Choosing the Right Business Structure

Starting a new business is a stressful time. From hiring employees to determining an operating budget, there are many decisions to make in the beginning stages of the creation of your business. One of the most important decisions is choosing a business structure that’s right for you.

Choosing a business structure is important for many reasons. Your structure will determine how much you pay in taxes, filing requirements and personal liability. The four main business structures in Florida are: Sole Proprietorships, Partnerships, Limited Liability Companies and Corporations.

  • Sole Proprietorship – A sole proprietorship is the easiest business structure to form, and therefore one of the most common. This type of business entity is an unincorporated business that is owned and operated by a single individual. Some business owners choose to form a sole proprietorship while they test out a business idea. However, a sole proprietorship does not protect your personal assets from any debts or liabilities from the business. If your business includes a high-risk or inherently dangerous activity, it would be best to choose a different type of business structure, as you will be personally liable.
  • Partnership – There are many different types of partnerships: general, limited, limited liability (LLP) and limited liability limited (LLLP). General partnerships usually exists when two or more people own a business together. A disadvantage to the general partnership is the personal liability that comes with it. Similar to a sole proprietorship, co-owners in a general partnership are personally liable for the debts or liabilities of the partnership. Due to the liability that comes with a general partnership, most new business owners choose a different business structure. The various forms of limited partnerships are more advantageous. In a limited partnership, a general partner has the same rights and liabilities as in a general partnership, however, a limited partner has limited rights and liability. If forming a limited partnership, you may want to consider forming a corporation to act as a general partner to further limit the total exposure of the principals involved. A limited partnership may elect to become a LLLP. This frees general partners of the limited partnership from personal liability and leaves the partnership with the sole obligation. However, LLPs go a step farther and absolve partners in a general partnership from personal liability altogether (with exception to personal misconduct) so long as the partnership is formed as a LLP. A good way to understand this is a LLP is a general partnership with limited liability protection, compared to a LLLP, which is a limited partnership with limited liability protection.
  • Limited Liability Company – A limited liability company “LLC” is a very popular business entity and it allows business owners the benefits of both partnership and corporation structures. LLCs protect your personal assets by offering limited personal liability. LLCs also do not require the same formalities as corporations (mandatory stockholder meetings, management meetings, etc). Additionally, subject to the number of members, the LLC may elect to be taxed as a sole proprietorship, partnership or corporation. You can read more about LLCs at LakelandLaw.com.
  • Corporation – A corporation is an independent legal entity that is separate from the people managing the corporation. Offering the strongest personal liability protection, corporations are a much better choice if the business engages in a higher risk activity. While the cost to form a corporation is higher than other entities, corporations have a significant advantage in raising capital through stock sales. Additionally, corporations require more formalities such as, annual stockholder meetings, extensive record keeping and reporting.

Selecting the right business structure can be your first step toward success in creating a new business. The decision can be challenging, but consulting with a local attorney is always the best option to make sure your personal and business needs are met.

Miranda K. Martinez is a 2019 graduate of Stetson University’s College of Law and recently joined Clark, Campbell, Lancaster & Munson, P.A., in Lakeland. Questions can be submitted to thelaw@cclmlaw.com.

An Overview of Limited Liability Companies

By: Zachary Brown

A limited liability company, commonly referred to as an “LLC”, is a type of business entity that has become popular in the United States because of some of the benefits it provides to business owners.  This article shall serve as an overview of the LLC, what it is, its advantages, and some disadvantages.  Hopefully this article will show why so business owners have elected to start a business using this type of entity.

An LLC is a business entity that is owned by its members and governed by an operating agreement.  A typical operating agreement will, at a minimum, determine how the LLC is organized, how it is to be managed, the financial distributions of the LLC, and how the LLC may be dissolved. 

An LLC shares advantageous traits of other business entities.  For example, LLCs share an advantageous trait with corporations – limited liability.  Limited liability means that a member’s liability is almost always limited to that member’s investment in the LLC.  The result of this, except in rare circumstances, is that a member’s personal assets are not at risk if the LLC is sued or goes bankrupt.

LLCs also share an advantageous trait with other types of entities in the way it elects to be taxed.  The LLC will elect how it wishes to be taxed for federal tax purposes.  Subject to the number of members, the LLC may elect to be taxed as a sole proprietorship, partnership, S corporation, or C corporation.  If the members elect to be taxed as a sole proprietorship, partnership, or S corporation, they are usually considered a “pass-through” entity.  That means the income will be taxed at the individual level on the member’s personal tax return.  This allows an LLC to avoid the double taxation incurred by a C-corporation (a common form of corporation) which are taxed first at the corporate level, then again at the individual level. 

In addition to certain tax benefits and limited liability, there several other advantages associated with forming an LLC.  The LLC is controlled by an operating agreement rather than bylaws, so typically there are no corporate minutes or resolutions, making it administratively more efficient and easier to manage.  When forming LLCs, there are usually no restrictions on the number or type of members allowed (i.e. an S corporation may be a member of an LLC).  Lastly, members have great flexibility in structuring the initial operating agreement governing the LLC.

There are a few notable drawbacks when selecting the LLC as a business entity.  Typically, it is more difficult to transfer a member’s ownership interest in comparison to a corporation.  If the LLC works with international companies, the LLC may be treated as a corporation in the countries where the LLC is doing business.  The annual filing fees for LLCs are more expensive than most other business entities.  Lastly, there are a number of legal complexities with LLCs, so legal issues involving tax, management, dispute resolution, and buyouts tend to arise if the operating agreement that governs the LLC is poorly drafted. 

An LLC is something that a prospective business owner will want to consider when forming a business.  As always, consulting with a local attorney is the best option to make sure this is the right business entity.

Pitfalls of Purchasing a Business

By: Kyle Jensen, Esq.
Clark, Campbell, Lancaster & Munson, P.A.

Acquiring an established and successful business may appear to be an attractive and low risk proposition for both experienced or novice entrepreneurs; however, there are numerous issues a prospective buyer should consider and pitfalls to avoid before purchasing a business. Asking the right questions and conducting proper due diligence can save the buyer significant time and money and put the buyer in a strong position to succeed once it purchases the business.

Generally, there are two basic ways businesses are sold. The first is the sale of the ownership interests of the business. The second is the sale of the assets of the business. Each avenue provides various benefits and detriments, and a prudent buyer will consider all factors before determining how it will acquire the business. For example, purchasing the ownership interests of the seller allows for a smooth transition of the business, but may also expose the buyer to significant liabilities. Further, purchasing the assets of the seller may, but not always, allow the buyer to avoid certain liabilities of the seller, but may also require the buyer to renegotiate advantageous contracts with the seller’s vendors and customers.

Regardless of whether the buyer is purchasing the seller’s ownership interests or the seller’s assets, the buyer should determine the potential liabilities the buyer may be exposed to after the purchase, such as whether there are any (i) outstanding lawsuits against the seller, (ii) outstanding taxes due, or (iii) security interests filed against the seller’s assets. It is vital that the buyer ascertain its exposure to potential liabilities and either adjust the purchase price of the business accordingly or walk away from the deal.

Other issues the buyer should consider relate to the operation of the business once purchased. For example, the buyer may want to obligate certain owners or employees of the seller to assist the buyer with the transition and operation of the business after closing. The buyer may also want to impose a non- compete on the seller and its owners, prohibiting them from competing with the buyer in its business. Lastly, if the seller is renting the premises where it operates, then the buyer should carefully review the lease to confirm the terms are agreeable to the buyer and that the seller can assign and the buyer can assume such lease. It is always prudent for the buyer to require the seller to obtain the landlord’s consent to such assignment.

The above items are just a few of the numerous issues a buyer must consider when purchasing a business. Accordingly, it is often in the best interest of a buyer to retain an experienced business attorney to assist them with purchasing a business.

Kyle Jensen is an attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. in Lakeland. Questions can be submitted to thelaw@cclmlaw.com.

A Starting Guide to Non-Conforming Uses

By: Zachary H. Brown, Esq.
Clark, Campbell, Lancaster & Munson, P.A.

Question: If I’m operating a business in a zoning district that my business is no longer eligible to operate in, what can I do?

Property owners have been experiencing issues revolving around zoning since the concept was first implemented in the 1920’s. For example, local governments have zoned property that was historically used for commercial or industrial purposes to something more in character with the surrounding neighborhood, such as residential or office. While some property owners thought that this was an overreach of governmental power, the Supreme Court of the United States ruled that local governments had this authority under the Constitution. Local governments now use this tool regularly to effectively plan their cities.

So, what are the options available to property owners whose ability to use the land has been severely limited as a result of a zoning change? One option available involves continuing to use the land under its current use under a common exemption that deems it “non-conforming.” Non- conforming uses are a way local governments “grandfather” in properties that no longer adhere to the local zoning regulations.

Non-conforming properties are typically properties that, at one time, were not prohibited under the zoning laws of whatever local government the property is situated in, but as zoning laws have changed the property can no longer operate as it has historically. In addition, “non-conforming” does not only apply to the use of the property itself, but also to structures and lot regulations that are associated with the property.

Local governments are wary of non-conforming uses because the property is being used in such a way that makes it inconsistent with the government’s planning purposes. As a result, many local governments will put caps on when a use can be discontinued and then continued again. For example, in the City of Lakeland if a property owner ceases operating a property as a non- conforming use for 365 days, then local law prohibits you from continuing the operation of that property as a non-conforming use. It is important that if the property owner is operating a business as a non-conforming use, that they continue to do so, or risk losing that prerogative indefinitely.

Local governments are also likely to place restrictions on non-conforming uses that limit the expansion of the structure or use that is deemed non-conforming. This is a result of the local government trying to keep the non-conforming use limited to what it was prior to the zoning change in hopes of discouraging expansion of that use, so as to fit the local government’s planning purposes. This is also included in the City of Lakeland’s Land Development Code, with the only exception to this being alterations to structures that are seen as maintenance or repair.

Conclusion: Local governments have become creative in the planning of municipalities, but sometimes this creativity comes at the expense of local property owners. If such a situation has come about, or if you are currently associated with a property that is non-conforming, the best course of action is to consult with a local attorney about your best options to maintain the property as it is and to keep the non-conforming designation.

Zach Brown is an attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. in Lakeland. Questions can be submitted to thelaw@cclmlaw.com.

Employer Access of an Employee’s Personal Information on a Work-Device

Clark, Campbell, Lancaster & Munson, P.A.

Question: What information may an employer access from an employee’s employer-issued mobile device?

Answer: If proper procedures are followed, employers are entitled to recover any information an employee has stored on an employer-issued device.

Interception of Electronic Communications and the Cloud
As technology advances, sometimes the law is painfully slow in keeping up with it. While many people still don’t quite understand how “the cloud” works, it has been a way for people to store their information without having to plug a phone into a computer to keep it backed up. This process ensures users that should a phone become lost, damaged, or replaced, the cloud allows customers to easily access old information and provides a seamless transition to a different device that includes all of the messages, photos, contacts, and music that was on the previous device. While most people frequently use this type of technology with regards to cell phones, it is equally common to connect laptops and tablets to the cloud.

The cloud becomes complicated when it comes to employer-issued devices because the line between what is work and what is personal to the employee begins to blur. If an employee sets up a cloud account on an employer-issued device and receives personal text messages on that device, can an employer use that information in any future lawsuit stemming from the employer- employee relationship? If certain procedures are followed, then the answer is probably yes.

The federal government has enacted the Electronic Communications Privacy Act (commonly referred to as the “Wiretap Act”) which prohibits the unauthorized interception or access to electronic communications. The Wiretap Act imposes civil and criminal penalties on any potential offender. Similarly, the federal government has enacted the Stored Communications Act, which prohibits the unauthorized access of stored wire and electronic communications and transactional records held by third-party internet service providers (ISPs). The State of Florida has adopted provisions that mirror its federal counterparts.

Collectively, these laws would seem to hinder employers from accessing information that is received by, or is stored on, an employer-issued device. While the law is not fully up to date with regards to cloud technology, there two critical trends in the law that allow employers to access information on a employer-issued device.

First, the Wiretap Act has an intentionality requirement that means it will not apply to many employers. This means that if an employee downloads his or her cloud account onto an employer-issued device, the employee is the one who caused that information to be stored on that device, not the employer. In a recent federal case, an employer sued a former employee for violating the employee’s contractual non-compete clause, using texts the employer had received on a work iPhone because the employee set up an Apple iCloud account. The court ruled that the employee was at fault for setting up the cloud account, and the employer did not violate the Wiretap Act because the employer did not intercept the communications intentionally.

Second, both the Wiretap Act and Stored Communications Act have consent provisions that exempt certain parties from the law. While most employees don’t realize it, employment policy handbooks or manuals that are given to new employees may contain a consent provision that allows an employer to store and monitor communications on an employer-issued device. Several courts have found that these consent provisions, with regards to using an employer-issued device, are enough to overcome liability that may be imposed by the Wiretap Act and Stored Communications Act.

Conclusion
Provisions in employer-issued employee manuals may address what information the employer is entitled to access and monitor on employer-owned devices. As long as the employer is not taking proactive steps to confiscate personal messages from an employee, it is unlikely that any criminal or civil liability will arise. The employer may be able to use information stored on an employer-issued device in a dispute should an employee or former employee decide to initiate litigation against them. In any case, consulting with an attorney is the best course of action before using any information on an employer-issued device.

Questions can be submitted to thelaw@cclmlaw.com.

Are salaried employees exempt from overtime pay?

By: J. Matthew Kelly, Esq.
Clark, Campbell, Lancaster & Munson, P.A.

The Fair Labor Standards Act (the “FLSA”) is a federal law which regulates, among other things, minimum wage and overtime pay. The FLSA generally sets a workweek at forty hours and requires that employees receive overtime pay for any excess work hours over forty.

However, not every employee is covered by the FLSA. While the FLSA has expansive coverage, it does have certain requirements that must be met in order for employers and individuals to be covered. The FLSA generally covers companies that have revenue in the amount of $500,000.00 or more, as well as federal and local government employers. An individual can be covered, regardless of the revenue of the company they work for, if they are involved in interstate commerce. Interstate commerce is interpreted broadly under the FLSA and may include individuals who make telephone calls outside of their home state, process payments from out of state, and produce goods that will be sent out of state.

One common misconception under the FLSA is that salaried employees are exempt from the overtime pay requirements of the FLSA simply because they are paid a salary rather than on an hourly basis. While in many cases a salaried employee is an exempt employee under the FLSA, they still must meet one of the exemptions created by the FLSA to be exempt from the overtime requirements. Generally, for a salaried employee to be exempt from overtime pay they must meet one of the following “white collar” exemptions: the executive exemption, the administrative exemption, the professional exemption, the computer employee exemption, the outside sales exemption, or the highly compensated employee exemption.

Each of these exemptions requires that the employee make at least $455 per week in compensation. Beyond the salary requirement, each exemption requires that the employee have certain job duties. It is not enough to pay someone $455 per week and give them a certain job title. The employee’s duties must meet certain requirements. For example, to qualify under the administrative exemption, the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and this primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. Each exemption has specific duties and requirements that must be met by the employee for an exemption to apply.

“Blue collar” workers, or those workers who perform manual work with their hands, physical skills, and energy are not exempt from the overtime requirements no matter how highly they are paid or how they are compensated. Police, firefighters, paramedics, and other first responders are not exempt from the overtime requirements of the FLSA. In

many instances employees working in agriculture as defined by the FLSA are actually exempt employees even though it may seem like they would be included with those workers who work with their hands and physical skills.

The important takeaway when dealing with exemptions is that just because someone has a salary or a certain job title does not exempt them from overtime. The real focus should be on the duties of that employee to determine if their job function meets the requirements for an exemption under the FLSA.

The FLSA is a complex federal law with many nuances that have not been specifically addressed in this article. When determining whether an employee is exempt under the FLSA I recommend that you have an attorney participate in the analysis and advise you as to that employee’s status under the FLSA. Treating a non-exempt employee as an exempt employee can be a costly mistake resulting in litigation and the awarding of damages. Damages awarded can be double the amount of the actual unpaid wages owed as a result of treating a non-exempt employee as an exempt employee.

J. Matthew Kelly is an attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. in Lakeland. Questions can be submitted to thelaw@cclmlaw.com.

What Employers Need to Know about the Family & Medical Leave Act

By: J. Matthew Kelly, Esq.
Clark, Campbell, Lancaster & Munson, P.A.

The Family & Medical Leave Act (FMLA) is a federal law which seeks to balance the demands of the workplace with the needs of the family by entitling employees to take reasonable leave for medical reasons, birth or adoption of children, and to care for family members with a serious health condition.

Not all employers are subject to the requirements of the FMLA. For a private employer to be a covered employer under the FMLA the employer must employ 50 or more employees in 20 or more workweeks in the current or previous calendar year. Different requirements apply to public employers and schools.

For an employee to be eligible for leave under the FMLA the employee must (1) work for a covered employer, (2) have worked for the employer for at least 12 months as of the date that the employee is to take leave under the FMLA, (3) have worked at least 1,250 hours for the employer in the preceding 12-month period from the date the employee is to take leave under the FMLA, and (4) work at a location where the employer employs at least 50 people within 75 miles of the employee’s worksite.

Once it is determined that an employee is entitled to leave under the FMLA, an eligible employee may take up to 12 workweeks of leave within a 12-month period. An employee is entitled to take leave in the following situations: (1) the birth or adoption of child, (2) to care for a family member who has a serious health condition, (3) for an employee’s own serious health condition, and (4) for certain circumstances relating to a family members military service. In some circumstances, leave can be extended for military caregivers.

Important Considerations for Employers

  • Covered employers are required to post and keep posted, in conspicuous places, a poster setting forth excerpts from, or summaries of, the pertinent parts of the FMLA. Additionally, a general notice regarding the FMLA must be included in employee handbooks or provided to new hires.
  • If an employee requests leave under the FMLA the employer must provide the employee with notice concerning his or her eligibility for FMLA leave and his or her rights and responsibilities under the FMLA.
  • If an employee’s leave is designated as FMLA leave the employer must provide to the employee a designation notice stating that the leave qualifies as FMLA leave, outline the requirements of the employee while on leave, and, if known, the amount of leave that will be deducted from the employee’s entitlement to FMLA leave.
  • In certain situations, an employer is entitled to request a certification from the employee which supports the employee’s need for leave under the FMLA. The certification process allows the employer to obtain information regarding the employee’s request for leave.
  • In certain situations, employers may require employee to take accrued paid leave like sick or vacation leave to cover the requested FMLA leave.
  • Employers must maintain the employee’s coverage in group health plan when on FMLA leave in the same manner as when the employee was not on FMLA leave.
  • When an employee returns from FMLA leave the employee must be put back in to the same position as when the leave commenced or be placed in an equivalent position with equivalent payments and benefits.
  • Importantly, an employer can be liable for various damages, including wages, salary, employment benefits, costs, and attorney’s fees, if the employer interferes, restrains, or denies rights provided for under the FMLA.

If your company is facing an issue related to the FMLA or wants to ensure compliance with the standards set forth in the FMLA, contact an attorney immediately to protect your rights as the FMLA is a complex federal law with many nuances.

J. Matthew Kelly is an attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. in Lakeland. Questions can be submitted to thelaw@cclmlaw.com.

Harassment in the Workplace

Title VII is a federal law which seeks to address discrimination and harassment in workplaces. Title VII regulates employers with 15 or more employees. Title VII prohibits harassment of individuals based on the following protected characteristics: race, color, national origin, sex, religion, and some other factors.

What constitutes harassment?

For an employee to bring a harassment claim under Title VII, the employee must possess a protected characteristic as identified above, be subject to harassment, the harassment must be related to a protected characteristic as identified above, and the harassment must be severe enough that it resulted in a change in the terms or conditions of the employee’s employment or created a “hostile” work environment. Finally, there must be a basis for holding the employer liable.

A “hostile” work environment exists where harassment unreasonably interferes with the employee’s performance or creates an intimidating, hostile, or offensive environment for the employee. The conduct of the harasser must be severe and pervasive in order for an employee to establish a hostile work environment. The factors that courts analyze to determine if conduct amounts to a hostile work environment are the frequency of the conduct, the severity of the conduct, whether the conduct was physically threatening or humiliating, and whether the conduct unreasonably interfered with the employee’s job performance. The factors are analyzed through a mixed objective and subjective approach. The conduct must be subjectively perceived by the employee and the conduct must be judged objectively under a reasonable person standard.

It is important to note that employees are not protected by Title VII against general rudeness, horseplay, or even workplace flirtation. Title VII is not a general civility code and is meant to protect employees against conduct that involves patterns or allegations of extensive, long lasting, unaddressed, and uninhibited threats or conduct.

 

How should employers handle harassment?

 To limit liability for harassment claims, employers should take reasonable care to prevent harassment through training and written policies, diligently investigate any claims of harassment, and correct any reported harassment or harassment about which the employer becomes aware. An employer can minimize liability for harassment committed by a supervisor if it implements and takes the above steps in a reasonable manner. It is also important to have written policies in place and to have the policies reviewed periodically by an attorney ensure that the policies comply with current law. If you are an employer that has a written policy it is recommended to have an employee sign and acknowledge receipt of the policy.

Employers become liable for non-supervisor harassment if they knew or should have known of the harassing conduct, but failed to take prompt remedial action.

Both instances of harassment, whether supervisory or non-supervisory, require that the employer quickly and reasonably respond to any allegations of harassment. Employers can limit their liability by taking corrective action that is immediate, appropriate, and reasonably likely to stop the harassment. Examples of actions to limit liability include, confronting and counseling the alleged harasser in a prompt manner, disciplining the alleged harasser if warranted, adjusting schedules or transferring the alleged harasser to end the alleged harassment, and by being committed to training and policies which prevent harassment.

If an allegation of harassment has been brought against you as an employer, contact an attorney immediately to protect your rights.

PLANNING AHEAD: Does my limited liability company really need an operating agreement?

An operating agreement serves as an instruction manual dictating the governance and operation of your limited liability company, or LLC. The purpose of an operating agreement is to: (i) preserve the limited liability status of your entity; (ii) specify rights and obligations between members; (iii) provide the necessary structure, accounting and tax provisions; (iv) identify policies in the event of disputes, the death or divorce of a member; and (v) set out the organizational governance for the LLC.

Currently, if there is no operating agreement, Florida law states that an LLC is subject to the default provisions provided for under Chapter 605, Florida Statutes. The risk of relying upon the default provisions in Chapter 605 is that these standard, default provisions may not align with the goals you have for your LLC or the agreement between the members.

To avoid relying upon the default provisions of Florida Statutes, I highly recommend that new business owners allocate time prior to the beginning of their LLCs existence to adequately prepare and draft an operating agreement. A clear and unambiguous agreement will help provide concise policies for distributing profits and losses, establishing a management structure, defining appropriate voting control and decision procedures, as well as resolving unforeseen disputes among members. Clear procedures will only further assist in the smooth operation and growth of an LLC. Such policies are also beneficial for planned and unexpected challenges, and typically can eliminate any confusion or ambiguity which may arise if relying upon Chapter 605.

Like its members, each LLC is unique, with each newly created LLC having its own set of specific goals and objectives that its members would like to accomplish. A good operating agreement should be structured to align with the ideals and objectives of the members of the LLC. Certain essential terms, including the following, should be included in all operating agreements:

  • Specifications regarding ownership percent or interest;
  • The rights and responsibilities of each member;
  • How to distribute profits and losses;
  • Voting rights (i.e. voting and non-voting membership interests; majority, supermajority or unanimous decisions);
  • Management hierarchy (i.e. appointment and removal of managers);
  • Termination, or dissolution, procedures;
  • Dispute resolution provisions;
  • Transfer restrictions;
  • Guidelines and parameters for borrowing money; and
  • How to remove an unruly director.

Business owners may draft and implement their own operating agreements; however, given that an operating agreement is an important legal contract that binds the members and the governance of the LLC, it is best to consult with an attorney who has experience in formation of business entities.

Dan Rich is an attorney with the law firm Clark, Campbell, Lancaster & Munson, P.A. in Lakeland.  Questions can be submitted to thelaw@cclmlaw.com.

When Does a Hobby Become a Business?

By: Clark, Campbell, Lancaster & Munson, P.A.

Do you have a hobby that has become profitable on eBay, Etsy, or social media? If so, the IRS may consider your hobby a business, and certain income tax consequences may result.

Q: What is the difference between a hobby and a business?

The IRS has provided the following nine factors a taxpayer should consider:

  1. Is the activity carried on in a businesslike manner?
  2. Does the time and effort put into the activity indicate an intent to make a profit?
  3. Does the taxpayer depend on the income from the activity?
  4. Are the losses from the activity beyond the taxpayer’s control?
  5. Has the taxpayer made changes to improve profitability?
  6. Does the taxpayer have the knowledge to carry the activity as a successful business?
  7. Has the taxpayer made a profit from similar activities in the past?
  8. Does the activity make a profit in some years?
  9. Does the taxpayer expect to make a profit in the future due to an appreciation of the assets used in the activity?

Overall, the key issue is whether a taxpayer treats the activity as a business and whether the taxpayer has an expectation of profit from the activity.

Q: If my hobby produces income, is it considered a business?

Not necessarily. A hobby can produce income even though the taxpayer does not have an expectation to make a profit. For example, a taxpayer enjoys painting swans on the weekends and frequently posts pictures of her paintings on social media. Taxpayer’s friend offers to buy a painting for $100. Taxpayer usually does not sell her paintings, but decides to take the $100. Taxpayer likely has a hobby because the taxpayer does not have an expectation to make a profit when she paints. However, if the taxpayer were to advertise her paintings for sale on social media, then the taxpayer may have a business.

Q: What are the tax consequences of a hobby and a business?

Regardless of whether the taxpayer has a hobby or a business, the taxpayer must report any income received. Therefore, in our example above, the taxpayer should report the $100 as income. A taxpayer may deduct the ordinary and necessary expenses from a hobby or business, but a taxpayer may not deduct a loss from a hobby. In our example above, assume the taxpayer spent $150 on painting supplies. If the taxpayer has a hobby, then the taxpayer may only deduct up to $100 on painting supplies as ordinary and necessary expenses because she received only $100 of income, and may not deduct a loss of $50. If the taxpayer has a business, then the taxpayer may deduct the full $150, which will result in a $50 loss.

Generally, the IRS is reluctant to find that a hobby qualifies as a business since a business may deduct losses. However, if a taxpayer treats the hobby as a business, such as maintaining a separate bank account and budget, forming a business plan, and keeping books and records, then it is more likely the IRS will find that the hobby qualifies as a business.