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What Separates a Hobby From a Business?

Today’s gig-based economy is encouraging more and more individuals with part-time or full-time jobs to discover hobbies that provide a source of side income. In a way, these hobbies operate as mini-businesses, taking up a few hours of extra work every week and also providing you with another source of revenue.

But where do the categorical constraints of a “hobby” end, and where does a “business” begin? And, once you recognize it, how can you change things to turn your hobby into a full-fledged business?

Why the Distinction Matters

First, let’s consider why the distinction matters. Treating your endeavor like a business has several distinct advantages:

  • Time allocation. Being involved in a business means prioritizing it when making a schedule. You set aside hours to spend on your business (such as 40 a week if you want to be full-time), while hobbies generally occupy the hours that are leftover in a given week. This distinction means you’ll spend more time on a business than a hobby, which means you’ll be able to do more and make more money. Everyone has a finite number of hours to spend during the week, and a hierarchy of obligations and responsibilities to gradually take those hours away; a business will always land higher in the hierarchy than a hobby.
  • Seriousness. When you’re more focused on something, and you take it seriously, you’re going to be more productive while you’re doing it. For most people, hobbies are a true passion, and engaging with that hobby makes you inclined to achieve “flow,” a mental state that balances challenge and enjoyment to put you “in the zone” and maximize your productivity. However, you won’t achieve flow consistently if you aren’t challenging yourself enough, which can often happen in a hobby. When you take your endeavor from “hobby” to “business,” you’ll step up your seriousness, and invest more focus in your efforts, ultimately achieving more productivity.
  • Tax effects. The IRS taxes “hobbies” and “businesses” differently, so depending on how much money you’re making and how much in taxes you’ll be paying, it may be advantageous to structure your endeavor as a business. One of the biggest differences here is that almost anything you buy for your business is tax deductible at the end of the year, which means you’ll save significant money on your tax bill when you claim your taxable income.
  • Profitability. Finally, most hobbies are focused on enjoyment, while businesses are focused on profitability. For most hobbyists, revenue is a secondary consideration; for example, they might enjoy woodworking in their spare time and create only the most “fun” pieces, but only sell pieces they don’t feel a particular attachment to. Someone who treats woodworking as a business would specifically create the pieces they researched to be the most popular and the most profitable.
  • Skill refinement. When you treat something like a hobby, you’re generally less incentivized to improve your skills over time. When you treat it like a business, you’ll be more committed to refine your skills and invest in new abilities. For example, when you learn how to invest in stocks and futures as a hobby, you’ll probably stay limited to making basic trading decisions since you’ll be intimidated to try more advanced tactics. When you treat it like a business, you’ll be willing to spend more time, money, and energy learning new things—and since you’re spending more time on it anyway, you’ll incidentally improve your skills as you practice.
  • Investment. Of course, labeling your hobby as a business also gives you an excuse to invest more heavily in it; it’s far easier to psychologically justify spending $1,000 on new equipment for your business—instead of just for your hobby. Businesses can be expensive, of course, with the SBA estimating that the average business costs $30,000 to create—but if you never invest in yourself, you may never end up reaching your true potential. What would you be able to do if you could advertise yourself more effectively? What if you had the tools that allowed you to create higher-quality work?

The Advantages of a Hobby

The previous section mostly focused on the advantages that a “business” has over a “hobby,” but there are a few advantages that hobbies have over businesses as well:

 

  • Expense. As previously mentioned, businesses can be expensive. If you don’t have a few thousand dollars to convert your hobby into a business, it might be less stressful and less burdensome on your budget to keep your hobby as just a hobby for the time being.
  • Enjoyment. There are some people who advocate the idea of following your passion as a career, but many others who reject this idea; turning your passion into a career means you’ll increase your risk of burning out. The thing you enjoy could become the thing you loathe, and you may lose the coping strategy you have to deal with the stress of ongoing work. Ultimately, hobbies are more enjoyable than businesses, and for some people, the enjoyment is far better than the money.
  • Diversity. When you convert your hobby into a business, you immediately lose a large chunk of your free time, which means you have fewer other hobbies to pursue; instead of focusing on lots of little hobbies to fill up your free time, you start dedicating almost all of your time to one source. This can be a good or bad thing, but most people find more enjoyment with an assortment of activities, rather than only one.

That being said, if your end goals are to make more money, improve your skills, or otherwise advance objectively, the “business” end of the spectrum is almost universally better.

How to Turn Your Hobby Into a Business

So what actionable steps can you take to turn your hobby into more of a business?

  • Allocate more time. First, dedicate more time to your endeavor. Rather than giving your endeavor whatever leftover scraps of time you have, schedule a bit of time every day to spend on your project. If you want to take it seriously (assuming you’ve already done your market research and have drawn up a business plan), you can quit your current job so you have a full 40 hours to dedicate to it. Don’t skimp here; the more time you spend, the more results you’re going to see.
  • Set new priorities. Next, you’ll need to think differently about your priorities. With a hobby, you might prioritize things like making the most of your free time, or getting a generically defined “few things” done over a set period of time. In a business, you’ll need to set new priorities, such as maximizing your profitability, or achieving a certain level of productivity. In general, businesses are more numbers-focused, so you’ll need to spend more time filling quotas and making projections than following your whims or making guesses. Everything needs to be grounded in research, and preferably, documented.
  • Make specific goals. Don’t just let it happen; if you want to build a business, you need to set specific goals for your business. For example, you might strive to achieve a certain number of customers, or work on one aspect of your business to perfect its execution. Think of your goals as rungs on a ladder toward higher revenue and profitability. Make sure you set both long-term goals, such as how much revenue you want to build after a year, and short-term goals that will help you get there.
  • Consider restructuring your operation. Finally, consider formally restructuring your business. For tax purposes, you can report income you earn from personal projects and solo businesses the same way, by reporting it as self-employed income (if you aren’t claiming it as income from a hobby). However, you may have an advantage if you form a partnership (if your hobby/business involves another person), or as an LLC. On top of that, you’ll want to formalize and document some of your operations, and attach a brand name to your business so it’s easier to generate visibility and customer loyalty.
  • Start investing. You have to spend money to make money. If you want people to take you more seriously (and if you want to take the business more seriously in your own right), start buying things and investing in services you need to be bigger, more effective, and more visible. These are things like tools, software, branding, ad space, and even help with services like accounting. Look for small businesses and independent contractors to save a few dollars here and still get the quality you need.

Most hobbies could feasibly generate revenue, and almost any revenue-generating hobby could be turned into a full-fledged business. There are tremendous advantages to making your hobby a business, especially if it’s highly profitable, but that doesn’t mean that hobbies aren’t worth your time.

Consider the advantages of both approaches, and make the decision that feels right to you. Anything you do to make a side stream of income will help you build wealth and stabilize your finances.

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Jeremy Webb

Chief technologi.st & Adventurer about.me/jeremy.webb

Jeremy WebbWhat Separates a Hobby From a Business?

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