Business Or Hobby?

When setting up a business online, it is important to establish from the beginning whether or not it is a business or a hobby.  Laying the proper foundations to answer this question will benefit you well into the future.

If you were setting up a conventional business, you would put together a business plan to guide your direction and to present to your banker when setting up your business financing.

More often than not, people jump into an online business with very little in the way of a plan.   Regardless of whether you are doing business the conventional way or on the Internet, there are some things that you need to setup to answer the question, business or hobby.

One item, which many fail to properly setup in the beginning, is finance and accounting. They use the same accounts for their business that are also used for their everyday living.  When it comes time to sort out which is which, the task can be quite daunting.

In the US and Canada, the taxman who sees this may assume that you have a hobby, not a business.  If this should happen, you will not be allowed to claim money spent on your business for income tax purposes.  The tax department has to believe that your are conducting business with a serious expectation of making a profit from that business.

If you are serious about your business, even if at the moment it spends its time in the red, instead of the black, you want to be able to prove that fact to the tax department.   You may not be able to use business losses immediately if you have no profits to offset against, but, losses and expenses can, in some cases, be carried forward against future income.

One of the easiest ways to answer the question, business or hobby in the eyes of the tax department, is to maintain separate bank accounts, credit cards and accounting software for anything related to the finances of the business. You’ll pat yourself on the back when tax season comes as well. Oh and while your discussing that new business credit card, find out if it is available with air miles, which can be used for business trips.

Using a separate accounting system for your business will also assist you in keeping track of how it is doing financially.  Even if all you use in the beginning is a simple spreadsheet to track money in and money out, you will be a lot farther ahead.  Trying to go back even a month and identify financial transactions that have taken place can cost you many frustrated hours.  Make sure you are also collecting the related paperwork as you go.  If you keep a monthly folder for your receipts you will have the paper trail needed if an expense if ever challenged.

At Worlds Best Online Business Resources, we do not claim to be professionals in the accounting or financial fields, and therefore recommend that you consult a professional with experience in the areas of home business and online marketing.  You might consider taking a course to gain or increase the basic bookkeeping skills you will need.

Consult with your accountant on which method to use to best track the financial side of your business or discuss your intentions with your banker so that he/she is able to inform your of the services they have to get you started.  Use the professional resources available to you to provide you with ideas and means by which you will be able to grow your business in a professional manner and take no chances of the question of whether you are running a business or hobby popping up.

To Your Success,

SherryD
http://www.wbobr.com