Over the weekend, I received a question from a reader, Rachel, about turning her hobby into a business. We’ve traded a couple of emails and, with her permission, I am publishing a summary of our exchanges, with her initial email first.
Hi. My name is Rachel. A friend of mine sent me to your site. I am looking to start my own business based on my stained glass hobby. Over the years, I’ve made many decorative items for family and friends as gifts. Recently, I went to a craft fair and was able to sell a few of my items through a friend. I’m in the process of looking into my options beyond just craft fairs. And, I’ve already got an estimate for my annual costs (equipment, insurance, etc.) I have a full-time job as a Corporate Accounting Manager and this is something I will do in my spare time. But, I would like to eventually transition into this full-time. What else would you recommend I do to get started in the New Year?
Rachel – thanks for the note. Exciting to hear that you are looking to take this new step. And, congratulations on your commercial success at the craft fair.
OK, there are several things to consider and there are many, many sites/blogs that will give you a lot of information. I prefer to start with the basic 3 steps first. You may already be aware of some of the points below. For others, you may need to either do more research or talk with a professional (your financial advisor or tax preparer or attorney). You can also send me a note back if you’d like to chat further – no strings.
To Plan is to Do Away With Assumptions and Unknowns
It’s good that you’ve got an estimate for your annual costs and that you’ve considered insurance already (particularly as you’re dealing with glass and kilns).
Even if this is a part-time business, I highly recommend a holistic business plan, particularly since you want this to be your full-time source of income in the future.
While there are many resources out there for business plans. I usually recommend Alex Osterwalder’s Business Model Generation. If you want something quicker and more guided, you could try bplans.com (their site has a lot of other good information as well). For an even quicker guided approach, use SBA’s new online tool.
Whichever method you choose, what’s most important is that you are clear on the target market segment(s) you are focusing on, which types of stained glass offerings (products AND services) you want to provide to those target customers and their value perceptions. These will help you develop your revenue / pricing / profitability models. I intend to write a lot more about these aspects shortly. In the meantime, you can refer to my post on Pricing. Given that you want to make this a full-time business eventually, the business plan should cover how you’re going to achieve that – how will you find customers and grow your customer base, what partnerships you will need (contractors, retailers, other commissioning businesses, etc.), how you’re going to market (website, blog, social media, email marketing, etc.)
The “Business “Profit” Test or “Hobby Loss” Rule, courtesy of the IRS
As part of your financial model, it is important to consider your tax implications. The IRS will treat any income, regardless of source, as taxable. So, some things to keep in mind here:
1) While you can offset or reduce that taxable income by the expenses incurred, you can only do so to the extent of the income received. So, for example, if your expenses are $10,000, but your income is $3000, then you can only offset $3000 worth of expenses.
2) If you expect your expenses to be higher than your income in the early years when you are doing this part-time, you may want to consider running the hobby as a business. This will allow you to do a few more write-offs and deductions against your overall taxable income (including that from your full-time job, investments, etc.) I wrote about some of this in a recent book review for Wealth Creation for Small Business Owners by James E Cheeks.
In order to declare your hobby a business, you need to show the profit intent and that the activity is operated in a businesslike manner. There are guidelines to help with this – check IRC 183 on the IRS’ website. This is not an easy read (none of the IRS documents are, for that matter). I am working on creating a simpler version and will email you when I post it.
3) Note that if you actually make profits in 3 out of 5 consecutive years (including the latest tax year), then the IRS will not consider it just a hobby. So, keep a good documented and backed-up record of all your expenses, time spent on the work, income, other operating costs (e.g. if you’re doing the work in a dedicated space or require special transport for larger items).
A Few Other Legalities to Consider
My final recommendation is that you check your local city / state regulations for operating this hobby as a business from your home. These vary so much from state to state and, sometimes, city to city, that I cannot give you a simple answer here. Even if you’re not going to be entertaining customers on your premises, there are likely some licenses that you will need, depending on your location. So, make sure that you check into all the requirements here to avoid any expensive legal hassles down the line.
So, these are my 3 basics for getting started with turning your hobby into a business. I hope I have not put you off or overwhelmed you. It might help to create a pre-launch timeline where you have a more granular task breakdown for all the checking / verification you need to do. Also, take a trip to your local SCORE or SBA offices to get some free help / guidance if you get stuck. And, of course, I’m here to help too.
Once you get to the stage where you want to go full-time, there will be a few other considerations. But, let’s deal with one phase at a time.
All the best to you in your new venture. Keep me posted, please.
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