Turning your hobby into a business sounds like a great idea. If you love cooking, you could just as well be doing what you love as part of your home-based business. However, the IRS is in charge of declaring whether your hobby is a business or whether it is nothing more than a glorified hobby. Needless to say, if it is the latter, you can’t deduct your expenses further than the amount of income you earn.
Say, for instance, that you’ve decided to open a cookie baking business in your kitchen. You spend over $1,000 on new kitchen equipment and dispatch boxes, but unfortunately, in your first year, you only make $100 in sales. If the IRS rules that your business is only a hobby, you can’t deduct more than $100 in your hobby loss.
While there are no concrete rules for defining whether you operate a hobby or a business, the IRS explains that a business must actively be trying to make a profit. Consequently, the first rule of turning your beloved hobby into a real business is to establish a solid digital presence to attract buyers. Beware, however, the first few years are the hardest for small businesses, so don’t waste all your money in ill-founded investments.
Can your hobby make some business dough?
Is your hobby viable?
The first question you need to answer for yourself before you fully embrace the difficulty of a business launch is whether your hobby can make a profit. Let’s imagine you love baking. Do you think you have what it takes to transform your love story with cookies into a home-based cookie business?
The IRS will study not the viability but the profitability of your business, and the potential for growth, before defining whether you can register as a business owner or as a professional hobbyist. Consequently, it’s a question you want to clarify from the very start of your journey.
The advantage of a cookie business is that the basic investment is relatively low. You probably already have all the utensils and baking tools you need. However, you will need to bake in large quantities to generate a good income.
Additionally, you also need to decide on a type of products. You need to differentiate your home-based business from others. To carry on with the cookie example, you can use cookies as a present, such as a personalized cookie bouquet for celebrations, seasonal holidays and birthdays. A business that doesn’t have any USP – Unique Selling Proposition – can’t beat the competition.
Start your own company
When you are reassured that your hobby has the potential to drive profit, you can start the administrative process to create a business. You will need to decide on a business name, and to make sure you don’t commit any accidental faux pas, make a list of several options and test them with friends and relatives. Once you’ve settled on a name and you’ve ensured that the name is available with the U.S. Patent and Trademark Office, it’s time to start a company.
You have several options, from a C-Corp to an S-Corp for a family business. For home-based businesses, an LLC for either single member or multiple members – depending on your aspiration for growth – is the best solution. However, you might want to ask an expert for clarifications.
Create your brand visuals
One of the factors the IRS will be taking into account is whether you’ve developed a brand for your activities. You will need to spend a few days clarifying the image and the personality of your business, using this brand-building tool for guidance. Ultimately, you need to define clearly what you do and what your company stands for and compare it with whom your clients are. Your brand image will need to meets both requirements of identification and customer appeal. Additionally, you want your brand to be personable, and consequently, it should reflect your personality while remaining a professional brand.
Get a website where people can buy
Once the brand is established, it’s time to boost your digital presence with a website that can showcase your products to your potential buyers. If you’re selling goods and not services, you will find it helpful to work with a professional agency that can offer retail marketing services.
Indeed, an e-commerce site is more than just a website. It needs to fulfill further functions, such as enabling your visitors to see and filter through your product catalogue and presenting a full 360° display of each article. As too many DIY e-commerce websites fail to address the needs of their customers for informative and detailed product visuals, it can be something that would work against you in the eyes of the IRS.
Spread the word on social media
As a small business, you need to drive visitors to your website. That is precisely what visual content is about.
You’ve probably heard the saying before; content is king. Nevertheless, be aware that while content is king, the type of content people consume has evolved. Indeed, with Instagram sharing an average of 70 million photos a day, and over 72 hours of new videos being uploaded every minute on YouTube, it’s clear that users prefer visual content.
The images you share with your audience define your business. In fact, you’ll be surprised to know that for cookie bakers, the competition is very harsh on Instagram already, with several inspirational baker’s accounts to follow. Your reputation depends on the quality of your social media profile, so it’s time to stage great pictures.
Find partners who love you work
You can build a network around your brand. To continue to cookie business scenario, you can liaise with local coffee shops or companies and offer your cookies as part of a trial. This can help you to find potential partners, and similarly, help them to find out whether your products are right for their audience groups. Cookies can be a great perk for a company, for instance. The same argument is valid for any other home-based business. You need to branch out to partners to establish a network of advocates.
In conclusion, you need to give your business the chances to make a profit if you want the IRS to classify it as such. Creative hobbies make enjoyable and fun home-based businesses, but it’s only when you establish a digital presence that you can reach your target audience.