So your side project or hobby turned into a full-fledged business, now what? Here are the steps you have to take to make it official.
Technology has transformed the modern workplace to the point where there frequently is no need for a physical place where everyone goes to work. Additionally, work is no longer seen as a lifetime commitment to one or two companies.
As pointed out in the article “Workplace Transformation and the Changing Nature of Work,” the notion of “work” has more flexibility than ever before. In particular, Generation X and Y workers prefer greater autonomy. Which is why just about everyone has a side project or two in addition to a main gig that provides a regular paycheck.
To quote M.C. Hammer, when do you decide if your side project is “too legit to quit”—no longer a hobby or a way to make extra income, but a full-fledged business?
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Signs Your Side Pursuit is an Actual Business
Check for the following symptoms. Are you:
- Working nights and weekends to keep up with the demands of your side project(s)?
- Thinking about your side project(s) when you are at work when you are supposed to be dedicating your time to, well, work?
- Increasingly bored and/or frustrated by your regular job?
- Making enough money from your side project(s) to pay your bills without that regular check from your day job?
All of these (particularly the last one) are indications that your side pursuits constitute an actual business. Even if you decide to continue working your “day job,” you can’t treat this other income source as chump change. There are legal and tax implications to consider.
When the Hobby Becomes a Business
You are legally required to report any source of income as taxable income. However, there is a difference between income from a business and income from a hobby. And there are tax advantages to business income, including deductions for expenses related to conducting the business.
Selling stuff on eBay is not necessarily a business. But the IRS may consider selling stuff on eBay a business when you:
- Use a business name instead of your own name
- You advertise or market for the purpose of selling or making money from what you are doing
- Maintain a separate bank account under your business name
- Are profitable for at least three out of the last five years
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Get Down to Business
The bottom line is that whether you are selling stuff on eBay or selling a mobile app on your website, if you’re doing anything with the expectation of making money off of it, you’re running a business. It doesn’t matter if it’s part-time or full-time, whether you have another full-time job or not. You must take steps that legally protect both you and the goods and services you provide in your business. Some steps to consider:
- Form a business structure. In this kind of a situation, your business is usually a solo proprietorship. This is the simplest business type. Of course, if you have a partner or joint owner, you set up a partnership. However, this can leave your personal assets at risk should someone decide to sue you. If that’s a concern, you can either incorporate or form an LLC (limited liability corporation), although this is a much more complicated process to establish. If you’re unsure, get professional legal advice.
- Obtain a Tax ID. Also called an Employer Identification Number (EIN), this is how the IRS tracks your business income separate from income you report from your Social Security Number (SSN). The form to get an EIN is available free from the IRS.
- Keep good records. Track your expenses and your income. Keep business accounts separate from personal accounts. This is important to keep tabs on your business, anyway, but is of particular importance if you and your business ever undergo a tax audit.
- Get the licenses you need. This depends on the type of business, but can include various professional licenses, tax licenses and permits required by state and local authorities.
If you’re making money from a side project, congratulations, you’re running a business. Just remember, you can’t afford to treat it like a mere hobby.