Are You Starting a Business or Making Some Money from a Hobby?

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I recently wrote about how many people who don't have a job are starting a business because the recession is a great time to get started. However, there's more to starting a business (at least if you don't want to be one of the many small businesses that have been closing up shop) than just hanging out the proverbial shingle.

So, how do you know if you are really starting a business or just investing time in building a hobby that throws off a little cash? New Business Mentor Leah Grant shares "Seven Ways to Know Whether You Have a Hobby or a Business". I love the first sign of having a hobby versus a business:

1) You buy more for yourself than you sell to customers.

Prom1986 I am a scrapbooker and an Independent Consultant and Executive Managerfor a scrapbooking products company, Close to My Heart. For me, this is not a business, it is a way to be immersed in my hobby and buy my supplies at a discount. I sell to my friends, but it's to support my habit, not make a profit.

Close to My Heart, and companies like them, such as Pampered Chef, Tastefully Simple, Mary Kay and Arbonne cater to special interest niches providing both products and a business opportunity. While it is possible to work these opportunities and build up to making a decent amount of money, most consultants dabble in the business portion while consuming the products.

Most importantly is the closing sentence of her post which almost gets lost in the shuffle, but it is the key takeaway:

This list is not to say that you can't make money doing something you love or that a hobby can't turn into a profitable venture. However, to qualify as a business you must be making a profit or working to get to that point through a consistent plan and persistent effort.

Sometimes a hobby can turn into a business or it might simply be a creative way to bring in extra cash where and when needed. Ashley shares an example of this in "Turning a hobby into a business".

Regardless of whether you have a hobby or a business you need to get clear on the tax implications of both. Don't Mess with Taxes has a good article on the tax issues for both.

Taxgirl has an excellent article on the perils of getting this distinction wrong in "Rethink Pink: Mary Kay May be a Hobby, Not a Business". The big takeaway (and all the details of the article are very worth reading) is:

So where did Brenda Konchar go wrong? She didn’t operate her Mary Kay activities like a business. She didn’t effectively promote the business - she didn’t even have business cards - and most of her customers were family and friends. She mixed her business assets with her personal assets. She lost money year after year and made no substantial steps to make changes. As a result, her business losses were disallowed.

Here’s the lesson to be learned: if you’re going to operate a business, treat it like a business.

One thing I at least have going in my favor is my degree in accounting and experience as an auditor that perhaps makes me a little too vigilant at times with the details.   Unfortunately for many other women starting business these details elude them either because of fear, lack of information, or procrastination.

Consider reading over the "5 Success Indicators to Knowing If You Have a Hobby or a Business" from The Wealth Spa. I happen to like the way number three is presented:

3. You’re making money.

Your business needs to be holding its own and then some. OR, at the very least, well on it’s way to profitability. You can’t be drawing out of your savings or racking up credit card debt with no idea of when you will actually start making money.

Hobbies can cost a lot with no hope of financial return aside from the sheer pleasure of engaging in them. Businesses can not.

Now for a startup it might seem like a dream, but the bottom line is a business needs to make money or at least have projections of when it will start to. Otherwise it is definitely just a hobby. The whole Enron way of fabricating money doesn't work in the real world.

So, whether you are a savvy person making money from your hobbies or starting a bona fide business, it pays to know the difference and treat it appropriately.

Paula Gregorowicz, owner of The Paula G. Company, offers life coaching for women to help you gain the clarity, confidence, and courage you need to have success on your own terms. Get the free eCourse "5 Steps to Turn Fear Into Freedom" at her website

Get the latest word on personal finances from an LGBT perspective and Paula's practical coach approach to the topic at Queercents

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