Help!!! New Business Starting

Q.  I am hoping to start doing a little development work on the side soon.  I am curious if I should just do it personally for now or if I should go ahead and set up a company.  I don’t anticipate much business or income at least not in this tax year.

A. Congratulations on your endeavor.  The question here is whether or not this will be a hobby.  It is irrelevant whether or not you “”set up a company”. If your activities are designed to make a profit,  you have essentially set one up already.  Regardless which type of activity this becomes, you must report any income produced by your activities.

If you do not ever plan to make a profit in these endeavors, the activity is considered a hobby.  You can claim expenses for your hobbies up to the amount of income you produce.  More on this can be found on the IRS website here.  For instance, I am an avid banjo player.  I have no group to play with yet.  However, if I decided to start playing solo once or twice a week outside the local arena or ballpark for fun and found that occasionally people dropped money in my case, likely this is just a hobby.  I could claim the mileage that I drive to these venues and any cost of supplies needed while playing.  On the other hand, if I were the banjo player for a real group and traveled full-time with that group for pay, the endeavor is now a business.  (Assuming I am not an employee) I would be able to claim all my income and expenses, even if I have a net loss, with the goal of attempting to make a profit.

Aside from taxes, if your business will involve anything that would create potential lawsuits against you, then officially incorporating and insuring your business is important as well. You never know when a disgruntled customer will decide to make your life miserable.