Let’s say that there is something that you like to do and you do really well. You’re a great cake decorator or photographer or maybe you like to work on cars. Your friends and family likely tell you that you’re so good at it that you should start a business. People tell you that if you start a business you can work for yourself and get tax benefits. You think about it and it sounds like a great idea! You could do the things you like to do and get paid for it at the same time.
When you decide to start your business, you will hear that the odds of a business surviving the first five years is slim. If you’re truly determined to turn your passion into your business, you have a better chance of surviving that time period, but there are some things you should consider.
Hobby vs. Business
The IRS has very specific guidelines about deductions for business expenses for a hobby. Here are some questions you need to answer:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
If you want to make some money doing what you love, that’s fine, but if you want to make it a business you will actually have to focus on all aspects of the business besides just creating the product or service that is your passion. You’ll have to deal with permits, taxes, marketing, accounting and other important things that need to be done to keep the business running.
In order to have a successful business, you need to have something that will help you to stand out from the competition. It could be the product or service itself or the way in which you provide that product or service. In order to stand out, you need to answer the following questions:
- What is unique about the way your business will run?
- Why will customers decide to choose your product or service over those that are already available?
- Can you provide your product or service in a unique way on a larger scale than you currently do?
Let’s take the example of a photographer. You may love to take pictures and enjoy spending hours proofing and editing those photos to achieve the perfect final product. Will you be able to charge enough to enable you to spend that much time on each image or will you need to streamline the process in some way? Is the unique aspect that you are providing compelling enough that customers will want to pay more?
Prepare for Change
Finally, you must prepare for the fact that the hobby you currently love may lose it’s appeal once it becomes your livelihood. It’s human nature to enjoy doing something for the pleasure, but take a completely different attitude when forced to do the same thing. Are you passionate enough about your product or service that you will want to keep doing it, even when it literally becomes a chore? The opportunity to work for yourself and get paid for doing something you love, even if it is only a small part of the larger process of running a business, may be enough to propel you forward into entrepreneurship. If so, setting your expectations properly could make the difference in your success or failure.
Taking the Plunge
Research everything you can about your product or service. Find out who the competition is, what they are offering and how much they charge. You’ll need to find out about running a business and the Small Business Administration is a great place to start. There you can find out about business plans, government regulations, financing, and more. You can also check out our marketing resources for small business for great information on how to market your new business.
I have taken the plunge myself and would love to hear from you! Have you started a business? Is there any other advice you would give to someone thinking about starting one?