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Turning a hobby into a business takes careful planning

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How can the average person turn a hobby into a fully operational manufacturing business?

Besides a good idea and lots of ambition, there are several other things people must have in their toolkit.

John F. Hussell, a partner in Dinsmore & Shohl's Charleston office, said there are two major questions a person must consider.

The first question, Hussell said, is how will this business be financed?

"How do they transition from something that they do as a hobby to something they do as a living?"

Hussell said there are several entities available for financing.

"The traditional means is to borrow from a bank, but there are government entities like the West Virginia Small Business Development Center," he explained.

One of the most crucial steps is to formulate a business plan to transition from a hobby to a business. The business plan covers the nature of the business, growth, target audience and how to best reach that target audience.

"A business plan is critical," Hussell said.

The second question people should answer is what legal steps they should take to form the business.

"This can be taking into consideration how to tax the business and entity formation," Hussell said.

People must register their business with the secretary of state, and there are different entities a person can choose from.

"They're kind of an alphabet soup," Hussell said, noting there are LLCs, PLLCs, LLPs, C corporations and S corporations.

However, Hussell cautions people to steer clear of sole proprietorships.

"From the standpoint of liability, you would like to have some liability protection that limited liability affords you. The second thing is it makes it somewhat difficult to bring on business partners if doing business as a DBA. If you have the framework in place, as the business grows, you can bring on other partners and other investors if you want to."

Hussell said the best entity choice for someone starting a business from scratch would usually be a limited liability company.

"Generally, an LLP is limited to professionals, and it is unusual to do a limited liability partnership," he said. "You can do a limited partnership, or an LP, but with that, you still would have to have a general partner who calls the shots and subjects their own assets to liability."

Hussell explained that with an LLC, a person's individual assets would not necessarily be obligated to claims against the entity.

"If your business gets sued, the assets of an LLC are subject to claims of credits. Individual members are not subject to those claims," Hussell explained.

Hussell said that a C corporation is taxed at two levels, the corporate and the shareholder level.

"C Corporations are not advantageous for someone looking into taking their hobby to the next level," he said.

S corporations, meanwhile are not taxed at two levels and generally provide the same tax benefits as an LLC, but Hussell said a person has more flexibility with an LLC.

"When you weigh an S corporation with an LLC, the LLC comes out on top, particularly someone in this niche that wants to take their hobby to the next level."

Would there ever be a time when someone would switch from an LLC to a corporation? Generally, Hussell said the business owner would not need to do this.

"Once you're set up as an LLC, there's not much motivation to convert to a C corporation or an S corporation, unless you get really big and want to take it public," he said. "The cost of taking it public is fairly expensive."

But people must be careful. Hussell cautioned aspiring business owners to look twice when going to a bank to sign on behalf of the LLC.

"People who establish an LLC need to be careful when getting money and obligating an LLC or obligating themselves," he said. "Many banks say, ‘Yes, we want the LLC to be obligated, but we also want you individually to sign off on the indebtedness.'"

Hussell also advised potential business owners to think about patenting their invention or design to protect intellectual property.

"It's also beneficial to get legal counsel to help them navigate the legal process," Hussell said.

Karen Price, president of the West Virginia Manufacturers Association, meanwhile, advised potential business owners to talk to manufacturers and to work with universities and other institutions.

"Sometimes you've got to have a certain piece of equipment," she said. "The Robert C. Byrd Institute, they buy equipment all the time that companies can go over and use to develop new products with.  I don't think people really understand that; they're such a little gem here in the state, but they spend money to buy equipment that sometimes companies cannot afford to buy."