How to Turn a Hobby Into a Business

How to Turn a Hobby Into a Business

writing a business plan

Did you know there are over 20 million sole proprietorships in the United States, and those individual businesses account for about 80 percent of all small businesses? The entrepreneurial spirit has fueled innovation and economic growth in this country since its inception, and people today are keeping the spirit alive and well. It makes sense because owning your own business can be incredibly rewarding. Being your own boss, creating something out of nothing, and even setting your own hours, are all intoxicating thoughts. That is why so many people dream about starting their own business.

In fact, I’m willing to bet you’ve thought about starting a business at some point. We’ve all had those flashes of inspiration and thought we might be on to something. Then reality sets in and we realize that starting a business usually takes a lot of time, money, and energy to get off the ground. Even then, we are reminded constantly by friends and family that most businesses fail within their first few years. So, after careful consideration most people put their business idea up on the shelf and go about their daily lives.

It’s true that there is a lot of risk that goes into starting a business. The statistics don’t lie. Waking up one morning and deciding to quit your job to go start a business carries a lot of risk, especially if you have a family that relies on your income.  This is how most people envision starting a business. Drop everything, dump the job, and put 110 percent into the new venture and hope it succeeds. Fortunately, not all businesses require this all-or-nothing approach and much of this risk can be minimized by easing into a business that stems from an existing hobby.

Why Hobbies Can Make a Great Business

Why do you have a hobby? Obviously, it’s because it’s something you enjoy. And what kind of businesses do most people start? That’s right, something surrounding what they enjoy. Think about it. If somebody loves to cook are they going to wake up one morning and decide to start an accounting business? Is somebody who enjoys sewing or knitting going to create a home-based web design business? Probably not.

This is why so many small businesses start with a hobby. If somebody is already doing something they love in their free time it isn’t uncommon to think about what it would be like to make money doing what you love. When you combine the love for an activity with the ambition to make some money along the way, a business is born. So, take a moment to think about some of your hobbies. Have you ever dreamed of a lifestyle where you did that every day and made a living? Granted, not all hobbies are suitable business ventures, but many can be. And if they can’t sustain a full-time income they may at least provide a second stream of income, which is always a good thing.

My Own Hobby Turned Business

Here’s a little secret. This website, and in turn my present career, all stemmed from a little hobby. Ever since high school I’ve dabbled on the web. I had no specific training or education when it comes to creating websites, but over time I built a number of sites, mostly for fun. From online message boards to personal sites, I simply enjoyed creating something out of nothing and seeing if other people would stop by to visit. None of this was done to make money, and in almost all instances no money was made and I had no real intentions of getting into this arena as an actual business.

The same could be said back in 2006 when this site came about. I had a comfortable job in the financial services industry consulting retirement plan participants, so I had no intentions of setting out to start an online business. In fact, I didn’t even know what a blog was back then. I just assumed it was something teenagers had so they could complain about how bad their day at school was. I didn’t know anything about WordPress or that there were sites out there actually making money at this. All I knew was that I enjoyed building and experimenting with websites, so with my background in personal finance and investing I figured it would be interesting to try something along those lines. So I did.

For at least the next year the site was still little more than a hobby. It was just something to tinker around with after work, learn more about creating websites, and read other personal finance blogs to see how they do it. This site didn’t make a dime, and I didn’t expect it to. Eventually, I learned about some ways to make money via ads, so I signed up for an Adsense account and put some ads up on the site. Nothing happened. I thought if I built it, they would come, and they would click on ads. Hardly. It took six months to earn my first $100 and even receive a payment. Not quite a thriving business by any means.

Again, this didn’t matter. I created the site as a way to escape the 9 to 5, not to turn it into a full-time  business. The thing is, after you follow a bunch of other sites and learn more about creating websites, you realize that many people are doing it as a business. After reading some inspirational stories about others who have made the transition from hobby to business I began thinking about what I could do to possibly transition my site from a casual hobby into something that could put a little money in my pocket. And so my focus shifted from wasting an hour or two each night playing with the website to taking a hard look at how I could begin treating it a little more like a business.

Long story short, the beauty of turning a hobby into a business like this is that there is little risk starting out. I didn’t have to suddenly quit my job just to register a domain and put up a website. I didn’t have to get a business loan to finance the venture. I simply took something I was already doing in my free time for fun anyway and over time began to focus that energy so the hobby evolves into a business. Who knew that after a few years I’d be completely self-employed and working from the comfort of my home?

Identifying Your Hobby

So, what do you like to do? Maybe you’re into photography, arts and crafts, writing, gardening, or art? No matter what your hobby is, there is potential there. Of course not all hobbies are created equal and some may have a more natural market than others, but there’s no stopping you from taking almost anything and finding a business opportunity.

Next, consider whether you’d be providing a product or a service. If you actually make something and think you could sell it to others, you’ve got a product. If you’re giving somebody your time or doing something for them, that’s a service. But don’t let that black and white definition stop you from thinking outside the box. For example, let’s say you love taking photographs. Most people think of the photography business as lending your time and expertise to take nice photos of somebody or something, which they can then in turn get prints of. But the opportunities are almost endless. Instead of that traditional photography business model, you could take photos of local landmarks or landscapes, get them printed and framed, and then simply sell the prints online, in local shops, or arts and craft shows. Or maybe you enjoy teaching others so you begin offering your own local photography class or local photo tour. As you can see, one simple hobby can have many business possibilities. It all comes down to what you enjoy doing.

Treating Your Hobby Like a Business

When you’re just starting out and haven’t even sold anything yet you probably haven’t even thought about the aspects of running a business, and that’s fine. If you test the waters by selling a scarf to your mom or set up a blog for the first time you don’t really need any special business items in place. But that doesn’t mean you shouldn’t be thinking about the business even before it becomes a business.

When it comes to setting up your business you have three primary options:

  1. Sole Proprietor – This is the most common and easiest business structure. Basically, you are your business. In the eyes of the government and IRS the money you make is yours, and will be taxed as income. There are no forms to file to become a sole proprietor, and if you simply begin making money selling something or providing a service, this is what your business will be. Keep in mind that you still may need to check with your city or county to see if a business license is required. In addition, if you’d like to create a business name to operate under you’ll usually want to check with your county clerk and file a DBA (Doing Business As). Business licenses and DBAs are typically just a nominal fee. Finally, since you are your business, you are personal liable for everything related to your business.
  2. Limited Liability Company – The next step up is a Limited Liability Company, or LLC. The LLC is similar to a sole proprietorship in that the income generated is generally just treated as personal income and taxed accordingly. The real benefit to an LLC is provides some additional liability protection because it is a business entity. Each state has different laws and requirements surrounding LLCs so you will need to check with your state to determine how to set one up. Typically, there will be an initial application fee and then minimal ongoing annual reporting and renewal requirements.
  3. Corporations – Finally, you have corporations. A corporation is a separate legal entity and affords the most liability protection if managed properly. Corporations come in two flavors: S-Corp and C-Corp. In the S-Corp the income is passed down to the individual and taxed as personal income. A C-Corp is instead treated as a separate taxable entity and must file its own corporate tax return. Corporations have the most stringent filing requirements and are usually not suitable for most individual small businesses.

After determining how your business will be structured it’s time to think about banking. One of the best things you can do is to separate your business and personal finances. In fact, if questions were ever to arise regarding your business activities and taxes, the IRS will almost certainly expect to see your finances separated. Not only does keeping business and personal money separate make your life easier, but it will help you ensure you get all of the tax breaks available to you.

So, shop around and see what banks have to offer in terms of business accounts. To make it simple you may just want to go to the bank where you already do business, but they may not have the best business accounts and there could be better options. At the very least you’ll want a business checking account. With this account you will be able to deposit funds from payments and write checks or use a debit card to make business purchases. At some point you may also want to consider a business credit card so you can get the added purchase protection and maybe even start collecting rewards or cash back.

While running a small business isn’t incredibly difficult, you may want to brush up on the basics of business law. Unless you have a fairly complex business situation, you probably don’t need an attorney, but having a few contacts at your disposal is always welcome.

Business Taxes

Some of the benefits of owning your own business are tax breaks. In most cases, expenses directly related to running your business are tax deductible. For example, if you were to begin selling your scarves online and wanted to build your own website to showcase your products and take orders you’d be able to deduct the cost of the domain name, web hosting fees, and design fees. If you go to the local craft show every weekend and set up a booth you’d be able to deduct not only the cost of the booth, but even the travel expenses to get back and forth from the event.

In addition to the obvious expenses involved with running the business there are additional deductions such as the home office deduction if you work out of the house. There are some restrictions on the home office deduction and you may want to consult an accountant when you file your taxes, but the potential is there for a significant tax break if you qualify.

When it comes to paying taxes, things are a little different if you’re used to working for an employer. In most cases when you work for someone else you receive a paycheck and then taxes are deducted automatically. When you make money on your own this isn’t the case. Instead, you’re receiving a gross payment and then it’s up to you to pay the necessary taxes. One of the biggest mistakes many new business owners make is forgetting about the need to pay tax on the income along the way. What happens is tax time rolls around and after crunching the numbers they realize they have a huge tax bill due since they haven’t paid any tax on all that business income. If money wasn’t set aside for taxes it could really put you in a difficult position.

This is where paying estimated quarterly taxes come in. When you have a regular stream of self-employment income coming in you will usually need to begin making estimated quarterly tax payments. This applies to both federal and state taxes. If you still have a job that withholds taxes you’re in luck because you can simply change your withholding amount to cover the extra taxes due. If you don’t have a job that withholds taxes, or you’ll make too much with your business to make that a viable option, then it’s time to set up those estimated tax payments. To learn more about these estimated tax payments be sure to see IRS Form 1040-ES.

Promoting Your Business

You may have the best product or service in the world, but you’ll never make any money if nobody knows about it. This is one aspect of having a business that many people are unfamiliar with. This may be the first time you’ve had to think about marketing or advertising and it can seem like a daunting task, but it doesn’t have to be.

Start with an online presence. It doesn’t matter if you’re only serving local customers or you’re trying to sell to anyone, anywhere. Having an online presence is a requirement these days. It could be as simple as a single webpage that showcases your business, products or services, location, and contact information. Everybody uses online search these days so you at least need the basics. In addition to a basic website you can obviously do much more such as create a Facebook page, use Twitter, list your business on directories or yellow pages, and even post on Craigslist. Ultimately, you want people to be able to find you online.

As important as being online is, having a local presence can be just as important if you sell your product or service locally. This means spending a little money to get some business cards made. Face-to-face encounters can be important and having something to give the person so they can remember you in the future can make all the difference in the world. In addition to business cards you may want to look at local advertising. Check with the local papers, bulletin boards, or even approach existing businesses to see if you can work together.

Putting It All Together

Turning your hobby into a legitimate business isn’t difficult, but you can certainly set yourself up for success if you take the time to plan ahead and do things properly. The beauty of a hobby turned business is that you don’t have to jump in head-first and risk losing it all if your idea isn’t successful. You can test the waters and take some time determining if the idea has any potential.

Worst case scenario is that you find out that the business doesn’t have as much potential as you thought, or that maybe you don’t enjoy the business side of things, so you go back to just doing it as a hobby. The best case scenario is that over time your little hobby has proved to be a profitable venture and may even provide you the opportunity to quit your regular job and focus on the business full-time.

Whatever the outcome it will most certainly be an amazing journey and great learning experience. You will learn new skills and meet new people along the way, and you never know when this may come in handy in the future.

Have you ever tried, successfully or not, to turn a hobby into a business? Be sure to share your comments below.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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