When a hobby becomes a business

Q: A hobby I have pursued for years is beginning to turn into a business. I’m still doing it out of my house, filling orders that we get over the Internet from all over the world. We’re doing it as a family business with kids and cousins and in-laws all pitching in at different times. I have been told I should incorporate as a business, but if I do that, will I suddenly have to act like a formal employer, pay my family real paychecks, do withholding and all that? And would I have to pay attention to child labor laws? I’m afraid trying to go formal will actually make my business unworkable.

A: It sounds like your hobby has definitely turned into a business, whether you have done the appropriate legal work – like opening a separate bank account for money received and paid out – or not. At this point, you are already a “formal employer,” a sole proprietor in business terms, and you must comply with all the laws that apply to a business. Some, like laws governing child labor and workers’ compensation, are referred to as “employment laws.” Others, like minimum wage, overtime, and rules governing how much and when children can work, are called “labor laws.” And then there are the tax laws that will apply, including what you report on your own income tax forms, collecting and paying sales taxes, and payroll taxes – which include the withholding issue you mentioned, among others.

You can find some good information about the laws pertaining to small businesses such as yours at the state of Maine Web site. Go to www.maine.gov and click on the word “business” in the banner at the top.

However, you need more than information. Until you take legal action to create an appropriate business entity other than a sole proprietorship – limited liability company, corporation, limited partnership (there are several to consider), as well as tax and nontax considerations – your personal assets are at risk for actions of your family (and nonfamily) employees. You should consult a business attorney promptly to create the legal framework for your business, and review your situation to date to see whether you need to adjust things retroactively. Home-based businesses can be successful, but running a business like a hobby is courting disaster.

This column is a service of the Lawyer Referral and Information Service of the Maine State Bar Association. Its contents are a general response to the question and do not constitute legal advice. Questions are welcome. Go to AAL@mainebar.org, describe your question and note you are a BDN reader. Written questions mailed to “Ask a Lawyer,” Bangor Daily News, P.O. Box 1329, Bangor, ME 04402-1329 will be forwarded to the LRIS.