Hello, I am a 19-year-old college student majoring in business administration and I had a question about when to start a business. I am interested in building guitars and my career goal is to become a private luthier (builder of stringed instruments). I would assess my current skills as less than required to become a profitable luthier, so you could say I’m a hobbyist luthier. I am in no way ready to start a business but would like to start a guitar business within a few years. I have a lot of expensive plans related to this business idea like converting my garage into a workshop (buying tools and shop equipment) and taking classes at a luthiers school, and eventually way down the line buying property to put a warehouse/workshop and home on. It would obviously be convenient to take advantage of the tax benefits of owning a small business for these expensive plans, but I don’t know when the IRS would allow that.
The frequently asked questions page at the IRS lists these factors as deterministic of whether your business is a hobby or a real business:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether you have personal motives in carrying on the activity.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
I will answer these questions as if I will be starting the business today.
I would carry out a businesslike activity, put in reasonable time and effort, I assume losses are normal in the startup phase, and I would expect to make a profit in some years. On the other hand, I have personal motives in carrying out the activity; it’s fun, I will have a job outside of the business, I have never made a profit making guitars in the past, and the assets (shop equipment) would be expected to depreciate. I think the “last straw” that currently places me in the hobby category is that I do not have the knowledge needed to carry out the activity as a successful business (I do have family and other advisors who have started successful businesses able to help me).
My question is what are some of the next steps that will have to be completed before I start the business?
I could buy hobbyist grade shop equipment to build and sell guitars (in order to prove past successful profit) and upgrade my equipment when the business starts. I could invest in myself and take classes at a luthiery school and start a business. I could wait until I am ready to buy a home and buy it in the business’s name (as that asset is expected to appreciate). I could first get a job in the guitar industry. I could wait until I receive my business degree to start the buissiness. I could do all or some of these. What steps do you think I should take to bring myself closer to my goal of starting a guitar business.