According to the Small Business Administration, 70 percent of Americans dream of one day starting their own businesses. And one of the most popular ways that people become entrepreneurs is by turning a hobby into a business. Whether it's restoring classic cars, collecting Beanie Babies, crafting websites or blogs, building furniture in your garage, hand-tying fly fishing lures, helping technophobic friends and family setup their home computers and wireless Internet networks, or any number of hobbies -- each can become a thriving business if you decide to put the necessary time and energy into it.
In a recent Wall Street Journal article, columnist Susan Solovic cites the example of Kristin Omdahl, who in 2006 parlayed her passion for knitting and crocheting into Styled by Kristin Inc., a Bonita Springs, Fl., provider of needlework patterns. The single mom says she now spends about 55 hours a week on her design work, up from 20 when the activity was just a hobby. "If you're passionate about something, it justifies the long hours," Ms. Omdahl says. "My hobby consumed me and I wanted to spend every waking hour knitting and crocheting, designing, sketching, creating -- and I knew that the only way I could spend that much time doing it is if I made it my work, too."
Here are the first few tips from Solovic's article, 10 Tips to Turn Your Hobby into a Business.
1. Evaluate your "joy" factor. Could transforming a favorite leisure activity into a business be too much of a good thing? Some people find that when they make something they love a full-time endeavor, they lose the joy they had for it. Do some soul-searching to determine how much you truly love your sideline – and whether you'd continue to take pleasure in it after turning it into a commercial enterprise.
2. Evaluate the market. Say you enjoy cake decorating, and your family and friends always praise you for your work. Are there people who would be willing to pay you for your craftsmanship? And has your talent risen to the level of other players in the marketplace? Be honest with yourself. Remember, family and friends tend to always say nice things. If the answer is yes, then ask yourself how you'll stand out from the competition. Perhaps you could fill a special niche or undercut competitors' fees.
3. Name your price. It's important to charge enough for your product or service to make a profit. To determine the right price, you'll need to add up your expenses and factor in intangibles, such as the time you spend on labor. Then ask yourself: Will people be willing to pay that amount? (See related article, "The Price Is Right. Or Is it?")
4. Try it out. It's always a good idea to test the waters first, so consider starting your business on a part-time basis while maintaining your day job. Just remember that customers will still expect the kind of service they'd get from a full-time operation. Be ready to put forth the effort and manage your business growth carefully.
There's just one thing: If you decide to start taking tax deductions for your new business that was once a hobby, be sure that you're familiar with a little something that the IRS calls the "hobby loss rule." Long story short, if you want to benefit from the tax deductions and other advantages that having your own business affords you (which can be considerable), the IRS wants to be sure that you're really operating a business and not a hobby.
Here are some of the things that the IRS considers when it makes that particular determination:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
Not sure if your hobby will make the cut? Millions of people have successfully turned their hobbies into businesses, and you can too. Why not give it a try?
