Here, we outline some very important rules that will help you conduct your new venture—rules that will help you see that if you’re going to be in business, you must act like it!
It is important you run your business like a business, not like a hobby – if you want to be treated as a business – by the government and her agencies, IRS, clients, investors and every other person that matters.
Rule #1: Show business intent.
You must show that you entered your business activity with the intent to make a profit. It doesn’t have to be a big profit; but it does have to be some kind of profit. A majority of court cases on this subject indicate that you are required to have an honest profit objective when you undertake the venture. Thus, if you have a sincere purpose in the venture, including eventually reaping an overall profit, it will be assumed that you have a profit motive.
A good way to document business intent is through creating a business plan.
Rule #2: Be businesslike.
Conduct your business in a businesslike fashion. Such advice may sound very simple, but it’s probably the single most important factor in the determination of your intent. Is the manner in which you conduct your activity in accord with good business practices?
What steps should you take to run your activity in a businesslike fashion?
1. Keep accurate and complete tax and other financial records.
2. Create a separate bank account for your business.
3. Be sure to control your own money.
Rule #3: Create a business plan.
It is very important that you take this step. The key, obviously, is that you want to show on your plan when you expect to start producing an overall business profit. You want to demonstrate that you expect to make a profit as quickly as possible. The numbers should have some reasonable basis in reality as well.
Rule #4: Remember that your own statements may testify against you.
In determining whether you are involved in business activities or just a hobby, listen to what you say. Again, we can’t emphasize enough that you must watch what you say! Your own words may be used against you in a court of law – especially where one tries to ‘use’ you on the grounds that it’s just a hobby and not a business.
Rule #5: Run your business the way similar profitable businesses are run.
You should try to show that your activity is being carried on in a similar manner to other profitable business ventures. If you want to be a millionaire, hang around millionaires, or as they say: “If you want to fly like an eagle, don’t hang around with turkeys.”
In addition, if you follow the path of a coach, mentor, or other financial expert, your chance of becoming successful is further enhanced. Adopt marketing efforts similar to those that are successful.
Rule #6: Understand that your prior business experience can help or hurt you.
If you have no prior business experience in a particular line of work, it may be said that you are taking a big chance, and therefore find it questionable that you ever had a profit motive. Investigate the business you are going into before you launch it. Do feasibility study; see how profitable the type of business you want to launch can be. Listen to training tapes, take seminars, and attend training meetings. This is very important. Every time you receive training or go to a seminar, document it.
Thoroughly investigate your business venture before jumping into it: The more thorough your investigation, the better the chance that it could be believed you are in business to do business.
Rule #7: Devote regular time to your business.
Although you don’t have to devote your full time and attention to a side business, it is very important that you devote some time in a regular manner to your activity. Businesses are conducted in a regular and systematic manner; hobbies are not.
Nobody says that a home-based business must be a full-time duty, but the more time and effort you put in it, the better.
Rule #8: Keep a history of income, losses, and steps you have taken to improve the bottom line.
Maintaining this kind of history is a very important step. In any business, expenses can certainly exceed income. However, real businesspeople do everything necessary (and legal) to turn those losses into profits. You should watch out for expenses that are unreasonable. Expenses should be in proportion to your income.
Your main objective should be to show that you are really trying to make a profit or turn your losses around. The best way to do this is to document, document, document! Document all marketing activities and all reasons for trips, noting the business intent and the necessity for taking the trip in order to make money.
Rule #9: Be more alert if you are involved in inherently “suspicious” activities.
These are business ventures that may have more potential for significant personal pleasure. Following are some examples:
• Antique Collecting.
• Travel and Tourism.
• Ministerial Duties.
• Training and Showing Dogs. Etc.
If you are involved in one of these activities, you need to pay close attention to all the other rules we have outlined above.
While the rules that determine whether you are running a business or doing a hobby may make starting a home-based business seem like a lot of work, we can assure you that learning these rules will make running your business a lot easier, and will bring peace of mind.
Plan to start your new business venture on the right foot by doing the things right the first time.