# When does it officially become a business?



## WackoWasko (Nov 14, 2009)

Right now a friend and I are planning to buy the essential materials and start screenprinting clothes to sell to students at our high school. We have looked through all of our local laws and know what we need to start a business, but when does it go from being a hobby to a business?

We are thinking of obtaining a seller's permit as we sell strictly to students, and then if that goes well and we decide to continue on and maybe even try to hookup with local stores and retailers _then_ fill out the paperwork and get a business license. Is there a certain net profit cut-off where we absolutely need a license? We are in California. 

Thanks for any help!


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## Girlzndollz (Oct 3, 2007)

Hi Conner,

Welcome to the forum. First suggestion is to go to the website for doing business in California. In PA, it's called PA Open for Business. I've been to the Jersey site, too. Just google... you will find it.

On that site, you will find the answers that are "specific" to your state. Each one can have various rules, etc.

A faster way to get a solid answer, and likely for free, is to call around to some local accountants. In the early stages of courting you as a new client, they will answer some of these lightweight questions for free, to display their knowledge and willingness to be accommodating. They are looking to do your taxes each year, they want to impress. Within reason, they'll answer some basics on the first call, and this is surely a basic one.

But, I can't tell you, I'm not doing biz in your state and I'm not an accountant.

Also, it does not matter "who" you sell to. Once you "sell" you have made a sale. You are in business.

Whether or not your paperwork is filed and such is a separate matter. 

Best wishes.


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## RM5 (May 6, 2009)

Have you tried a community college in the Southland. Know you you'all have some budget cuts in Socal. But used to be great courses in a number of schools for just about anything.


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## kimura-mma (Jul 26, 2008)

As Kelly pointed out, once you sell something, you are "in business." So basically, that's the line between hobby and business. Legally, you are supposed to be registered before you start operating, although each state has its own laws and requirements. But keep in mind, once you start making money, you need to be paying taxes. And since you will be selling at a point of purchase, you need to collect sales tax and then pay that sales tax to the government every quarter. Kelly really offered the proper advice... contact a local accountant.


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## Bigpapi (Nov 15, 2009)

I would set up an agreement with your partnet too. Right now you guys are all good with each other, but it only takes one disagreement to throw everything into wack. Set up some sort or liability agreement between the two of you. It doesn't have to be too official, but something so you know what each others responsibilities are and what your expectations are.

What happens if he gets a girlfriend next week, doesn't want to put in as much time, and your stuck with all the work? That's just an example, but it should be layed out, just incase.


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## Nikelover (Nov 6, 2009)

hobby if you dont make a profit from it, but when you already made profit from it its already a business and you have an obligation on the government to seek permits and pay dues.


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## FRESH. (Nov 22, 2009)

The moment you decide you want to sell for a profit!


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## bungy (Aug 24, 2006)

I am in Australia, so it will be a little different to the USA.
_
 _In Australia: 
Hobbies and businesses are not subject to the same tax requirements.
If you conduct a hobby, you don't need to include the income in your tax return.
But, you cannot claim any expenses or losses you incurred in conducting the hobby.

Where you are conducting a business, you must include all the income earned by the business in your tax return. You may also be able to claim tax deductions for expenses incurred in conducting your business and/or claim business losses against other income you have received.


I did a quick search for USA hobby/business and came up with this:
Turning hobby into business means tax breaks

for those who don't want to click the link. 

The main points are:

*Hobby vs. business *

The Internal Revenue Service defines a hobby as an activity you pursue without expecting to make a taxable profit. Basically, you do it because you like it, regardless of the cost.But if you demonstrate that you are involved in an activity with the expectation of making money on it, the IRS will consider it a business. As such, you'll be able to deduct expenses directly from your income. You even can deduct overall business losses in the years you don't turn a profit.
You must, however, make the right moves to convince the IRS that your sideline is a legitimate business.
*
What constitutes a business *

The IRS uses two tests in determining whether your activity is a business rather than a hobby.First, the profit test demands that you show you earned money on the activity in three out of five years.
If you can't meet the profit test, you get another chance to convince the IRS that you are running a business by passing the factors-and-circumstance test. Here, the tax agency takes a subjective, individualized look at your pursuit.

They will look at things like


Whether you carry on the activity in a businesslike manner. This includes, for example, keeping good books and records, promoting your business and holding down costs where possible.
How much time and effort you devote to the enterprise.
Whether you depend on income from the activity for your livelihood.
If your losses are due to circumstances beyond your control or are normal for a business in its startup phase.
Whether you change your methods of operation in an attempt to improve profitability.
The knowledge and background you (or your advisers) have in running such a business.
If you were successful in making a profit in similar activities in the past.
Whether the activity makes a profit in some years and, if so, how much.
Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
The element of personal pleasure involved in the activity. That doesn't mean you can't enjoy your new business, but you better be getting more out of it than just a good time.
*IRS looks at everything *

In determining whether you are carrying on an activity for profit, the IRS says all the facts are taken into account. No one factor alone is decisive. So be prepared to come through in several areas to convince the IRS that you're making a good-faith attempt to run a business and not just looking to illegally claim the more-expansive business tax breaks.By successfully transforming your hobby into a business, you'll be able to deduct your associated expenses on Schedule C or C-EZ without worrying about a percentage limitation. You might even find a few more you can take, such as one for the home office you set up to take care of your new endeavor's administrative chores.
And if you have an occasional year where you lose money, the loss can help reduce your other income and lower your tax bill.



Hope it helps.


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