Join Whitney Johnson for an in-depth discussion in this video Determining whether you have a business or a hobby, part of Entrepreneurship Foundations.
- As an aspiring entrepreneur, one of the questions you need to ask yourself is, do I have a business or a hobby? The word "hobby" comes from the word "hobbyhorse," a fancy toy, hence the sometimes pejorative use of the word. Historically if you did something "just for fun" you were described as an amateur, which derives from the French word "lover of." Whereas if you engage in an activity for a reward, you were considered a professional. Over the last century as we've had the resources to give our dreams more sway, especially in the developed world, more and more hobbyist are becoming experts and there is more and more demand for a hobbyist expertise.
The first step in determining if your hobby is something you can do for fun and earn money is to gauge interest or demand. Are there people stopping you on the street asking about what you're wearing, downloading your do-it-yourself instructions, or watching you explain what you do on YouTube? That's a good sign. Once you've determined there's interest, the next step is to find out are people willing to pay for what you do. Scott Heimendinger, for example, has always cooked as a hobby.
In trying to make meals as tasty as possible he discovered the sous vide technique that allows for scientifically accurate temperatures. When he couldn't find a Sous vide cooker, he and his friends built one. After posting the DIY instructions online, downloads were so high he wondered if people would actually buy one. After pre-funding, the entire first production run on Kickstarter, in a matter of hours, he knew they would.
The third thing to consider, as you decide whether you have a business, is to ask the IRS if you do using the profit or three of five test. Have you earned money on this activity in the last three out of five years, including the current year? If you have you are presumed to be spending money to make money or have a profit motive. The IRS's concern is that you are deducting indulgences as business expenses. From a tax perspective this also applies to passion, or social-good projects.
Wether you're raising cancer awareness, or trying to raise the self-esteem of teenagers. I learned this the hard way. I had spent a lot of money, on the initiative Know Your Neighbor in order to help build community. "A wonderful thing to do!" said my accountant, but without having gone through the proper steps to become a non-profit this was a hobby. My expenses were not tax deductible. In addition to the three out of five test you'll want to show proof that you are trying to make money.
For example, do you have business cards, a well maintained set of books, a separate business account, current business licenses and/or marketing expenditures that would persuade an auditor that you really are in business. Now, more than ever, people can make a living doing what they love. So, if you're still looking for a business idea why not start with what you've already invested considerable time and money on, your hobbies.
- Finding your idea/problem to solve
- Finding your first customer
- Writing a business plan
- Deciding on a legal structure
- Building a team of employees and advisors
- Marketing your business
- Building a website
- Minding cash
- Managing stress
- Funding growth
- Balancing entrepreneurship and life