Hobby or Home Business? How to Tell the Difference
Many people start out with a hobby that they eventually turn into a business. But how do you know when your hobby has crossed the line into business territory? Here are a few factors to consider:
- Motivation: If you’re creating and selling items because you enjoy it, it’s probably still a hobby. But if your primary motivation is to make money, you’re more likely in a home business frame of mind.
- Inventory: If you have a lot of inventory, especially if you’ve invested a lot of money in it, that’s another sign that you’re running a business.
- Marketing: If you’ve created a logo, labeling, and marketing materials, you’re clearly taking your business seriously.
- Sales tracking: If you’re carefully tracking your sales and inventory, that’s a good sign that you’re running a business.
- Business structure: If you’ve set up a business structure, such as a sole proprietorship, partnership, or LLC, that’s a clear indication that you’re running a business.
- Space: If you have a dedicated workspace in your home and you’re using it for business purposes, that’s another sign that you’re running a business.
- Customer base: If you’re selling to mostly strangers, that’s a sign that you’re running a business. If you’re mostly selling to family and friends, it’s probably still a hobby.
If you’re developing a home-based business that is bringing in increasingly significant amounts of income, or if you have invested heavily in equipment or inventory, you should be aware that your personal homeowners’ insurance policy will not provide coverage should a loss occur due to fire or theft. You should reach out to an independent insurance agent to get a quote on protecting your home-based business.
If you’re still not sure whether your hobby is a business, it’s always best to err on the side of caution and treat it as a business. This will help you to stay organized and compliant with all applicable laws and regulations.