I would also suggest speaking with an accountant (and I'm not an accountant or a lawyer) but...... I think you are a business the first time you include a Schedule C with your tax return. Depending on the laws in your state and city, you may need a local business permit, a state sales tax permit, etc. BUT (especially if you're doing all your business online or have no physical business location) you can stay below the radar for a while and see if you even have, or like the business. The worst that happens is the different governmental agencies send you a polite notice and you final have to do what the accountants call "surfacing". We've all been there. There's nothing to prevent you from doing business on the side of your regular job, but once you file that Schedule C that sort of gives the IRS an idea of your intentions. As a hobby you can't deduct your photo expenses, but as a busiess you can, no matter how little your gross, but eventually you have to show a profit. There really are no advantages to declaring yourself a business unless you think it gives yourself credibility, or until you start to deal with bigger clients and people who need paperwork. Without being a "business", you could still license images to clients occaisionally, and just declare the income on your regular tax return (which you'd do especially if you were paid over $600 in a single tax year from a single client, and they sent you a 1099).
If you hire people, you'll need an federal employer tax number & maybe state payroll stuff (maybe easier to use a payroll service at the beginning). If you don't hire anyone, you won't. If you hire casual (true independent contractors) they don't need to be employees on payroll if they qualify as ICs, but you will need Worker's Comp and you may have to send them a 1099. (You don't have to be a business to do either of those. Housekeepers are supposed to get WC & 1099s even though their employer is not a business). If you sell products within your state, you may need a sales tax permit (that one really varies from state to state). Here in CA we have to charge sales tax on the bottom line of a shoot (that means film, models, assistant, prop rentats, my fees - everything) if we transferred anything - as little as a CD of images - to the client, even if we sent film and got it back eventually. The new exemption is if we deliver it digitally - via FTP, transfer directly to the client's laptop, or have him provide a blank CD. You may also want a general insurance business policy for liability and your equipment. Professional policies cover your gear in situations where some homeowners policies don't - like if you were using the camera to make money! Some insurers may ask to see your business license, mine never has.
It all depends on how much risk you want to take, and what kind of legitimacy you need, and how soon. For example, if you wanted to rent a location, you'd probably need to provide the location owner with a Certificate of Insurance, which, since you're renting for a commercial project, is not available under a homeowners policy, but would be for a business policy. Now the insurance company doesn't usually ask if you've got a business permit, or pay sales tax, but your premium cost may be determined by how much equipment you have, where its kept, and whether or not you have a studio or work from home. If you're working from home, the city may not know you're a business until the neighbors complain that you've got clients coming to the house, or unless they somehow get wind from the IRS that you're filing a business return from that address.
If you're opening a retail location or even a studio with a sign outside, take out yellow pages ads, etc, all bets are off, you probably need to go full tilt. If you're partnering up with someone, you might want to investigate the accounting & tax procedures for a true partnership or even an LLC to avoid getting stuck with his obligations if he bails. Again, ask an accountant. Most of the photographers I know started out as an assistant and/or gradually took on assignments, until the numbers got to the point where they had to "surface". Its only painful once, but no need to do it until you have to.
Also, depending on what kind of photography you're doing, I'd suggest joining a professional association to stay on top of the current state of the business. Coming from an commercial (publshing, advertising, product) background, I endorse the organziations and resources on this list I've posted before, below. Learn all you can about advertising & marketing yourself, copyright, dealing with clients, how to estimate a job, what goes into a production day, workflow, and basically being a "business".
http://www.apanational.org/
http://www.editorialphoto.com/
http://www.asmp.org/
http://www.fotoquote.com/
http://www.loundy.org/commoncents/
http://www.pdn-pix.com/
http://www.stockartistsalliance.org/
http://www.pickphoto.com/
Regards,
Andy Pearlman
Andy Pearlman Studio
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