On Business Dave Says

Dave Ramsey

1/3/2013 12:01:00 AM

 

Dear Dave,

In your opinion, how do you know when a hobby officially becomes a business?

Dan

Dear Dan,

This is a great question. But when it comes to something like this, my opinion doesn’t matter nearly as much as what the Internal Revenue Service says.

According to the IRS, if you run a business for two years or more without making a profit, then it is not a business. You have to become profitable at some point. Otherwise, the IRS will declare your endeavor a hobby. Personally, I think that’s a pretty good marker. I mean, if you’re making money at something, it’s a business. It’s an income.

Now, I’m not talking about little tidbits, like making a doily for a friend for $5. But if you’re at the point where you’ve created an online store, or have a Pinterest strategy for displaying your product and making sales internationally, then your little hobby has become a business. But a business that doesn’t make money is simply a hobby. The difference is profit. And you need to become profitable in a reasonable period of time. If this doesn’t happen, you should probably just back up, admit your intent isn’t for profit and think about focusing any business aspirations you have somewhere else.

Still, there’s absolutely nothing wrong with having a hobby as long as you realize that’s what it is and you don’t let it negatively impact your financial well-being. Lots of people collect or make things, and it’s a stress reliever—it’s fun. They had no intention of making a profit from day one. Just make sure you love whatever it is you pour yourself into. Then, if it turns into something that’s a moneymaker, you’ll have the satisfaction that goes with loving what you do for a living. That’s a great feeling!

—Dave

Dear Dave,

I co-own a property in Florida with my business partner. I’m considering paying off the property and implementing an LLC to limit my liability. Does this sound like a good idea?

Leigh

Dear Leigh,

Doing that would take the general liability off of you, but it wouldn’t do anything to relieve the financial liability because you’d still be on the mortgage. Why not just buy out the partner instead?

I’d choose having a mortgage over having a partner any day. Let’s say the house is worth $120,000, and $60,000 is owed, then it would cost you $30,000 to buy him out of your half—the full market value minus the mortgage and expenses it would take to sell the place. Or, if neither of you wants the house, and then you sold it, you could split the results. That would be around $20,000 to $25,000 each after the dust settles.

If it were me, I’d either buy out the partner for $25,000 and pay off the mortgage or let your partner buy you out for $25,000—as long as they’re willing to take your name off the mortgage or get a new one completely.

Get rid of the partner, and then get rid of the debt. Both of them are trouble, but partners are an even bigger headache than debt!

—Dave

* Dave Ramsey is America’s trusted voice on money and business. He’s authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.