Legal Views: Your Hobby is a Business!

Legal Views

Has a friend or family member ever purchased one of your handcrafted items?  Do you have an Etsy shop or other e-commerce site where you sell your handmade goods?  Do you want your products carried in a brick-and-mortar retail shop?  If you answered ‘yes’ to any of those questions, then your hobby is a business and you need to treat it that way!  Read below for the top three reasons you should consider transforming your hobby-business into a legitimate business.

Scales Protect your assets!

When you sell a product on the open market, you become liable for that product.  If some form of harm is resultant from your product, you could be legally and financially liable for the damages.  You can protect yourself and your personal assets from liability by forming a legal business entity.  There are a variety of business entities you can form that provide varying levels of liability protection and tax benefits.  Read next month’s Legal Views post to learn more about these different business entities and consult a lawyer for advice on which entity path your company should take.

 Expand your business with Wholesale!

If you want to expand from retail and into wholesale, it is highly recommended that you form a legal business entity.  Most retailers prefer to do business with other, legitimately established businesses.  By forming your company as a legal entity, you are communicating other businesses that you are committed to your business and accountable to your customers (and to the government).  This endears a level of confidence in you as a business-person and in your business.  This assurance of your business legitimacy will translate to wholesale orders more readily than if you were still operating as an unformed company.

DollarYou owe taxes!

No one likes to pay them and they are certainly a hassle, but in spite of our collective aversion to taxes, we have a legal obligation to pay them.  When you make a sale, you owe sales tax (unless you live in a state without sales tax).  The size of the sale and who you sell to is irrelevant.  It doesn’t matter if you are selling a $400 sculpture to a stranger or a $20 bracelet to your mother.  You owe sales tax.  Each state’s requirements are different, so make sure research what your state requires.  In addition to sales tax, the profits you make or the salary you pay yourself need to be incorporated into your annual federal tax return.  Taking the time to understand your tax obligations will benefit you enormously in the long run and will help you avoid problems with the stress-inducing IRS.  Consult a tax professional in your area for expert advice and guidance.

[DISCLAIMER: This article does NOT contain legal advice and NO attorney-client relationship arises from reading it.  Always contact an attorney in your jurisdiction to learn about laws applicable to you.]

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