If you are engaged in any kind of activity that involves earning money, you may wonder if you are running a business or not. This is an important question, as it can have significant implications for your tax obligations, legal liabilities, and reporting requirements. However, determining if an activity is likely a business is not always straightforward, as there are many factors and criteria to consider.
In this blog post, we will provide you with some guidance and tips on how to determine if an activity is likely a business, based on the definitions and examples provided by the Internal Revenue Service (IRS) and the Small Business Administration (SBA).
What Is a Business?
According to the IRS, a business is “an activity carried on for a livelihood or in good faith to make a profit” . The IRS further states that “the facts and circumstances of each case determine whether or not an activity is a trade or business” . The IRS also provides a list of factors that can help you determine if your activity is likely a business, such as:
- The manner in which you carry on the activity: This factor considers how you conduct your activity, such as whether you keep accurate and complete records, follow a business plan, seek expert advice, etc. The more organized and professional you are, the more likely your activity is a business.
- The expertise of you and your advisors: This factor considers how much knowledge and experience you and your advisors have in your activity, such as whether you have education, training, skills, licenses, etc. The more qualified and competent you are, the more likely your activity is a business.
- The time and effort you put into the activity: This factor considers how much time and effort you devote to your activity, such as whether you work full-time or part-time, hire employees or contractors, etc. The more time and effort you invest, the more likely your activity is a business.
- The expectation that the assets used in the activity may appreciate in value: This factor considers whether you expect to make money from the increase in value of the assets used in your activity, such as land, buildings, equipment, etc. The more you rely on appreciation rather than income, the less likely your activity is a business.
- The success of other activities that you carry on: This factor considers whether you have been successful in other activities that are similar or related to your current activity, such as whether you have made profits or losses, how long you have been engaged in them, etc. The more successful you are in other activities, the more likely your current activity is a business.
- The history of income or losses from the activity: This factor considers whether you have made profits or losses from your activity over time, such as whether you have had consistent or sporadic income or losses, how large or small they are, etc. The more profitable you are over time, the more likely your activity is a business.
- The amount of occasional profits from the activity: This factor considers whether you have made occasional profits from your activity that are large or small compared to your investment and expenses. The larger and more frequent your occasional profits are, the more likely your activity is a business.
- Your financial status: This factor considers whether you depend on the income from your activity for your livelihood or not. The more dependent you are on the income from your activity, the more likely your activity is a business.
- The elements of personal pleasure or recreation involved in the activity: This factor considers whether you enjoy or have fun doing your activity or not. The less pleasure or recreation you derive from your activity, the more likely your activity is a business.
According to the SBA, a business is “a person or entity who carries on a trade or business for profit” . The SBA also provides some examples of activities that are likely businesses, such as:
- Selling goods or services online or offline: This includes activities such as selling products on e-commerce platforms, running a retail store, offering consulting services, etc.
- Renting out property or equipment: This includes activities such as renting out residential or commercial property, leasing out vehicles, equipment, or machinery, etc.
- Creating content or products for monetization: This includes activities such as creating blogs, podcasts, videos, e-books, courses, etc., and earning money from advertising, sponsorship, subscription, or sales.
How to Start and Grow Your Business
If you determine that your activity is likely a business, you need to take some steps to start and grow your business legally and successfully. Some of these steps include:
- Choosing a business name and entity: You need to choose a name that is catchy, memorable, and relevant to your niche and business model. You also need to check the availability and legality of your name with your state and local authorities. You may also need to register a domain name and a trademark for your name.
You also need to choose a business entity that suits your needs and goals. A business entity is a legal structure that defines how your business is organized, taxed, and liable. The most common types of business entities are sole proprietorship, partnership, limited liability company (LLC), corporation, and S corporation. Each type has its own advantages and disadvantages, depending on factors such as ownership, control, liability, taxation, and administration.
You should consult with a lawyer or an accountant to help you choose the best name and entity for your business. You should also register your name and entity with the appropriate authorities and obtain the necessary licenses, permits, and insurance for your business.
- Creating a business plan: A business plan is a document that outlines your goals, strategies, and actions for your business. A business plan will help you organize your ideas, identify your strengths and weaknesses, analyze your opportunities and threats, and measure your progress and results.
A business plan should include the following sections:
- Executive summary: This is a brief overview of your business plan that summarizes your mission statement, vision statement, goals, strategies, and financial projections.
- Market analysis: This is a detailed analysis of your target market, including its size, demographics, psychographics, needs, wants, and preferences. You should also analyze your competitors, their strengths and weaknesses, and their market share.
- Marketing plan: This is a comprehensive plan of how you will promote and sell your products or services to your target market. You should include your marketing objectives, strategies, tactics, budget, and metrics. You should also identify your unique selling proposition (USP), your brand identity, and your value proposition.
- Operations plan: This is a practical plan of how you will run your business on a daily basis. You should include your organizational structure, your roles and responsibilities, your policies and procedures, your systems and tools, and your legal and ethical compliance.
- Financial plan: This is a realistic plan of how you will finance and manage your business. You should include your income statement, balance sheet, cash flow statement, break-even analysis, and financial projections. You should also include your sources of funding, your expenses, your revenue streams, and your profit margins.
You can use a template or a software to create your business plan, or you can hire a professional to help you. You should review and update your business plan regularly to reflect your current situation and goals.
