Turning a hobby into a small business | Part 1 – The big leap

For Small Business Month, Jamil Khan, Chief Strategy and Small Business Officer at H&R Block, shares a five-part series that guides future entrepreneurs on what they need to know when transforming their hobby into a small business. Block Advisors by H&R Block is honored to support Small Business Owners all year round. Our friendly experts provide affordable tax, bookkeeping, payroll, and business formation expertise and tools 365 days a year, backed up by the Block Advisors 100% Accuracy Guarantee.

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The ways of entering the world of entrepreneurship are many. Some inherit the family business, others start their first venture after extensive training through a trade school or university, and then there are those who fall into becoming a small business owner by accident when their passion turns from hobby to primary income source.

When I speak with people in the latter group, hobbyists turned full-time entrepreneurs, I hear how overwhelming it can be to make the “big leap” into small business ownership. Their tenacity is certainly admirable.

This is the first of a series of musings I’m sharing to celebrate National Small Business Month. Throughout May, I will present information from my own experiences, supported by the knowledge of Block Advisors tax, bookkeeping, and payroll experts, that I hope will help small business owners find long-term success – no matter their path.

Signs that it is time to “make it official”

I like to joke that deciding to own a small business is much like deciding to marry. Both represent a desire for a long-term commitment, both come with bright hopes and dreams, and both can have their fair share of challenges that may leave you wondering, “What was I thinking?”

If you can answer “yes” to any of the below, it may be a sign that your hobby has crossed over into small business territory – at least in the eyes of the IRS:

1. Your primary driver for your efforts is making money, not simply providing recreation.
2. Your venture now creates most (or all) of your income.
3. You are conducting business-like activities and investing in business expenses such as marketing & advertising, hiring employees, or purchasing insurance.
4. You have made a profit in three of the last five years.
5. You have business-related assets that you hope will provide a profit down the road.
6. You’ve had a similar business in the past that earned a profit.

If you found yourself nodding along as you read that last section – congratulations and welcome to the exciting world of Small Business Ownership!

The bottom line – next steps for making your hobby a career

Whether or not this news comes as a surprise, there are several things that I believe new small business owners need to consider as they lay the foundation for their success.

After reading these thoughts, I hope you better understand how the IRS views the differences between small businesses and hobbies. When it comes to taxes, the two groups are treated very differently. But there are many other things to keep in mind, some of which we will cover in upcoming series posts. Next week, I look forward to sharing some of the advantages of business registration with you. 

The hard truth is that the road to small business success and stability isn’t easy. It is widely known that only about half of all businesses survive to celebrate a fifth anniversary. Block Advisors tax, bookkeeping, and payroll experts are here to help you beat the odds.  The Block Advisors Resource Center also has valuable knowledge to help you optimize your chances of reaching that half-decade milestone.

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