer not to form an LLC or corporation, you can register your business name with the state via a DBA (Doing Business As) filing and operate as a sole proprietorship. You may decide to take your business to another, more serious level later. Register your business and apply for a Federal Tax ID number (aka Employer Identification Number or EIN): If you incorporate or form an LLC (Limited Liability Company) for your business, your personal assets are shielded from creditor claims against the business. In addition, formalizing your activity as a corporation or LLC helps show the IRS you are serious about the business. Obtain the necessary business permits and licenses: Depending on the specific nature of your business, you may be required to get one or more licenses or permits from the state or local government. The most common requirement is the Resale License (and the proper way to collect and report sales tax). You might also need a general business operation license, health department permit, or zoning or home-based business permit. Open a business bank account: Once you have registered your business and obtained an EIN, you can open a busi- ness bank account and accept checks made out to your business name. In addition, a business bank account keeps your personal and business finances separate — a must for corporations and LLCs and a wise practice if you go the sole proprietorship route. Learn about marketing: Establishing a new company is not a "Field of Dreams" mentality of "If I build it, they will come." You can be the best in the world at what you've chosen to do, but if you don't market your business, you'll never get enough customers to turn a profit long-term. Read up on small business marketing and observe carefully how other similar yet successful businesses promote themselves. Don't Forget the Bare Essentials All businesses, regardless of size or legal structure, need out- side support. This means retaining the services of an accountant, There are many advantages to running a business from home, including flexibility of setting your own hours, saving money and rent, and no wasted travel time. (Image courtesy Cheryl Kuchek) 1 2 3 4 5 6

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