Could Your Hobby Become Your Small Business?

Most people spend their entire lives working for someone else, sometimes doing work they enjoy and other times just earning money to pay the bills. They dream of retirement when they will have enough money to do something they love to make a bit of money and keep busy. Some entrepreneurs have figured out ways to make their hobbies pay, either by focusing their energies and knowledge in very specific ways or by creating side businesses that do not take too much of their time but are still financially and personally rewarding.

Suppose you like coin collecting and have a real passion for it. You are familiar with which coins have very high value, what coins other collectors discuss and search for, and which lower value coins can be located easily and sold for a profit. You’ve read extensively about or even seen famous coin collections exhibited. With this sort of hobby, it’s not the coins you manage to acquire that gives you a marketable advantage - it’s your knowledge of both coins and coin collectors and your ability to bring the two together. Collecting has given you that skill set, and setting up an online storefront/ecommerce site would be a straightforward way of making that available to others. Beyond that initial investment of time and money, all you’d have to do to make your business viable would be to spend more time on your hobby.

This seems like a win-win situation, doesn’t it?

There can be complications, however. A lot of hobbyists dabble in making money, selling to friends or acquaintances or just when they need a little extra cash. They ease into business creation so slowly they don’t realize they are failing to act like business owners, whether that means detailed record keeping or declaring income to the IRS. Obviously, this can get them into trouble - the more trouble the more successful they are.

A long-standing IRS rule is that the income you make doing your hobby is considered business income if you’ve made a profit for three out of five years, including the current year. Obviously, the more money you make, the more it would benefit you to consult a tax professional and ask for advice. You do not want the IRS to dun you for thousands of dollars because you were better than you thought at your interests.

It gets more complicated when you lose income because, while the IRS counts every bit of money made as income and expects you to report it, it only allows you to deduct losses against gains. So if you make $2000 selling coins and lose $775, you are responsible for paying taxes on the net $1225 of profit. If you simply lost $775 this year on your hobby, that’s just bad luck for you.

It’s always best for a business owner to keep scrupulous records and remain apprised of any tax laws that might apply to them, but don’t let those considerations scare you away from trying to build a business with any knowledge or skills you’ve picked up because of your love for something. Chances are that if you’re in expert in something, there’s a way to benefit from that expertise somehow. A little bit of brainstorming into the how could result in money in your pocket.

Millenials and Entrepreneurship

Here is Alexis Ohanian, co-founder of Reddit, being interviewed about Millennials, opportunities for start ups, and the sudden burgeoning of entrepreneurship among young people.  This blog has covered before the situation young people are in coping with the present bad economy. Ohanian point, that the lack of economic opportunities means that there's no opportunity cost for entrepreneurship, and that this is the silver lining in our economic cloud is an interesting one. He also points out that the barriers for entry into business have never been lower because of increased access to consumers and open source software.

Michigan Future, Inc. put out a report several years ago with the purpose of attracting knowledge workers to Detroit and thereby encouraging the revitalization of downtown Detroit. Their "knowledge workers" are Ohanian's audience as well - young, very bright, creative, willing to work hard and take risks. In the past they've gone where the jobs are and taken their energy and drive with them, reducing the fortunes of smaller cities already on a downward spiral and enriching larger cities with, arguably, enough knowledge capital. Now, however, with good jobs hard to find nationally, they have incentive to stay where they are and build their own opportunities.

The less fortunate part of this is that knowledge workers - people who can create with "a laptop and an internet connection" are only a small subset of the general population. Most would be small business entrepreneurs still need some capital to get started. Even if you have the knowledge to build a parts washer to spotlessly clean engine liners, you can't do it without investment capital. While some small businesses can be run from home, manufacturing plants, auto garages, medical care centers, and organic farms, to name but a few, cannot, and those are the businesses who will hire workers who are not knowledge workers but still need employment. The economy won't get better until there are jobs available to the average worker, not just the specialty one.

It is, however, a blessing for very bright people who don't want to move away from their communities to find their livelihoods. And, eventually, many knowledge workers do generate jobs from their risk taking. Reddit only has 28 employees, but Ohanian has other projects that fund average people looking for a break.  It's not an overall solution to the nation's economic problems, but for those people he's helped get exposure and funds it's been life changing. We need to see more of this virtuous cycle of economic activity.

Don't Be Ashamed of Asking for Help as a Startup

Is your city struggling to survive? It might not be the next Detroit, but a number of metropolitan areas like Oakland, California, are having a hard time, still leaking funds and people through the bullet holes left over from the machine gun fired by the recession. According to Jack Dorsey, a founder of the social media giant Twitter, small business may be what saves these cities. Another company he founded has been sponsoring a series on local entrepreneurship called "Let's Talk" and it recently visited the largest city to ever declare bankruptcy: the Motor City.

It's hip to be Square | Photo courtesy of Square

There, the conversation turned to several local business owners who use Square, a device that allows owners to accept credit card payments on their tablets and smartphones. This has given many companies a convenient way to facilitate operations, allowing them to grow much easier. Speaking of growing, one of the women spotlighted on the panel at "Let's Talk" owns several cupcake shops in downtown Detroit. Her sales have grown from when she opened her first shop--called Just Baked--in 2009 to more than $3 million as of late, making her one of the most successful female business owners in the nation. Interestingly, all of the other panel participants were women as well. One of them owns a boutique, another runs a letterpress studio, and the last makes jam. Each of them have taken a chance at doing what they love and have been successful so far. Though they are all successful now--partially due to innovative devices geared toward small businesses--they have all probably been through their fair share of failures. Successful entrepreneurs do not let failure scare them from chasing success--they use it as a learning experience and move forward with their new knowledge, instead.

Back to that founder from Twitter, though: Dorsey was also in attendance at another small business conference called Techonomy Detroit on the same day, as was Rick Snyder, the governor of Michigan and former head of computer hardware company Gateway; Dan Gilbert, founder of Quicken Loans; and Chad Dickerson, the CEO of Etsy. These goliaths of business were talking about startup boosters and how they could contribute to the recovery of a city that is known throughout the country as troubled. Their goals include bringing the style of entrepreneurship seen in Silicon Valley to the Motor City. Gilbert is already doing this, using his venture fund to contribute to the furthering of several startups located in the downtown area.

The moral of the story is that if your business is struggling, you should seek out assistance from other entrepreneurs and organizations that focus on bringing small businesses out of the home and into the neighborhood. Getting that little boost could be what you need to keep your operations flowing and growing for years to come. Who knows? If someone who sells cupcakes can cross the $3-million threshold, you too could have a chance at denting whatever market - green transportation, family portraiture, office furniture - you are considering.