You love that little charge you get from selling an item on eBay, knowing you've sold a product and made a little bit of money for yourself. As you search your neighborhood and town for more products to sell, you realize you're hooked--you're an eBay seller at heart. But can those little products you've been selling for fun in your spare time really turn into a serious, revenue producing business? Absolutely, according to the panel of experts we consulted in the areas of business plans, tax and money, internet marketing, technology and legal issues. Follow their advice, and before you know it, your hobby will become your full-time entrepreneurial success story.

Going To Market
To make your growing business on eBay really penetrate the marketplace, Catherine Seda, an eBay University instructor and author of Search Engine Advertising, offers the following advice.

Entrepreneur: When someone is thinking of taking a hobby business on eBay full time, what marketing issues should they consider?

Catherine Seda: You want to drive offline and internet traffic to your Store. Make sure your URL is on your business card--and anywhere else you can mention it. Online, there are two [ways to get search engine traffic that] I'm particularly fond of: through pay-per-click and through search engine optimization. Through the search engines, shoppers are actually looking for particular products--they're ready [to receive offers], and they are in shopping mode.

When people are in shopping mode,how do you get them to your store?

Seda: For pay-per-click, you might start on Google, MSN or Yahoo!--those are the three big U.S. search engines. Through pay-per-click, you can bid on any keywords you want, and you're only paying a per-click price; the highest bid generally gets the highest position. Also, if you want your products to be found online, you need to go where the shoppers are. Many buyers compare products at shopping comparison sites [like] BizRate.com, PriceGrabber.com and Shopping.com.

Internet marketing can be a challenge because there are so many messages out there. How can you tailor your marketing message so you can be heard?

Seda: By being as descriptive as possible--not only [about] product items, but if you have brand names, brand names sell very well on the internet because there's already [name] recognition. Even [specify] the product types or model numbers.

What typical marketing mistakes do new online business owners make?

Seda: Not using relevant keywords in your store or website. If you use relevant keywords, you can get free search engine traffic because the search engines have a nonpaid-listing area. eBay [Store owners] should use relevant keywords in their Store URL, their Store title, description, category names and page copy.

If you want to grow your business on eBay, where should you increase your marketing efforts?

Seda: The biggest and most profitable tool is e-mail. If you spend all your time driving new traffic [to your site], and people come to your website and leave without leaving their contact information, you constantly have to look for new prospects. That's why I highly recommend [starting] a newsletter as soon as pos-sible, even if you're just sending [it quarterly]. When people come to [your] website or Store, market your newsletter. Provide some way to keep in contact with your prospects and customers.

What final marketing advice would you give new eBay users?

Seda: Once you're generating business, you want to maintain that top-of-mind awareness with your customers. So put your business name and URL in [every] newsletter and on invoices [sent] out through PayPal. And when you ship things out, putting a piece of marketing information in the box that you ship is a great strategy to remind [buyers] to come back and shop more often.

The Tax Man Cometh

Turning an eBay hobby into a full-time business has many tax ramifications, so we asked Diane Kennedy, CPA and author of Tax Loopholes for eBay Sellers, to share some tips.

What does it take to be considered an official business on eBay in the eyes of the IRS?

Diane Kennedy: Here is what they're looking for.

  • They want to see that you're [running your business on eBay] in a businesslike manner. So have a separate bank account, some way of keeping receipts and a filing system. [Run] financial statements, maybe just once a year, to show that you've got a true business.
  • You're truly [spending] time and effort to create a business. If you're selling on eBay and you can prove you're doing it, you're going to pass that test.
  • Even if you're not making money now, you have a plan to and are trying to. The goal is to make money and be dependent on the income.
  • If you have losses, they're reasonable.
  • If you've got experienced advisors helping you in the business, like through eBay workshops, you're showing that you're trying to get more education.
  • You're truly building a business that's got some value to it, that you can maybe even sell at some point.

The [main] idea is that you're doing this in a businesslike way. It's not a hobby anymore.

What common tax mistakes do new eBay entrepreneurs make?

Kennedy: [They say,] 'I'm just selling a few things, so I don't have to pay taxes.' I speak at the eBay Live! Community Conference, and I can't tell you the number of times I get asked the question: Does eBay report these sales? [No, eBay doesn't report sellers' sales to the IRS, but] the IRS is very aware that millions of people are selling on eBay [in the United States]. For example, you might be buying a lot of inventory; you're buying things that you're going to sell. Those aren't a current write-off; they're actually considered an asset of [your] company because they are something you're going to sell and make money on. So at the end of the year, if you have a lot of inventory sitting around, you might actually owe taxes and not even know it.

Planning For The Best
Barbara Weltman, author of The Complete Idiot's Guide to Starting an eBay Business and monthly newsletter Big Ideas for Small Business, gave us the skinny on preparing a business plan for eBay.

What's the first element of a successful business plan for a business on ebay?

Barbara Weltman: For many businesses, not just ones on eBay, it's not uncommon to lose money in the startup years while you're acquiring inventory or other equipment that you need for your business. So what you want in your business plan is to show how you expect to make money. You need a reasonable expectation that you're going to make a profit, whether it's a year from now or two years from now. Usually for businesses on eBay, you can be profitable rather quickly.

Do you need to include the same things in your eBay business plan that would appear in any business plan?

Weltman: Absolutely. Just because it's easy to [have a business on] eBay doesn't mean you want to overlook any legal steps. You may want [your business plan to include steps] to incorporate the business or form a limited liability company, especially if you're doing business with somebody else.

How do you plan for the growth of your business on eBay?

Weltman: There are various ways to expand. One is just expanding your product line. The other is to expand how you sell: [opening] an eBay Store, for example, which is effectively like having an online catalog, if your product line is big enough; or having your own website, separate and apart from eBay, where you drive traffic to eBay and eBay drives traffic to your website--those kinds of things.

Should your business plan include contingencies for possible difficulties? In the eBay environment, what should new businesses be prepared for?

Weltman: If you're thinking of doing this as a business, don't quit your day job until you have established yourself. Test the waters. Make sure this is something you really want to do. It may sound great, but working alone and doing all the activities required [to run] a business on eBay may not, in the long run, be something you want to do [full] time. If you thought of this as a full-time business, make sure this is something that you really can do, and that you're suited to. Also, be realistic about what your sales are going to be. Not everything that gets posted [sells]. The sell-through rates vary with the items being sold, and just because you list something, there's no guarantee it's going to sell. [There's] certainly no guarantee it's going to sell for what you hope it's going to sell for.

Technology 101

To learn about the technological side of your business on eBay, we asked Mike Hogan, technology editor at Entrepreneur magazine and author of Accounting for Non-financial Managers, for his advice.

What technology do you need to start a business on eBay?

Mike Hogan: There's very little equipment you need to sell on eBay: a PC, a printer, a digital camera. There [are] just no technical hurdles. There are also some amazing multifunction devices coming out that are appropriate for entrepreneurs, and they include printers, scanners, copiers and faxes for $200 or less. It will cost you next to nothing to get rolling, and it's the kind of stuff you probably would've bought for your family anyway. Until you have a considerable volume of transactions, you're good to go. [To find high-volume software that fits your needs, check out product reviews at www.auctionsoftwarereview.com.]

What kinds of software programs can help entrepreneurs grow their businesses on eBay?

Hogan: You need to keep track of all your sales and all your costs of sales, and you need to make quarterly estimated tax payments. If you have people working for you, you need to keep track of salaries. Suddenly, you have an accounting challenge.

With eBay, you want to be able to balance the flow of goods through your company. That requires you to have an accounting program such as Peachtree, QuickBooks or Microsoft Small Business Accounting. They cost a couple hundred dollars and have entry-level versions. As you grow, you can move up to the next size in these products.

Intuit's TurboTax is hands down the best tax software to use for your business. Intuit has a website called Tax Center for eBay Sellers (www.taxcenter.turbotax.com). This is a tremendous resource because it addresses the issues that eBay sellers in particular face with taxes. Intuit also has a site to help you with filing estimated taxes (www.estimatedtaxes.com).

Embrace these tools--don't run away from them. It's not optional. These tools will teach you how to do business better.

Law School
Finally, you want to stay out of trouble with the law when you start your full-time business on eBay. Cliff Ennico, small-business attor-ney and eBay University instructor specializing in the legal and tax aspects of using eBay, offers his advice.

What is the first legal element you need to address in setting up your business on eBay?

Cliff Ennico: The hardest step for most people is just finding a good name for the business. When you think of a really cool name, make sure you can [use that name]. Check the U.S. Patent and Trademark registrations at www.uspto.gov. If someone has registered something as a federal trademark, you cannot use it, period, end of story. Check your secretary of state's office, and make sure no one in your state has registered the same name. Lastly, go to your county clerk's office, and make sure nobody in your town or county is using the same name as a dba. [Also make sure you can] get the domain name. Google it and see if anybody out there already has that website up. If it looks [clear], go ahead and register the URL.

Then find out if you [need to] get a license to sell stuff on eBay. Believe it or not, you may need a license to sell certain items. My little rule of thumb: If you're selling anything that has the potential to injure someone if it's abused, then you probably need to get a license from your state. Check out www.sba.gov/hotlist/license.html; it's a directory of state agencies that can tell you if you need a license or not. If you're not sure, call the agency and find out.

From a legal standpoint, how should you prepare to grow into a larger business on eBay?

Ennico: There's always a big question: Do I have to set up a legal entity for my business? Should I be a corporation? Should I be an LLC? If you're going into partnership with someone you don't know very well, [you might want to consider it].

What common legal mistakes do new eBay sellers make?

Ennico: The biggest mistakes that people make are not realizing they have a business in the first place and forgetting to pay their taxes, failing to charge sales tax to in-state customers, and not spelling out what their terms and conditions are. Draft your terms and conditions, and make sure those appear on every listing. My advice is to draft them yourself and have an attorney look at them, but don't put them in legalese.

Warranties are another legal issue: Anything you say in your listing description of an item on eBay is a legal warranty. If you don't know that much about your merchandise, disclaim all express and implied warranties. Make it clear [to the buyer]: You're giving lots of photos, answering questions, but you're not making any warranties whatsoever, so [they] should look at the item and make sure they're comfortable bidding. You can solve a lot of legal problems, in the event that a transaction goes bad, by warning your buyer upfront about what your policy is going to be.