In today’s gig economy, the side hustle reigns supreme. From freelancing and consulting to launching an online store or creating a hit podcast, more and more individuals are exploring ways to supplement their income and pursue their passions. But when does a hobby become a business, and how should it be structured? This is where a Limited Liability Company, or LLC, enters the picture.
The structure of an LLC offers several benefits that can be advantageous for small business owners and side hustlers alike. It’s designed to provide legal protection, tax benefits, and a level of credibility that can make your side hustle more appealing to potential customers and investors. However, like any business decision, it’s not without its drawbacks. It’s important to understand both the advantages and the disadvantages of forming an LLC for your side hustle to ensure it aligns with your business goals and personal needs.
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Understanding Side Hustles
Before getting into the specifics of how an LLC can benefit your side hustle, it’s crucial to understand the concept of a side hustle itself and its significance in today’s economic climate.
Definition and Explanation of Side Hustles
A side hustle is typically a self-driven, income-generating pursuit that you engage in outside of your regular job. It’s not necessarily a part-time job — though it could be — but more often, it’s a passion project or a personal business. The main objective is not just to earn extra money, but also to explore your interests, hone new skills, or test the waters of entrepreneurship.
Side hustles can range from selling handmade crafts on Etsy, starting a blog, freelance writing, or even offering coaching services in a field you’re knowledgeable in. The opportunities are vast, and with the rise of digital platforms, launching a side hustle has become more accessible than ever.
Brief Discussion on the Prevalence and Importance of Side Hustles Today
In the modern economy, side hustles have taken on a newfound importance. According to a 2022 survey by Bankrate, about 45% of working Americans report having a side hustle. This trend is even more prevalent among younger generations, with more than half of millennials and Gen Zers having a side gig.
Side hustles not only provide an additional income stream but also offer an opportunity to diversify one’s skills, gain entrepreneurial experience, and achieve a sense of financial security. In a world of economic uncertainty and evolving job markets, the importance of having a side hustle is becoming increasingly recognized.
However, as your side hustle grows and becomes more profitable, it may also come with increased risk and complexity. This is where considering the formation of an LLC comes into play [1].
LLC and Side Hustles: An Overview
To make informed decisions about your side hustle, it’s important to understand the potential benefits and drawbacks of forming an LLC.
Brief Explanation on the Connection between LLCs and Side Hustles
An LLC, or Limited Liability Company, is a type of business structure that blends elements of sole proprietorships, partnerships, and corporations, offering its owners—referred to as members—certain advantages of each. One of the main reasons side hustlers turn to LLCs is to safeguard their personal assets. In the event of a lawsuit or debt, an LLC generally protects the members’ personal assets from being used to settle business debts or liabilities.
However, the relationship between LLCs and side hustles isn’t merely about protection; it also involves aspects like taxation, credibility, and ease of raising capital. But how do you know if forming an LLC is the right move for your side hustle? That’s exactly what we’ll discuss in the upcoming sections.
Rationale Behind Considering an LLC for a Side Hustle
The rationale for considering an LLC for your side hustle comes down to a few key factors. If your side hustle is growing, and you’re beginning to see a significant income stream, then forming an LLC can help provide a protective layer for your personal assets. This can be especially important if your side hustle involves some level of risk—like if you’re selling a product and there’s potential for a customer to sue.
Moreover, an LLC can also add credibility to your side hustle. It shows potential customers and partners that you’re serious about your business. It can also make it easier to apply for business loans and attract investors, should you choose to expand your side hustle [2].
Still, it’s important to note that forming an LLC comes with costs and responsibilities. You will have to consider the filing fees, the paperwork, and the ongoing requirements to maintain the LLC.
Advantages of Forming an LLC for Your Side Hustle
Understanding the key benefits that come with forming an LLC can help you determine whether this step is a fit for your current business situation and future aspirations.
Legal Protection
One of the most compelling reasons to form an LLC for your side hustle is the legal protection it provides.
Personal Liability Protection
The primary advantage of an LLC is that it creates a legal separation between you and your business. This means your personal assets, such as your home, personal bank accounts, and other personal property, are generally safe from creditors seeking to collect business debts. This protection is crucial if your side hustle involves risk that could potentially lead to a lawsuit or substantial debt.
Protection from Other Members’ Actions
If your side hustle is a partnership, another benefit of an LLC is the protection it offers from the actions of other members. Each member’s personal assets are protected from the actions of other members. So, if your business partner incurs a debt or legal problem, it generally doesn’t affect your personal assets.
Tax Advantages
Apart from legal protection, an LLC also offers certain tax benefits that can be advantageous to side hustlers [3].
Flexibility in Choosing Tax Classification
An LLC offers flexibility in how it’s taxed. It can be taxed as a sole proprietorship, a partnership, or a corporation, depending on the number of members and the preferences of the owners. This flexibility allows you to choose the tax classification that best suits your financial situation and tax planning strategies.
Possible Tax Deductions
Additionally, forming an LLC for your side hustle may allow you to take advantage of certain business expenses as tax deductions. These could include costs for office space, equipment, marketing, and more. This can help lower your overall tax liability.
Credibility and Professionalism
Establishing your side hustle as an LLC can also enhance its credibility. An LLC suggests a level of professionalism and seriousness about your business venture. It may make clients, suppliers, and investors more comfortable doing business with you, potentially opening doors to new opportunities.
Easier Access to Business Funding
As an LLC, your side hustle may find it easier to access business funding. Banks and investors often prefer to lend to or invest in official business entities like LLCs over sole proprietorships or partnerships. An LLC also allows you to bring in more members, who can contribute capital to the business [4].
Easier Transfer of Ownership
An LLC offers greater flexibility when it comes to transferring ownership. Unlike a sole proprietorship or a partnership, an LLC exists separate from its members, which means it can be sold or passed on more easily.
Disadvantages of Forming an LLC for Your Side Hustle
While forming an LLC for your side hustle comes with a host of benefits, it also carries certain disadvantages that you need to consider. Each business is unique, and what works for one might not work for another.
Costs and Administrative Burdens
Despite the advantages that come with forming an LLC, it does entail certain costs and administrative responsibilities.
Setup and Filing Costs
Forming an LLC involves setup and filing fees, which vary by state. Depending on where you live, these costs can range from $50 to several hundred dollars. This initial investment may be substantial, especially if your side hustle is still in its early stages or isn’t generating a significant income yet.
Annual Fees and Reports
In addition to setup costs, most states require LLCs to file annual reports and pay an annual fee. These ongoing costs and administrative tasks can add to your workload and operational expenses, which is a key factor to consider when deciding whether to form an LLC.
Complexity in Management
Compared to a sole proprietorship, managing an LLC can be more complex. There are more rules and regulations to comply with, and you may need professional help from an accountant or a lawyer, adding to your costs. Plus, if your LLC has multiple members, decision-making can be more complex, and disagreements among members could affect the operation of your business [5].
Tax Disadvantages
While we discussed some of the tax advantages of forming an LLC earlier, there can be potential tax disadvantages too.
Self-Employment Tax
Unless you choose to have your LLC taxed as a corporation, profits from your LLC will be subject to self-employment taxes. This means you’ll be responsible for both the employer and employee portions of Social Security and Medicare taxes, which can be significantly higher than what an employee would pay.
Possibility of Double Taxation
If you choose to have your LLC taxed as a corporation to avoid self-employment taxes, you could potentially face double taxation. This happens when the corporation’s profits are taxed at the corporate level, and then any dividends distributed to members are taxed again at the personal level.
Difficulty in Raising Capital Compared to Corporations
While an LLC may make it easier to access business loans and attract investors compared to a sole proprietorship, it can still be more difficult to raise capital compared to corporations. Corporations can issue stocks, making them more attractive to investors. On the other hand, investment in an LLC can be more complicated, potentially limiting your ability to raise capital.
References
[1] If you think you need to register your side hustle with the government to be considered a business, think again
[2] Should I Start an LLC for My Side Hustle?
[3] The ultimate side hustle guide
[4] How to Start a Side Hustle (And Which One to Choose)
[5] Do You Need an LLC for Your Side Hustle
