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Do I have a hobby or a business and why it matters
Updated: 6 December 2019
Not everyone needs to set up a business structure right away.
In fact, you'll only need to set up a business structure if you are really running a business, and not undertaking a hobby.
For example, in your spare time you might be testing out a product or service on some friends, getting them to pay for materials only (and not charging any other fee ) - this is likely to be a hobby and not a business.
And, if you have a hobby, you won't need to set up a business structure.
But, on the other hand, if you are running a business, you'll need to set up a business structure. And you may even need to register for GST.
Below is a guide to help you classify correctly, but as always, get advice if you are ever in doubt.
In a hurry? Jump ahead.
What is a hobby?
A hobby is something you do in your spare time for leisure.
Hobby features
As a hobby, you'll be able to:
- give away or sell your work for the material cost;
- do it in your spare time; and
- avoid business reporting obligations.
Contrast a hobby to a business, discussed below.
What is a business?
If you have the aim of making a profit and your activity as a whole is commercial, then you're in business.
Business features
As a business, you'll be able to:
- apply for an Australian Business Number (ABN) to use in your business transactions. You can check the ABN entitlement tool to see if you're eligible.
- register a .com.au website once you have an ABN.
- access government information, services and concessions for business.
- establish a business identity when selling to customers and other businesses.
- claim tax deductions for business expenses.
Business or a hobby?
You'll need to know if you have a hobby or a business for tax, insurance and legal purposes.
Key questions to consider:
- is the activity for commercial reasons?
- is your main intention to make a profit?
- do you regularly undertake your activity?
- is your activity planned, organised and carried out in a businesslike way?
If you answered yes to most of these questions above, you're likely to be running a business.
The ATO website provides further questions, information and examples to help you understand the differences between a hobby and a business.
Why does it matter?
Well, if you're running a business, you'll need to set up a business structure.
And, ideally, you'll want your structure setup before you start entering into contracts with suppliers, business partners or anyone really.
And, you'll want to consider tax, insurance and legal factors.
The items below are not exhaustive, but they'll give you an idea about why the classification of hobby or business matters.
Tax - you'll want to know the most effective structure.
For example, sole traders and partnerships pay tax at the individual tax rate.
And, if your turnover is $75,000 or more per year, you'll need to register for GST.
And, companies that are operating as a small business will pay 27.5% tax.
Insurance - if you are running a business, you may need insurance to protect you for:
- workers compensation
- professional indemnity
- building and contents
- public liability
Legal - the first step is to pick the right business structure (before you start entering business contracts).
The 4 main business structures in Australia are:
- Sole trader
- Company
- Partnership
- Trust
Liability is a big deciding factor when choosing a business structure.
While sole traders and partnerships are personally liable for debts of the business, this is not the case for a company.
As a company director, you'll enjoy limited liability. This means, your liability is limited to the value of the company assets.
And, the company is a seperate legal entity that's seperate to you.
So, now you know the difference between a hobby, a business and why it matters.
Got questions or comments? leave them below.
I wish you every success in your ventures!