If you think you need to register your side hustle with the government to be considered a business, think again
- You don't have to register with the government to be considered a business - even picking up some freelance or gig work on the side technically counts as a business.
- When you start earning money through a side hustle or side job, you're considered a sole proprietor, which in many cases is a fine status to stick with.
- But as you earn more, take on a partner, or decide to take your side job full-time, you might want to look at structuring your business as an LLC or S-Corp for tax and legal benefits.
- Before you change your status, you'll probably want to consult with a professional to get the full picture of what it would cost and how it would impact your business.
- Need help figuring out the smartest way to structure your business? SmartAsset's free tool can help find a financial planner near you »
I started a blog as a small side hustle way back in October 2008. Little did I know at the time that I was setting myself up for a brand new full-time career working online. Along the way, I picked up some very important lessons about how to structure your side hustle for both short-term and long-term goals.
Some people think you have to register a business with your state's government to be considered a true business, but that isn't actually the case. Follow along to learn how the government looks at your side hustle when you get started and whether or not it may make sense to register a limited liability corporation, or LLC, for your side hustle.
What qualifies as a business
If you think you need to register with the government to be considered a business, think again. If you sell any product or service, you are in business. By default, any business that doesn't register with its secretary of state is considered a sole proprietorship.
As a sole proprietorship, you operate the business under your own name. You file the taxes with an added Schedule C on your personal tax return. You and the business are the same legal entity in the eyes of the law.
If you ever sell crafts online, take a little computer work in the evening, or drive for a ride-sharing platform, you are in business. But the default sole proprietor status may not be in your best interest.
Options to structure your business
You can keep your business as a sole proprietorship indefinitely if you want. Many side hustles choose to go this route, and there are a lot of good reasons for it. After all, it is free and automatic. There are no extra hoops to jump through.
However, you can get added financial and legal benefits if you do register your business. Here are the options you have in most situations:
An LLC, or limited liability corporation, is the most basic business entity you can register. In fact, LLCs are not recognized at a national level - they operate on a state-by-state basis based on your state's laws. In some states, you can register an LLC for $100 or less.
Where I live in California, they come with a minimum $800 annual franchise tax. Look into your state rules to find out if an LLC makes sense. LLC taxes are filed on your own taxes just like a sole proprietorship, but you may have some additional options to save money.
An S-Corp, short for S-Corporation, works similarly to an LLC in many ways, most notably taxes. But legally, an S-Corp is often more suitable for larger businesses.
If you plan to take your venture full-time, an S-Corp may make more sense. But not always. Consult with a trusted tax or legal professional if you are unsure of which structure might be best for your business needs. This filing status gives owners shares in the company, so it works well for businesses with more than two owners, among other scenarios. My own online writing business is a registered S-Corporation in California.
C-Corp status is usually held for larger entities, but there is no rule saying you can't have one yourself. Like an S-Corp, a C-Corp is required to have officers, have an annual meeting, and fulfill additional filing requirements. Most big, public companies are C-Corporations. If you want to turn your side hustle into the next big public company, this is the way to go. However, very few side projects would ever need to file as a C-Corporation.
If you run your business with a partner, you have a few additional partnerships available as well. But if you run it alone, in most cases a sole proprietorship, LLC, or S-Corp will make the most sense.
Consider taxes, legal issues, and costs
If your business makes less than around $30,000 to $40,000 per year, there are no tax benefits to filing as an LLC or S-Corp. Around the point where you could consider yourself an employee of the business and pay yourself a full-time paycheck, the benefits of filing your taxes with LLC taxed as an S-Corp or S-Corp status kick in. Most side hustles don't earn nearly that much, so you should be safe as a sole proprietorship for tax purposes.
However, there are legal issues to consider as well. If you are a sole proprietor and get into a legal dispute, you can be sued for your personal assets. That includes your personal finances and even your home! Filing as an LLC or corporation offers a "corporate veil" that protects your personal assets if you follow specific guidelines. Consult with a trusted legal adviser if you are unsure of how to handle that aspect of the decision.
Finally, you have to look at the costs. When I lived in Colorado, I could register an LLC for $50 myself online and pay just $10 per year when I filed a periodic report. In California, you'll pay a minimum $800 annual tax or 1.5% of your total business earnings, whichever is higher. Don't rush to sign up for an LLC until you've looked into the costs.
There is no right or wrong when it comes to business structures, just what's right for you. If you have a small, part-time side hustle, odds are going without registering your business as an LLC is just fine. If you have any major legal risks or make more than around $40,000 per year, however, you may benefit from filing with your state. Focus on the long-term costs and your long-term goals when making your decision.
Need help figuring out the smartest way to structure your business? SmartAsset's free tool can help find a financial planner near you »
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