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A hobby can be more than just a fun way to spend your free time. If you're looking to earn extra money, consider turning your passion into a business. If you enjoy hobbies such as baking or photography, in particular, chances are you won't mind getting paid to do it, even on a part-time basis.

Setting Up a Business

Turning a hobby into a business requires research along with the willingness to make an upfront investment. The U. S. Small Business Administration recommends conducting market research to determine if there's a need for your business. Then, check out similar company websites or visit local shops to discover the going rate for your product or service. If you think your business idea is still feasible once you've done your research, consider whether you need to further your education through training or classes to take your hobby to the next level.

Next, draw up a business plan, including a budget. This should cover the costs of any necessary equipment, inventory, office or retail space, and marketing. As you draw up your plan, consider how you'll be funding your venture.

Decide how you want to classify your business. You can register as a Limited Liability Corporation (LLC) or you could file as a sole proprietorship, which would allow you to file your business income and expenses on Schedule C of your tax return. Talk to your insurance agent about running a home-based business as well as the need for additional business insurance. It's also a good idea to open a business checking account to separate business and personal expenses for tax purposes.

Maintaining Financial Wellness

The best way to ensure you're not spending too much on a new business is to start slowly and build gradually as demand for your product or service increases. Depending on your tax situation, if you spend more than you earn in the early stages of running your business, you may be able to offset those losses against your primary income on your federal, state, or local tax returns. Finding a partner or an investor is another option that may help you avoid overspending on your new business.

Once you start making a profit, talk to a financial advisor about how to save or spend the money. Depending on your specific situation and financial goals, you may want to invest in your children's college tuition, a new home, or even your retirement fund. Another option is to reinvest your profits into the business to help it grow and potentially become your primary source of income.

Changing Your Mindset

Before devoting a significant amount of time to starting a business, consider the impact it'll have on your life. When you turn a hobby into a job, your passion for the activity could be affected. For example, if your business takes off and you're suddenly struggling to keep up with order fulfillment, you might not find your fun creative outlet to be the escape it once was. Another factor to consider is that planning for and running a business could take away from time you used to spend on your hobby. Managing business administration and logistics can be more time-consuming than you might expect.

If you've done your research, weighed the pros and cons, and you're ready to turn your hobby into a business, learn about all of the different small business services, including financing options and payment solutions.

This information and recommendations contained herein is compiled from sources deemed reliable, but is not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or is offering any tax, accounting, or legal advice.

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