Starting a Very Small Business - Part 1 - Is This a Hobby?

My sister called me the other day and said she wanted to start a small antique/collectibles business. She wants to set up a booth in one of those antique malls. It sounded like a good idea, since she loves to shop for antiques. Since the business is located in a mall, the mall maintains the booths and charges a percentage of sales, in addition to a monthly rental fee.

Since she knows I help people start their businesses, she had lots of questions, and I am helping her work through them. Over the next week or so, I'll take you along as we get her business started.

Our first discussion was whether this is a business or a hobby. If she doesn't make a profit the first year or so (a distinct possibility), she may run into problems with the IRS for trying to deduct her business losses from her personal income tax (called "hobby loss"). The IRS has set up guidelines for businesses to help them avoid problems. (Also see my list of guidelines on setting up and running your business; basically, you must act like a "real" business as much as possible. So she decided to begin her business the right way.

Next, what legal entity type she chose and why.