5 Basic Steps to Turn Your Hobby into a Legitimate Business
"I've been honing my craft for years and currently make a significant income from selling my jewelry online, but I've never declared myself or my craft a business. While the idea of having my own 'official' business is intriguing, I'm not sure if/when it makes sense to do it. I was hoping you could provide me with some legal steps and guidance on how to make the switch from hobby to business. What are the pros and cons of making this switch? More to the point, does it benefit me to make it official?"
- Jaime T. Greensboro, NC
1. First, the business will need a name that is available for use. If you're already using a name you'll want to check with the North Carolina Secretary of State's office to be sure no one else is already using the same name. Take a look at www.NorthCarolina.gov for leads to this information.
Mermaid Tears by Shawn Morello Cannon. Photo by artist
||It's time. The IRS is looking more carefully at the "hobby" business and challenging the legitimacy of business deductions claimed by non-businesses. This is definitely something you want to avoid. In addition to the pleasure you'll get from having your own business, there are numerous legal and financial benefits. Besides, if you're making and selling things, you're already a business! Showing at craft shows is another solid way to grow your business and you really can't do this without the proper paperwork in place.
Here are five key steps you'll want to follow as you make your business a legal entity.
2. Next, decide the legal form you want to give your business. There are a number of choices available beginning with sole proprietorship and moving to incorporation as a C, S, or LLC corporation. An online search of each of these options will give you the information you need to make this decision. Each provides different legal and financial benefits; take your time on this one.
3. You must have a tax number or Federal Identification Number. I'm assuming you collect and pay sales tax on any sales shipped to North Carolina customers? If not, start now. You never want to mess with the taxman. Contact the revenue office in your state to get this going. This number will allow you to buy supplies without paying sales tax.
4. You'll want a dedicated checking account to receive your income and to use to pay all the bills related to the business.
5. Once the legal stuff is in place, set up a way to document income and expenses for your accountant's use at tax filing time. You can do this with a computer program or old fashioned paper and pencil. Either way, you'll want a filing system for the paper receipts for the money you spend should anyone ask for proof of the expenses you claim.
Creative people seem to have an aversion to doing office work, but it's just as important as the work you do in the studio. I know from painful experience it's much easier to set up the systems you need before you're confronted with piles of paperwork on your desk. Get it right up front and you'll have more time to do the work you really love. Believe me and good luck.
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