Do I Need an LLC for a Side Business?

Updated: Nov. 20, 2024

According to Zapier, 45% of Americans (or about 70 million people) reported having a side hustle in 2022. Side hustles, such as driving, renting out property, selling online products, and freelancing, are popular among those looking to earn extra income.

Many side hustlers wonder whether they should structure their additional source of income as a legal small business, like a limited liability company (LLC) or corporation. While this is a personal choice, you must consider several factors before making your final decision. We’ll discuss these considerations below.

When Do You Need an LLC for Your Side Hustle?

You’ll need an LLC for your side hustle if:

Your Side Business Earns a Significant Amount of Income

Before forming an LLC for your side hustle, it’s important to understand the current income threshold and tax requirements for self-employed individuals.

As stated in the Internal Revenue Service’s guidelines for self-employed individuals, you must file an income tax return if your side hustle earns $400 or more. This rule also applies to sole proprietors with incomes of less than $400 who meet other criteria mentioned in the Form 1040 and 1040-SR instructions.

There is no exact income threshold for forming an LLC. However, experts recommend registering side businesses as LLCs when they’ve earned substantial income. For instance, gig workers and freelancers can create LLCs when their incomes reach at least $60,000 to enjoy the tax benefits associated with these legal entities. LLC formation has also been recommended for businesses earning a minimum of $50,000.

You Want to Reduce Personal Liability

If you’re a sole proprietor, you bear the responsibility for potential accidents or legal issues. Structuring your side business as an LLC reduces your liability if you face legal action or litigation. Forming an LLC also creates a separate legal entity, protecting your privacy and personal assets.

The liability protection attached to LLCs can be crucial in the following situations:

• Your business hires employees, which increases the risk of legal liability.
• The venture operates as a partnership. A general partnership can fail when a business partner encounters problems that can affect other partners and the venture.

You Seek Asset Protection

LLCs also allow entrepreneurs to protect personal assets, which could be at risk if a business operates without one.

While some entrepreneurs decide not to form an LLC because they do not have many personal assets, such as homes or vehicles, this can be dangerous reasoning. Being sued as an individual rather than as a business could have significant financial consequences, highlighting the importance of the asset protection LLCs provide.

You’ve Set Clear Business Goals

You can also form an LLC if you’ve established specific business goals and objectives. This step could help you save on business expenses and taxes over time.

You’re Considering the Cost of Business Formation

While business formation may feel daunting, this isn’t the case with LLCs. These entities are easy to form and considered cost-effective ways to legitimize a business. However, there are some costs you must consider when creating an LLC.

Depending on your state, filing articles of organization may cost $50 or more, and additional fees may apply. For example, LLC owners in California must pay an annual franchise tax fee of $800, regardless of whether business owners earn any income.

In addition, you’ll need to designate a registered agent for your business to receive important documents. While you can act as your own registered agent, it’s not recommended. Many states also require small business owners to file an annual report, potentially adding extra fees to your LLC maintenance.

What are the Other Benefits of Starting an LLC?

Beyond liability and asset protection, savings, and increased privacy, creating an LLC can help you:

• Separate personal from business finances. This allows you to:
  • Simplify tax filing and identify business expenses for potential deductions and write-offs.
  • Protect personal finances from the consequences of potential legal issues.
• Build trust and credibility with clients, customers, suppliers, and business partners. LLCs make you appear more professional to these individuals and create a reputable brand, helping you gain their trust and loyalty.

How to Form an LLC for Your Side Hustle

If you decide that LLC formation is right for your side business, you must take the following steps.

Understand the Basics of LLCs

Before forming an LLC, it’s important to understand what it is and what to expect when operating this legal entity. A trusted business formation attorney or service provider should discuss the fundamentals of LLCs with you and offer legal advice to ensure compliance with current business-related laws.

Choose a Business Name

A unique name helps your business avoid confusion and trademark issues. Before reserving and registering your business name, check its availability through your Secretary of State’s business portal. Ensure your chosen name is unused and meets your state’s naming requirements.

If your business name is available but you want to file your LLC documents at a later date, most states let you reserve a name. Fees for this service vary by state.

Write a Business Plan

A business plan helps your side hustle succeed and can turn it into a permanent and legitimate venture. It typically includes the following sections:

• An executive summary
• A business description and your mission statement
• A market analysis, including a competitive analysis
• The venture’s management structure
• A description of the product or service you offer
• Your marketing and sales strategies
• Data on financial projections
• Other documents relevant to your business

As your sole proprietorship grows, a business plan can attract potential investors, convince lenders to approve your business loan application, or help you build business credit.

Hire a Registered Agent

A registered agent receives official documents, such as subpoenas, lawsuits, and notices from the Secretary of State on behalf of the LLC. Again, you could serve as your LLC’s registered agent, but it’s better to use a third-party service. Failing to have a registered agent or mishandling legal documents can lead to serious consequences for your business.

Ideally, a registered agent must have a physical address in an LLC’s home state, and they can’t use a P.O. Box when receiving documents meant for the business.

Draft an Operating Agreement

An operating agreement outlines how an LLC is run, with items such as:

• Voting rights
• Ownership interests
• The allocation of profits and losses among members
• How meetings are conducted
• Governance within the business
• A dissolution plan (if you decide to close the business)

This document defines the rights and responsibilities of the LLC’s members to prevent potential issues. Once your operating agreement is written, have a business formation attorney or law firm review it to ensure it’s comprehensive and clear.

Create & File Your Articles of Organization

An LLC’s articles of organization contain important details about the business, including:

• The company’s legal name and address
• The nature and purpose of the LLC’s business
• The name and address of the company’s registered agent
• The length of the LLC’s existence
• The names of the LLC’s members

This document must be written, signed, and filed with the State’s Secretary of State Office or a similar state agency handling business registration.

Other Crucial Steps

In addition to the abovementioned documents, LLCs must prepare and submit a beneficial ownership information (BOI) report that’s filed with the U.S. Department of Treasury’s Financial Crimes Enforcement Network.

Businesses are required to provide information about their owners in their BOI reports. New, non-exempt LLCs must also provide details about the representative filing their formation documents.

Once your LLC is established, you’ll need an Employer Identification Number (EIN) and a state tax ID number to file business taxes. One or multiple permits may also be necessary to operate in and out of your home state.

We also recommend opening a business bank account to separate personal and company funds. For this step, your bank may ask you for your formation date, business type, owner names and addresses, EIN, and other details.

A Note on the Certificate of Good Standing

Finally, all states issue a Certificate of Good Standing or Certificate of Existence to registered businesses. This certificate verifies that a company has met local business formation requirements and is legally operating in its home state. If your LLC will serve customers in other states, you’ll need a Certificate of Good Standing.

Create an LLC for Your Side Business Today

An LLC is a flexible business option that is very easy to set up and can protect your growing side hustle. If your side hustle is taking off, now is the best time to form an LLC. Take advantage of Inc Authority’s expertise and start the next step in your business journey today.

Get started by forming your business online. Then, we can work with you to establish and build your business credit. We’re here to answer your questions and guide your business to success. Start forming your free LLC today!

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