You may have started off gifting your homemade candles to family and friends. Then word spread around, and friends of friends began contacting you, so you started selling your candles for the cost of materials. Now you’re thinking – how can I turn a hobby into a business?
For some, their hobby is for personal enjoyment and satisfaction. Others look to turn their hobby into a profitable business. Whether you are an artist, creative or maker, it is important to note that there is no dollar threshold to operate a business. However, if you do decide to turn your hobby into a business, there are a number of legal considerations you should keep in mind as set out in this article.
Am I Operating a Business or a Hobby?
Before you decide to open your Etsy store, it’s important to understand the differences between a hobby and a business, for example:
- Is the activity undertaken for business and commercial reasons? Do you intend to make a profit from the activity now or in the future?
- Is your activity carried out in a businesslike manner? Are you fulfilling orders or taking requests from interested parties? Are you selling your good or service in a commercial setting?
- Do you regularly undertake or perform your activity on a repeated basis?
Depending on your circumstances, you may be operating a business if you responded yes to these questions. You may have obligations to the Australian Taxation Office to declare your income and keep records of all your business transactions.
Failing to declare a business operation can lead you to significant fines and penalties. In 2010, an Australian man was convicted and fined $10,000 for raising and selling over 1,200 turtles online. He made gross sales in excess of $100,000 and did not declare taxes nor register a business.
Benefits of Turning a Hobby into a Business
If you decide to turn a hobby into a business, there must be some evidence that people are interested in your product or service (that’s great!). Aside from the enjoyment of earning a profit from an activity you enjoy, there are various benefits of turning a hobby into a business operation:
- you have an established identity when selling to the public and other businesses;
- you can claim tax deductions against your taxable income for business expenses;
- you have access to concessions and services from the government; and
- you can register a .com.au website once you have obtained an Australian Business Number.
How Do I Turn a Hobby into a Business?
Setting up a business is also a significant investment of your time and resources. You should plan what you will be selling and whether you can produce the good to a high quality. By selling a good to the general public, you will be bound by the warranties under the Australian Consumer Law. If you are offering a service (for example, consulting), consider whether you can meet deadlines or have the necessary qualifications to carry out the service.
Remember that while your immediate circle of friends and family may encourage you to set up a business, you should also research whether there is a market for your good or service. Research whether other competitors are offering similar products or services, and whether you can fund the business (e.g. to purchase supplies or hire staff). If you choose to trade online (on eBay, Etsy, Gumtree), understand how these platforms work and the associated fees. For example, trading on eBay will likely incur an insertion fee to list the product, feature fees (if used to upgrade a listing) and a final value fee if your product is sold. These fees can add up if you have a high-volume so should be factored into your finances.
Turning a hobby into a business requires a number of steps. A business advisor or lawyer can assist you to understand your obligations and legal requirements. While every business is different, turning a hobby into a business will typically involve the following steps:
- Apply for an Australian Business Number. There is no cost associated with applying for an Australian Business Number with the Australian Business Register. Depending on the business you operate, you may be required to apply for additional licences and permits.
- Register for GST. If you are operating a business with over $75,000 in profit per annum, you will be required to register for GST and include GST in the products or services you sell.
- Set up a business structure. Whether you are operating the business on your own or with a few friends, you should establish a formal business structure. If you decide to operate alone, a sole trader structure will be easiest to setup and maintain. However, if you have plans to expand quickly, hire employees and bring on others to help you manage the business, a company structure will be more suitable.
- Obtain insurance. Depending on the type of business, you may be required to obtain insurance to protect your business against liability.
- Set up a business bank account. For ease of bookkeeping purposes, it is advisable to set up a separate bank account from your personal finances. A business bank account will hold your business accountable and allow you to more easily keep track of how much you are making and spending.
Many successful businesses started as an extension of a hobby. If you are passionate and understand the market you are looking to operate in, turning a hobby into a business can become a successful venture. It is important to plan and prepare to maximise your chances of success in running your business. Understanding your legal obligations plays a major role in this process, including setting up your business and its structure. If you have any questions about turning a hobby into a business, get in touch with our business lawyers. Call us on 1300 544 755 or fill out the form on this page.