Do you have a Hobby or a Business?

A part of the boutique business world that confuses many designers (and new business owners of every type) is knowing whether or not they need to incorporate their business and how to go about doing so.

Let`s first view what the IRS considers the difference between a hobby and a "real" business. According to Barbara Brabec`s, The Crafts Business Answer Book: Starting, Managing, and Marketing a Homebased Arts, Crafts, or Design Business, a hobby income of more than $400 must be reported to the IRS. You may deduct all expenses related to earning this income, but it may not exceed your reported amount. Brabec continues on to note that in the case of a loss due to your hobby, you cannot deduct this amount from any other income. Furthermore, she notes that:

A "hobby business" becomes a "real business" in the eyes of the IRS at the point where you can state that you 1) are trying to make a profit, 2) are making regular business transactions, and 3) have made a profit at least three years out of five (page 111).

Most of us fall into the description of a "real business" so read on and we will outline the necessary steps that you need to take.

1) Determine the legal structure of your business. You have four choices:

A) Sole Proprietorship
B) Partnership
C) Corporation
D) Limited Liability Company

For excellent definitions of each of these terms, visit Isabel Isidro`s article which is located at:

http://www.powerhomebiz.com/vol3/legalstructure.htm#Sole%20Proprietorship

Note: to view the Limited Liability Company information, you need to click on the link near the top of the page.

2) If you plan to do business under any name other than your own, you will need to file a Doing Business As (DBA), also called a Ficticious Name Statement. A great list of answers about DBA`s can be found here. Many states allow you to file for a DBA online. To find out how to do this in your own state, use an internet search engine and type in "file DBA your state."

3) You may also want to obtain an Employee Identification Number (EIN) from the IRS. An EIN is required for any business that hires employees. If you choose to not hire employees, it is optional whether or not you will get an EIN. Basically, this is the number that you will use to file your business taxes. Additionally, some banks require an EIN number to open a business account, while some will allow you to use your personal social security number. EIN numbers can be obtained on the phone, by mail, and online. Visit the IRS website and type in "EIN" for more information.

4) Lastly, obtain a sales tax number. Sales tax numbers are required for any business that sells a tangible item, even if only at certain times of the year (such as craft fairs.) *NOTE: All sellers need to obtain this number, even if you only have a hobby! Once you obtain this number, you will start charging state taxes to your customers and paying them at regular intervals to your state, unless you live in a state with no sales tax. The benefit of a sales tax number is that you will be able to buy supplies from wholesale companies and will not have to pay sales tax. This will ultimately increase your profits since you will be getting your supplies from cheaper sources. To apply for a sales tax number, run an internet search for your state`s department of revenue.

If you are ready to start registering your business, but you find this information overwhelming consider contacting a lawyer to help you. Also, bizFilings.com is a website that for a nominal fee will do almost everything for you.


Copyright, 2007, Inch By Inch Designs

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