Which business structure should you choose for your side hustle? Read about the tax and liability advantages of running a side company.
If you’ve been operating a side hustle for a long and it’s finally starting to take off, you may be thinking whether you should get serious about making it more official. You may be losing out on key tax and legal benefits if you do not incorporate your firm, but what are your alternatives and how do you choose?
What business structures should you consider if you want to expand your side hustle? Continue reading to discover more about some of the most common legal structures for companies and what you should consider when choosing an organization for your firm.
What kind of businesses should I explore for my side hustle?
There are more than a half-dozen distinct corporate entities accessible, each with its own set of benefits and drawbacks. The following are the most popular possibilities.
Businesses with Limited Liability (LLCs)
A Limited Liability Corporation, or LLC, is a corporate structure that shields owners from personal liability for the company’s debts or judgements. The firm has some of the features of a sole proprietorship or small partnership under an LLC, but it may enjoy the same protection from personal responsibility as bigger companies.
Corporations
S Corporations (S-Corps — closely-held firms that pay no income tax), C Corporations (C-Corps — corporations that are taxed separately from their owners), and LLCs are all types of business entities that fall within the general “corporation” category. The majority of C-Corps are huge organizations and household brands, while the majority of S-Corps are single proprietorships or small firms that may benefit from the pass-through taxes that these company arrangements provide. Whether you want to form an S-Corp or a C-Corp,
Non-Profits
A Non-Profit Company functions similarly to a For-Profit Corporation, but without the profit motivation. This enables the Non-Profit to apply to the IRS for tax-exempt status and utilize revenues to pursue its mission of serving the greater good.
There are several forms of non-profit organizations, ranging from trade groups to community recreation organizations, and creating a non-profit may need a little more paperwork and a few more bureaucratic hurdles than other types of businesses. Thankfully,
How can I choose which business structure is best for my side hustle?
Here are some things to think about when determining which company structure is best for your side hustle:
The tax structure
If your side hustle only complements your normal income, there’s little need to pay taxes on these money twice: first when your firm gets them and again when you receive a salary from them. You may enable these money to flow straight through to you by incorporating an S-Corp or an LLC, where they will be taxed as regular income.
On the other hand, there’s a reason why most bigger firms are structured as C-Corps: adding a few hundred thousand dollars of company revenue to your normal income may easily push you into the highest tax rate. In these cases, a C-Corp or LLC may be a preferable option. If you have particular issues concerning tax liabilities and your company, you may consult with a lawyer.
Legal responsibility
Almost any corporation structure will provide a company owner better legal protection than a sole proprietorship. When it comes to limiting a company owner’s personal responsibility, an LLC, S-Corp, C-Corp, or Non-Profit is often the best option. The degree to which you’ll need to protect yourself against responsibility will be determined primarily by the nature of your side business. When you repair hard drives, the universe of legal claims that may be made against you is much different than when you drive for a ridesharing business or provide remote tech support. Talking things through with a lawyer might sometimes bring some clarity.
Potential conflicts of interest
If you already have a full-time “day” work, you may need to take precautions to avoid a conflict of interest with your employer. This may be as easy as adding a few phrases to your contracts with customers or informing your employer about your side employment in writing. In rare cases, your workplace may have its own policies and procedures regarding “moonlighting.” If this is the case, your employee handbook will take precedence. In any case, having your side hustle set up as a separate business will help you create a clear separation between your 9-5 existence and your side hustle life. Giving your company a legal structure doesn’t have to be difficult—and if you’re making money on the side, incorporating your company is the best way to protect yourself against court judgements, tax liens, and other costly issues that may eat into your profits.
