Back in April, I wrote a Hatch blog about Discovering and Cultivating a Hobby. Today, I’d like to pick up right where I left off and talk about how to transition your hobby into a small business.

Get the Right Mindset

A quick skim of the Internet (is that even possible?) has confirmed to me what I initially felt in my gut, which is that the main difference between a hobby and a business is your attitude. If your goal is profit over time, then you can safely define your activities as a business. A business doesn’t have to make money in order for it to be a business. According to Dr. Brené Brown, you can identify with the thing you are doing even if you don’t make any money doing it because it allows you to be creative and enriches your life. Perhaps you are an accountant who also sells jewelry on Etsy—then you are an accountant/jeweler. Most businesses start out at a loss or breaking even, but they are still businesses because the goal is increased profits. Basically, your hobby becomes a business when you start treating it like one! Rachel Hollis shares an anecdote in her inspirational book, Girl, Wash Your Face, about going to conferences and meeting women making six figures in their business and hearing them refer to their very successful business as a hobby. Don’t diminish what you are doing while it’s not making a profit because then your attitude won’t change when it does make a profit. Determine what your goals are, and then decide if you want to stay in the hobby lane or get on the business highway.

Keep Your Finances Straight

The IRS cares more than you do about the distinction between a hobby and a business because of tax bills and tax deductions. If you decide that what you are operating is a business, then you really need to keep your finances straight. A hobby can come from a slush fund or disposable income, but a business requires basic accounting practices—even if numbers aren’t your thing. An easy way to keep track of business expenses is to open a separate checking account out of which to funnel income and expenses. If you are the sole proprietor of your business, your bank can help you open a DBA (“doing business as”) checking account (Charlotte Web DBA Spider Web Design). Once you have a separate account, run all of your expenses and proceeds out of this account. This creates a bookkeeping ledger for you. Do not buy groceries out of your business account. When you have some profit and you’d like go shopping, pay yourself first (transfer money to your regular account) and then spend the money out of your household account. When you do take money home, you need to regularly set aside 25% of your earnings for taxes, or pay quarterly taxes on earned income over $600/quarter. If you don’t make any money in your business, losses are tax deductible for a little while. For more information on the nuances with this, consult a good tax accountant.

Grow Organically

There are hundreds of businesses you can start for under $500. Dan Miller says in his book 48 Days to the Work You Love that most successful businesses start with little or no capital at all. Starting a business is risky—starting it on debt is even riskier! The added stress and pressure chokes out the fun and creativity, and people tend to make poorer choices when they are under stress. Also, there’s no need to put your personal finances at risk in order to start a business. I heard an episode on the podcast How I Built This with the founder of Belkin International, which makes cables for electronic devices. The founder said the reason why he didn’t go into the computer manufacturing business in the early 80s (like everyone else) was because he couldn’t afford to do so. Instead, he saw an opportunity to make computer cables (which he could afford), and recently he sold the business for 800 million dollars. Avoid debt, and reinvest profit back into your business in order to grow it. You’ll make smarter business decisions when all you have to think about is what is best for the business.

Hobbies are great; businesses are great, too. The distinction isn’t whether something makes money, but whether or not making money is the goal. The transition from hobby to business might be a natural progression for you if your goal is to earn money in the long run. If it is, get the right mindset, keep your finances straight, and grow organically. Go get ‘em, boss lady!