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Do You Have a Hobby or a Business?

September 18, 2021
By James Gussie

The key to success is having a hobby or business that makes you happy. You can find happiness in anything, but it’s important to have a goal and something to work towards.

A hobby is something that you enjoy doing for fun. It’s a pursuit of happiness and pleasure, not profit. A business is something that you do to make money.

There is a lot of advice out there that says if you discover something you love, “you will never work another day in your life.” Are you living your passion or operating a company if you follow that advice?

Is this a business or a pastime?

Every company is not operated full-time or for profit. Not every pastime, after all, enables you to earn money. However, if you start earning money from a side hustle, it may be tough to distinguish between what was once a pastime and the beginnings of a legitimate company.

What does it mean to have a hobby?

A pastime is likely to disappear without having a significant effect on your lifestyle or money. Even if you’re working full-time on it—and it’s paying your bills—still it’s a hobby, not a company.

It’s absolutely OK to be where you are currently if you have an interest. Things change throughout time. You may have pleasure doing something every day that will support you and your family if you are enthusiastic about a pastime today and convert it into a company later.

What is the definition of a business?

A company, on the other hand, requires greater investment. You may have invested your savings, your children’s education funds, credit card debt, or money borrowed from a bank or family. You have a vested stake in it working well. If you approach it like a pastime, though, you’re just increasing your danger.

How to convert your passion into a profitable company

If you’ve been investing in your pastime with the goal of earning a profit or expanding your reach, it’s time to consider turning it into a formal company. Without a clear strategy in place, or a blueprint for where you want to go, your investments may rapidly spiral out of control.

You don’t need to start a full-fledged company if you simply want to have a side hustle that generates some money on the side. Here’s how to turn that money-making pastime into a small company if you find yourself spending more and more time on it.

1. Determine your objectives.

You’ve probably been doing this activity for a while and have a good idea of what you want to get out of it. It’s now time to put those thoughts, aspirations, and wishes into action. Consider the following questions:

What do you want to achieve?
What does it mean to be successful?
Who is engaged in this?
What are the materials you’ll require?

Do you want to earn enough money to be able to leave your job? Are you interested in pursuing a passion project? Do you want to start a company with your family and friends?

Answering these questions will help you get started with the critical thinking that will be required to get your company off the ground. They also serve as a starting point for creating SMART Goals, which may help you create strategic actions to make your nascent company a success.

2. Put together a lean business plan

Setting objectives also paves the way for the creation of a Lean Business Plan. Writing a Lean Plan is an excellent method for converting a hobby into a legitimate company. It’s fast and simple to complete, adaptable, and you don’t have to fill out every part of a conventional business plan if you don’t need it.

Because you already have a product or service to provide, the Lean Plan may assist you in laying out how your company will operate. It pushes you to put it all together into a company identity while taking into account the industry you’re entering, possible rivals, and the expenditures, income streams, and milestones you need to meet.

You’re still early in your professional career, so don’t stress about doing everything right the first time. The beauty of a Lean Plan is that it’s designed to start as a simple sketch of what you want to achieve. You can always go back and fine-tune and modify it afterwards.

Download our free Lean Plan Template to get started on this stage, or use LivePlan for a more advanced planning experience.

3. Make contact with existing consumers

If you’ve been selling your products or services as a pastime, you’ve already built up a client base. It may be worthwhile to contact those you’ve previously sold to give them a complete pitch and assess their interest. This may be a low-cost way to test your full-fledged concept, make some early purchases, and even get some good consumer feedback before you ever launch.

It’s absolutely OK if you don’t have any customers. Other means may always be put up to test your concept before making it public. To promote your new company, place advertisements, create a pre-order page, or join forums. Doing so early on may help you determine if your pastime should remain a hobby or whether it has the potential to become a company.

4. Make a name for yourself and register with the state.

Your company need a name as well as an identity. This may be your own name, one of your children’s names, or something made up. Choose something that works for you; if circumstances change, you can always add a DBA (doing business as) name.

After that, you must register with your state. Many individuals accomplish this by going online and completing their own paperwork. (While it isn’t difficult, we suggest consulting with a tax adviser or attorney to create a strategy before attempting to do anything like this on your own.) Make sure your registration is current.

You must decide on the kind of company structure you want and how you will submit your taxes. Consult a CPA and/or an attorney to determine the appropriate company structure for you (partnership, LLC, S-Corp, etc.).

To identify your company to the IRS, you’ll also need to file for a federal EIN. Sorry, but you must pay taxes and disclose your earnings to the Internal Revenue Service.

5. Organize your money

You need to know how much money you’re spending, how much money you’re bringing in, and how much cash you have accessible as a company owner.

There are many choices available to you. You may use a spreadsheet to keep track of things, employ an accountant, or invest in cloud accounting software like Xero and Quickbooks.

It’s a good idea to have your accounting procedures in place straight away. Until your company develops to the point where you can outsource to a professional accountant, attempt to manage your accounting yourself (and do it on a regular basis). When outsourcing, make sure you choose a contemporary accountant or bookkeeper that is acquainted with advising services and can present your data digitally to keep you up to date.

6. Open a bank account for your company.

To keep your personal and business money distinct, you’ll need a business bank account. Even if you determine your “company” is just a pastime, it’s a good idea to keep your expenses separate so you can see how much your passion is costing you.

Make sure you understand the “Hobby Loss Rules” so that valid deductions aren’t accidentally rejected. Consult your tax adviser once again.

Obtaining company credit cards is also a good idea. Not to get into debt, but to be able to charge any unexpected company expenditures and manage your cash flow by just paying such charges once a month. Rewards points are another advantage of credit cards. Your company may amass a large number of points that can be converted into money or airline miles to help pay operating expenses.

Check out our advice here if you have poor credit and aren’t sure whether you qualify for a business credit card or loan.

Additional aspects to consider while starting a business

You may need to examine the following factors depending on the size and location of your company.

Obtain a sales tax permit.

It is your duty to collect sales tax at the point of sale, submit sales tax returns, and pay the money you have received if you are selling a taxable product or delivering a taxable service in your state. Depending on the amount of sales tax collected, you’ll have to submit and return the money yearly, quarterly, or monthly; the state will inform you what you need to do when you register.

If you’re an e-commerce seller, there’s a lot more to sales tax than you may think, so consult a sales tax specialist or an e-commerce accountant.

Purchase a BOP (Business Operating Coverage) insurance policy.

To safeguard your company and its assets, you’ll need business insurance. Most small company owners invest a considerable amount of time and money into their companies; don’t put your time, effort, or money at danger by failing to have the proper insurance in place.

The fundamental coverage for every company is a Business Operating Policy (or BOP). They’re usually about $500 for a year of coverage, so they’re not a big deal. This will cover the fundamentals of running a company, including a home-based one. There should be no reason why your company should not have a BOP.

You should also speak with a business insurance broker to see if you need any more coverage. If you provide services such as consulting, you may require Errors & Omissions insurance to protect yourself and your company. If you run an online or e-commerce company, you need Cyber Liability insurance to protect yourself against a variety of cyber risks.

You may now go from a pastime to a company at any moment.

You now know the fundamentals of what makes a company successful. There’s a lot more to do to make your company successful, but if you cover these fundamentals, you won’t be missing anything.

The greatest thing you can do now is review your Lean Strategy and start developing a structural plan for your company’s growth. Also, remember that if you find yourself missing simply having a fun pastime, you can easily scale down or pivot your company.

Note from the editor: This article was first published in 2014 and has been updated for 2021.

The do i need to register my hobby as a business is a question that many people ask. There are some cases where you may not need to register your hobby, but there are other cases where you do.