How do you know if you’re running a business or hobby?
Welcome to Entrepreneurs Accountant and thank you for visiting our page.
For those of you who have started a hobby and have found your passion…I congratulate you!
For those of you have made the ultimate decision to turn your hobby into a business…I say welcome to the world of Entrepreneurship. It’s going to be one hell of a ride but with your determination, passion and drive you will achieve your goals [this journey will test you!].
So what’s the difference between a hobby and business?
How do you know if your income will be assessed for tax purposes?
What are the characteristics of a business?
If I do make that ULTIMATE DECISION to turn my hobby into a business, what steps should I take to ensure that I have set myself up with the right business foundation?
Should I obtain professional advice?
What’s the difference between hobby v business?
The MAIN difference between a hobby and a business, is that a business is run with the INTENTION of making a profit. A hobby is a spare-time activity or pastime pursued for pleasure or recreation [if you can find your passion and turn it into a business, then you’re one lucky person!].
There is no single rule for determining whether you are running a business, however the Australian Taxation Office [ATO] have provided some guidelines which may indicate that you are running a business (for those of you who are outside Australia, check your country’s rules regarding this):
- You have made the decision to run a business
- You have sought advice from a professional such as a Chartered Accountant [or are thinking of doing so]
- You have registered for an ABN [Australian Business Number]
- You have elected to be registered for GST
- Your intention is to make a profit or have made a profit since making the decision
- Your income is repetitive in nature [i.e. you’re incurring weekly, monthly or yearly income from your customers]
- Your business is planned, organised and carried out in a businesslike manner such as:
- keeping business records and account books
- you have prepared a business plan
- setting up a bank account in your business name
- operating from a business premises
- you have obtained the necessary licences to operate
- you have registered your business name such as “Breakfast at Tiffany’s”
If you answer yes to most of the questions above, then there’s a good chance that you are running a business. At the end of the day, the decision to quit your job and pursuit your passion is not something that one takes lightly. I made that conscious decision 4 years ago when I left a high paying job to pursuit my dream to become a Business Coach, Advisor & Mentor. My husband and I struggled for over a year. We had to adjust our personal budgets and cut down on spending. It was tough with two kids and a mortgage. BUT the rewards and perks of being your own boss [#girlboss] is SOOOO WORTH it!
Hobby Income Threshold
The amount of income earned from a Hobby is generally $20K or less. You should check regularly with your Accountant to ensure that your activities still qualify as a hobby. If your activities are a hobby and you supply goods or services to businesses, they may request your ABN when they pay you. As you don’t have an ABN, you can use the Statement by a Supplier Form from the ATO so that they don’t reduce your income by withholding tax.
Seek Professional Advice
If you have made that ULTIMATE decision to quit your job and pursuit your passion, my advice is to seek knowledge. Ask questions from those that have walked before you. Don’t be afraid to fail! Setup the right foundation for your business…you owe it to yourself to ensure that your business is ready. The following are some of things that I recommend as a MUST to any newbie Entrepreneur:
- Figure out who your customers will be and HOW to target them [this ties in to your marketing strategic plan as per below].
- Determine what structure will suit you and your business [for example should you be trading as a Company, Trust, a Partnership or as a Sole Trader]. Find out what the differences are and the tax consequences for each structure. Seek a Chartered Accountants advice on this.
- Find out what your Tax Obligations and Compliance requirements are.
- A business plan [forecasting the next 3, 6, 12, 18 and 24 months].
- A strategic marketing plan [with time frames].
- Set your goals and actionable items in bite chunk sizes [weekly, monthly etc].
- Have a budget…this is sooooo important. Know how much you need to spend [the key word here is need versus want]. Find out what you need to make in revenue to cover your costs.
- DO NOT over capitalise on setting up your business [this means you do not need to spend thousands of dollars to setup your business, be smart when it comes to spending].
- Have an accounting system in place such as Xero [which is cloud based and easy to use]. Track your income and expenses seamlessly.
- Have a POS system in place [i.e. determine how you are going to collect your customers money].
- Open two  bank accounts up FOR THE BUSINESS [one for operational purposes and the other for your tax obligations]. Keep the money separate for tax and GST so that you don’t freak out when it comes time to doing your tax.
- Seek advice and support wherever you can. Don’t be afraid to ask questions.
The above is literally what I had to consider when I started my own business. This is not an in-depth list. As an Entrepreneur and Business Owner, you learn as you go. You make mistakes…and you learn from these but you move on to conquer the next day!
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