If you’ve been running a side hustle for a while and your business is finally beginning to gain some traction, you might be wondering if you should get serious about making it more official. You could be missing out on valuable tax and legal advantages by not incorporating your business, but what are the options and how do you decide?
What business entities should you consider if you are taking your side hustle to the next level? Read on to learn more about some of the most popular legal structures for businesses and what you’ll need to consider when selecting an entity for your business.
Got a legal question?
Get legal advice in minutes. Real Lawyers. Real Answers. Right Now.
What business entities should I consider for my side hustle?
There are more than a half-dozen different business entities available, and each one has its own advantages and potential downsides. Here are the most common options.
Limited Liability Companies (LLCs)
An LLC, or Limited Liability Company, is a business structure that protects owners from being personally liable for the company’s debts or judgments. Under an LLC, the company has some characteristics of a sole proprietorship or small partnership but can enjoy the same immunity from personal liability as larger corporations.
Forming an LLC doesn’t need to be complicated. Rocket Lawyer can help you form your own LLC from start to finish, and help you grow your business as well.
Within the broad “corporation” category of business entity, there are S Corporations (S-Corps–closely-held corporations that pay no income tax), C Corporations (C-Corps–corporations that are taxed separately from their owners), and LLCs. Most C-Corps are large corporations and household names; most S-Corps, on the other hand, are sole proprietorships or small businesses that can benefit from the pass-through taxation these business structures offer. If you are interested in filing as an S-Corp or filing as a C-Corp, Rocket Lawyer can help you file your paperwork, follow up with your state of incorporation, and provide expert advice before and after your filing.
A Non-Profit Corporation is one that operates somewhat like a For-Profit Corporation, but without a profit motive. This allows the Non-Profit to seek tax-exempt status from the IRS and use profits to further its goals of serving the greater good.
There are many different types of Non-Profits, from trade organizations to community recreation organizations, and incorporating a non-profit may require a bit more paperwork and a few more bureaucratic hoops than other types of corporations. Fortunately, Rocket Lawyer can help you start your Non-Profit by filing your paperwork, following up with your state, and answering your legal questions both before and after your incorporation. Get help starting your Non-Profit with Rocket Lawyer.
How do I know which business entity is right for my side hustle?
Here are some factors to consider when deciding which business entity makes the most sense for your side hustle:
If your side hustle merely supplements your regular income, there’s little reason to pay taxes on these funds twice—once when your business receives them and once when you receive a paycheck from your business. By forming an S-Corp or an LLC, you can allow these funds to pass directly through to you, where they’re taxed as ordinary income.
On the other hand, there’s a good reason that most larger corporations are set up as C-Corps—adding several hundred thousand dollars of business income to your regular income can be enough to send you into the highest income tax bracket. In these situations, a C-Corp or LLC may be a better prospect. You can ask a lawyer if you have specific questions about tax liability and your business.
Just about any corporate form will provide a business owner with more legal protections than a Sole Proprietorship. However, when it comes to minimizing a business owner’s personal liability, an LLC, S-Corp, C-Corp, or Non-Profit is often the way to go. The extent to which you’ll need to insulate yourself from liability will largely depend on the nature of your side hustle. If you’re repairing hard drives, the universe of legal claims that can be levied against you is much different than if you’re driving for a rideshare company or providing remote tech support. Sometimes, talking this through with a lawyer can provide some insight.
Conflicts of interest
If you already have a full-time “day” job, you may need to take some steps to protect yourself against any conflict of interest with your employer. This can be as simple as adding a few sentences to the contracts you use with clients or notifying your employer in writing of your side gig. In some situations, your employer may have its own rules and notification procedures about “moonlighting.” If so, your employee handbook will control. In either event, having your side hustle set up as its own standalone business can aid you in creating a clear division between your 9-5 life and your side hustle life.Giving your business a legal structure doesn’t need to be a hassle—and if you’re earning money at a side hustle, incorporating your business is the best way to protect yourself from legal judgments, tax liens, and other expensive headaches that can cut into your bottom line.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.