by Dawn Ploegmakers
Originally Published: 18-Sep-08
Operate your business like a real business.
So, you’ve done your research and found the right work from home opportunity to pursue. Now, it’s time to ensure your business is set up like a business. Ensuring your business is properly set up will help you to avoid costly mistakes, give you a roadmap to success and help prevent complications with tax authorities should you face an audit.
Part of the definition of being in business means there is an expectation to earn a profit. There are eight things you can do which will define your business as a business and not just a hobby.
1. Keeping Proper Records and Receipts
Some of the things you want to make sure you are keeping a record of include your sales revenue, your business costs and expenses, your time and hours spent on the business and your mileage – if you use a car for business purposes.
2. The Manner in Which you Carry on your Business
This includes for example good record keeping, promoting your business and keeping costs down wherever possible.
3. Expertise in the Use of your Professional Advisors
If you have an accountant, lawyer, or other professional advisors it is important they have the knowledge and expertise required in running a business.
4. Time and Effort you Spend on Business
Keeping a record of your hours will help you verify that the time and effort you’ve spent on your business is more than you would if it were just a hobby.
5. Expectation that you Will Make a Profit
The definition of a business is to earn a profit, so if you are running a business and recording losses or you are not doing everything in your power to make a profit then the authorities may question your intentions. In addition, the IRS classifies a hobby as an activity without an expectation to earn a profit so if your business is making a profit three out of five years then it can be considered a real business.
6. Success of your Business
The length of time you have been in business as well as the history of your success will prove to authorities that you are operating a business.
7. Business Plan
Writing a business plan is the starting point and road map to how the business will operate. Business plans should be reviewed at least annually and updated to reflect any changes in the business environment or industry you are operating in. Business plan templates can be found online and on many financial institution’s websites. Business plans will also help with securing financing if you are looking to get a business loan.
8. Profit or Loss Statement (Income Statement)
Financial statements including the Income Statement, also called the Profit or Loss Statement, are a snapshot financial picture of your business in a point of time or for a period of time. The record keeping you do will feed into the preparation of the financial statements as well as aid in any audits. Typically the financial statements will be the first pieces of documentation you hand over to the authorities if you are audited and the auditors will then check your records and other business documents to confirm what you are reporting.
Ideally you will want to set up your business including the record keeping and financial statements within the first 30 days. It is easy as an entrepreneur to want to hit the ground running and lose sight of many of these key steps. By ensuring you have set up your business properly and it is run like a business you can avoid many of the common mistakes of not so successful business owners.
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Dawn Ploegmakers is a professional marketer living in Victoria, BC, Canada. Dawn’s goal is to create 100 Canadian Millionaires by 2013. She is a mother of a 2 year old little girl and enjoys inspiring and motivating others. Dawn is currently training for her third half marathon and loves traveling, drinking wine and eating good food.
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