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, and help you grow your business as well.
Within the broad "corporation" category of business entity, there are C Corporations. These are business entities that are taxed separately from their owners (or shareholders) and offer the shareholders some limited liability. Except for certain instances of fraud or malfeasance, a shareholder is not liable for the debts or obligations of a C-corp beyond the shareholder's investment into the corporation. Most C-Corps are large corporations and household names. If you are interested in 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 Nonprofit operates somewhat like a for-profit corporation, but without a profit motive. This allows the nonprofit 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 nonprofits, from trade organizations to community recreation organizations, and incorporating a nonprofit may require a bit more paperwork and a few more bureaucratic hoops than other types of entities. Fortunately, Rocket Lawyer can help you start your nonprofit by filing your paperwork, following up with your state, and answering your legal questions both before and after your formation. Get help starting your nonprofit 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 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, C-corp, or Nonprofit 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, forming a separate business entity may be the best way to protect yourself from legal judgments, tax liens, and other expensive headaches that can cut into your bottom line.
What are the risks of not forming a business entity for my side hustle?
When you run a side hustle without forming a separate business entity, you are essentially operating as a sole proprietorship or a general partnership (if you have a business partner) by default. While this is a common approach for many small businesses and side hustles due to its simplicity, there are several risks associated with not forming a distinct business entity.
Personal Liability: One of the most significant risks is personal liability. In a sole proprietorship or general partnership, your personal assets (such as your home, savings, and personal belongings) are not legally separated from your business. This means that if your side hustle incurs debts, lawsuits, or other liabilities, your personal assets could be at risk.
Difficulty in Raising Capital: If your side hustle grows and you want to raise capital from investors, it can be more challenging to do so without a formal business entity. Investors often prefer to invest in businesses that have a clear legal structure and ownership framework.
If you are ready to consider forming a separate business entity for your side hustle, reach out to a business services specialist at Rocket Lawyer or start your business formation online. We'll take care of your formation filing so you can get back to business.
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.