Defining the Hobby Business vs a True Business

scottalanmiller

This comes up a lot, because IT in the SMB sector tends to end up working in what I call a hobby, versus in a business. And I get asked a lot what I mean by this. But I think the answer is surprisingly simple, once you break it down.

Now, this is not a legal definition, a business can be all kinds of things legally, as long as it obeys the law. Some things, like non-profits, are classified as a business, even though they obviously are not actually businesses but rather entities (and some countries simply classify them as "organizations.") Business is used as a legal catch-all for incorporated entities that behave and can be represented as a person (hence the term "incorporate" or to be "made a body.")

But a true business is one whose purpose is profits, through whatever endeavor that they do. This is what is taught in business classes, what everyone accepts as the actions of a business, and this is what is required, by law, for any legally recognized business that operates publicly (e.g. SEC regulated in the US.) The concept of fiduciary responsibility applies where the responsibility parties of the business have an ethical obligation to act "as a business" and attempt to maximize profits (without breaking the law.) Fiduciary responsibility effectively just codifies the general concept of business and says that if you take public investment (e.g. from a stock exchange listing that anyone can buy publicly) that you will act properly as a business and not use the funds for other purposes under the guise of being a business. You see the same kind of laws protecting the public in real estate with how buyers and sellers agents must act with integrity and represent the buyers or sellers.

In a private company, the owners are responsible for overseeing fiduciary responsibility of their managers, rather than the SEC, but the concept is the same. Owners are just given the power, and risk, of overseeing this themselves. And owners, of course, can choose to look the other way if they so choose; to choose to not act as a business. In the public space, the government oversees this in order to protect investors. In the private space, the owners are only playing with their own money and have no one to sue but themselves, so the SEC gives them a free hand. But a CEO tasked with running a business, even privately, is liable for this unless told otherwise by the owner(s).

So now we understand what a true business is. We could also think of it as an honest business - a business doing business honestly, for the purpose of why businesses exist conceptually. That laws exist to define this when consumer funds are at stake is very handy, so we don't have to make any new definition, just understand the ones set forth in US (and most country's) laws.

So that brings us to the hobby business. This is simple to define, now that we know what a true business is. First of all, a hobby business cannot be publicly traded (in the US) because it would intentionally violate SEC regulations, so legal hobby businesses are privately held only. A hobby business is any privately held incorporated entity whose primary goals are not business profitability but any other goal.

scottalanmiller

There are loads of reasons why people make hobby businesses and there is absolutely nothing wrong with them. Many times, though, the people who own them (or even work for them) don't like it exposed that they are hobbies, because it doesn't sound impressive like working for a real business. This is unfortunate because it generally makes them far less favourable environments than they could be if they were honest with themselves and embraced (and stated) whatever their goals are.

Common reasons that we see companies choose the path of hobby over business:

It's just easier. Actually trying to be a solid business takes effort, and not everyone who owns a business wants to put in that effort.
Hanging out with friends is a priority.
Looking impressive is a priority.
Tax Shelter.
Company formed to keep a spouse or child occupied.
Hubris.
The work is fun.
Owning a restaurant/hotel/bar/pool hall/arcade/whatever is just fun.

In all of the cases, the fact that there is a business formed is really just a structure to allow for the hobby and/or to reduce the cost of it. In points 7 & 8, it's really common for it to be a true everyday hobby where someone just wanted a way to write off the expenses of the hobby.

scottalanmiller

IT gets dragged into this more than any other department, because everything that we do depends on understanding if who we serve is a business, or a hobby. Because IT is a pure business function, every action we do is determined by its context in the business. If the goals of the company are not profits, how do we make decisions? We have to know the goals in order to do our jobs, at all. We don't even know what are jobs are until we know this.

As a business consultant to loads of companies, this is one of the very first things we have to understand about any customer. There's nothing wrong with doing work for, or working for, or owning, a hobby business. Nothing at all. But a hobby business that pretends it is not is going to have natural conflicts. You can't talk properly to your IT, to your CPA, to vendors, to anyone until everyone is being honest. Otherwise, people are stuck working at cross purposes.

scottalanmiller

I'll give a great example for myself... I have a hobby, making travel videos. It'll never make a lot of money, it will never pay the bills. But I enjoy it. If I just do it as a traditional hobby, it costs X. If, instead, I do it as a hobby business, then suddenly the cost of cameras, computers, storage, software, hosting, etc. because tax deductible. Plus I can bring in partners to work with me and we are all covered under the company umbrella. It's a legal business, but the goal is the fun of making travel videos, not profits. Legally, it's a business. But if I told someone that it was a real business, I'd be absolutely lying. It's a hobby, incorporated as a business.

1337

There is also the "work" business.

The purpose of the "work" business is to generate work (for the owner and employees) while the purpose of a true business is to generate profit.

It's not a hobby, but it's not a true business either. It's hard work, incorporated as a business.

A telltale sign is that the business owner works in the business and not on the business.

JaredBusch

@Pete-S said in Defining the Hobby Business vs a True Business:

There is also the "work" business.

The purpose of the "work" business is to generate work (for the owner and employees) while the purpose of a true business is to generate profit.

It's not a hobby, but it's not a true business either. It's hard work, incorporated as a business.

A telltale sign is that the business owner works in the business and not on the business.

And @scottalanmiller seems to lump those in with hobby.

Carnival Boy

My uncle ran a successful hardware distribution business employing dozens of people for over 30 years. His motivation was to generate work, security, and happiness, for owner and employees. He could have been more profitable, but chose not to.

I'll have to tell him he spent his life devoted to a hobby

But then he was a socialist. Maybe we just think about business differently in Europe? Scott likes to label things, but I'm not sure it makes any difference.

Dashrender

@Carnival-Boy said in Defining the Hobby Business vs a True Business:

My uncle ran a successful hardware distribution business employing dozens of people for over 30 years. His motivation was to generate work, security, and happiness, for owner and employees. He could have been more profitable, but chose not to.

I'll have to tell him he spent his life devoted to a hobby

But then he was a socialist. Maybe we just think about business differently in Europe? Scott likes to label things, but I'm not sure it makes any difference.

It does, to the point Scott as trying to make, though the posts were long so perhaps you missed it. IT is a Business Tool, as such when in a "business" as Scott would call it - it's pretty easy to know what to do - IT does what it takes to make the business the money money. When you're running a "something else business" (really hate the hobby term, it's pretty demeaning), IT doesn't actually have a cut a dry clear goal... now it has to fall to the whim of those in charge.

scottalanmiller

@Carnival-Boy said in Defining the Hobby Business vs a True Business:

My uncle ran a successful hardware distribution business employing dozens of people for over 30 years. His motivation was to generate work, security, and happiness, for owner and employees. He could have been more profitable, but chose not to.
I'll have to tell him he spent his life devoted to a hobby

This is exactly what NTG does, and we are 100% a hobby. We couldn't possibly say we were a true business because we put our people ahead of profits (and were founded with that purpose.) We couldn't operate honestly if we tried to pretend that business processes came before our people, because they just don't, and were never meant to.

Being a hobby isn't a bad thing. Pretending something isn't a hobby when it is, though, creates conflict.

scottalanmiller

@Carnival-Boy said in Defining the Hobby Business vs a True Business:

Scott likes to label things, but I'm not sure it makes any difference.

Scott likes to make people admit the truth. It's not about labels, it's about honesty. Companies claim that they are all about business decisions, then do something else. That lack of honesty leads to politics, deceit, anger, sabotage, and just general unhappiness.

We see it every day... IT struggling, often getting fired for trying to do what they are hired to do, and the real problem was just a lack of transparency. Someone running a business, but hiring someone to run it as a business, then being upset at the conflict of goals. You don't need labels to have good communications, but communicating a false label is bad communications.

scottalanmiller

@Dashrender said in Defining the Hobby Business vs a True Business:

@Carnival-Boy said in Defining the Hobby Business vs a True Business:

My uncle ran a successful hardware distribution business employing dozens of people for over 30 years. His motivation was to generate work, security, and happiness, for owner and employees. He could have been more profitable, but chose not to.

I'll have to tell him he spent his life devoted to a hobby

But then he was a socialist. Maybe we just think about business differently in Europe? Scott likes to label things, but I'm not sure it makes any difference.

It does, to the point Scott as trying to make, though the posts were long so perhaps you missed it. IT is a Business Tool, as such when in a "business" as Scott would call it - it's pretty easy to know what to do - IT does what it takes to make the business the money money. When you're running a "something else business" (really hate the hobby term, it's pretty demeaning), IT doesn't actually have a cut a dry clear goal... now it has to fall to the whim of those in charge.

So the real question becomes.... why would anyone find the term "hobby" demeaning? Hobbies are what we love to do. Hobbies are the important things in our lives. Hobby is not demeaning or negative. It's just honest. It's only demeaning if the hobby itself is embarrassing.