Estimated reading time: 5 minutes
In 2022, 45 percent of Americans reported having a side hustle, which amounts to about 70 million people. In fact, side hustles are very popular among individuals looking to earn extra money doing various gigs, such as driving their car, renting out property, selling online products, working as a freelancer, developing a YouTube channel, tutoring, reselling clothing, and making and selling crafts.
Many side hustlers wonder whether they should structure their side gigs as real small businesses using a formal legal business structure. While this is a personal choice, there are several things to keep in mind when making this important decision:
1. Understand the income threshold and taxation requirements: According to IRS rules, if your side hustle earns more than $600 a year, you must report it on your tax return and pay estimated quarterly taxes. However, this does not mean you must form a limited liability company, as there is no required income threshold when it comes to forming an LLC. It is also important to keep in mind that there are tax benefits involved in forming an LLC, but these benefits do not kick in until you annually earn about $30,000 to $40,000.
2. Grasp the many benefits that LLCs provide: While forming an official business may feel like a daunting task, this is not the case. LLCs are actually easy to form and are considered cost-effective ways to make a business legitimate. In addition, LLCs enable entrepreneurs to protect their personal assets, which could be at risk if you operate without an LLC. The benefits include:
*Helping you separate personal and business finances
*Offering liability protection in the case of legal action or litigation
*Ensuring your business is a separate legal entity, which provides increased privacy and protection
*Building trust and credibility with clients, customers, suppliers, and business partners
3. Recognize the costs associated with forming an LLC: LLCs are the least expensive business entity to form, but there are still some costs you’ll need to factor in. Fees to file your Articles of Organization vary by state, with some starting as low as $50. But, in many places, there are additional fees to operate your business. For example, in the state of California, LLC owners must pay an annual franchise tax fee of $800, regardless of whether business owners are earning 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 is not recommended. Many states also require small business owners to file an annual report, which can add extra fees to your LLC maintenance.
4. Appreciate an LLC’s personal asset protection: One of the main advantages of an LLC is asset protection. 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—instead of a business—could have substantial financial ramifications, which makes the asset protection of LLCs very important to every business owner.
What Should Business Owners Do Before Starting an LLC?
If you decide that LLC formation is the right choice for your side business, there are several things you must do. Prior to creating an LLC, business owners should learn the fundamentals of LLCs, how they work, their limitations, and exactly how they can protect a business. Before starting an LLC, business owners should do the following:
Choose a Business Name: Search availability of your business name and its similarity to existing names. Keep in mind that selecting a unique business name helps business owners avoid confusion and trademark issues.
Reserve a Name: Most states will allow you to reserve a name (by paying a fee) if you are not ready to file your LLC documents.
Develop an Operating Agreement: This is a roadmap that breaks down how the LLC will be organized. It highlights various items, such as voting rights, ownership interests, allocation of profits/losses, how meetings are run, governance and a dissolution plan. This agreement defines LLC members’ rights and responsibilities, as well as minimizes any problems in the future.
Choose a Registered Agent: A registered agent is someone who receives official documents (such as subpoenas and lawsuits) on behalf of the LLC.
Create and File Articles of Organization: This important document includes the LLC name and address, the nature and purpose of the LLC’s business, the name and address of the registered agent (who is authorized to physically accept delivery of legal documents on behalf of the LLC), length of the LLC’s existence and names of LLC members. An Articles of Organization must be written, signed and filed with the State’s Secretary of State Office or a similar state agency handling business registration.
Receive a Certificate of Existence: Your state will issue a certificate once all LLC documents are filed. Once you have this certificate, you can obtain a tax ID number and business licenses and permits.
An LLC is a flexible business option that is very easy to set up and can provide a great deal of protection for your growing side hustle. If your side hustle is taking off, the best time to form an LLC is right now. Take advantage of IA’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. Form your free LLC today!