Side businesses are a popular way to generate extra income or explore a passion without quitting your day job. But when does a side hustle evolve into something that needs more formal business structure, like an LLC? This article explores that question.
Understanding Side Businesses
Definition of a Side Business
A side business, often referred to as a side hustle, is a venture one undertakes in addition to their full-time job. Side businesses are often born out of a hobby or a skill set that the individual wants to monetize, while still maintaining the security of their main job.
Common Types of Side Businesses
Common side businesses include freelance work (like writing, graphic design, or consulting), selling handmade products, running a blog or YouTube channel, and many more. The beauty of a side business is that it can be whatever you want it to be, as long as it’s something you’re passionate about and has potential to generate income.
Delving into LLCs
What is an LLC?
An LLC, or Limited Liability Company, is a type of business structure in the United States that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
Advantages of an LLC
LLCs provide a number of advantages, including protection of personal assets from business debts and liabilities, flexibility in management, and pass-through taxation which avoids the double taxation issue of corporations.
Disadvantages of an LLC
However, forming an LLC also comes with disadvantages, like the cost of setting up and maintaining the LLC, and potential complications in raising capital.
The Need for an LLC in a Side Business
Legal Protection
An LLC can protect your personal assets in case your business is sued. If you are running a side business without an LLC or any other formal business structure, you’re running it as a sole proprietor, which means your personal assets could be at risk in case of business liabilities.
Credibility and Professionalism
Establishing an LLC can enhance your business’s credibility. Customers, vendors, and partners may perceive an LLC as a more professional entity compared to a sole proprietorship.
Tax Advantages
While a sole proprietorship and an LLC both enjoy pass-through taxation, the LLC provides more flexibility and options for managing and distributing business income.
Circumstances When an LLC May Not Be Necessary
Despite the advantages, not every side business needs to be an LLC. If your side business is low risk and doesn’t generate a significant income, the costs and formalities of an LLC might outweigh the benefits.
Steps to Forming an LLC for Your Side Business
Choosing a Business Name
Your LLC name needs to be distinct and cannot be in use by another company in your state. Most states also require the inclusion of “LLC” or “Limited Liability Company” in your business name.
Filing the Articles of Organization
This is a document that includes key details about your business. You file it with the Secretary of State in the state where you want to establish your LLC.
Creating an Operating Agreement
Though not always legally required, it’s recommended to have an operating agreement that outlines the ownership and operating procedures of the LLC.
Obtain an EIN
An Employer Identification Number (EIN) is like a Social Security number for your business. You’ll need it for tax purposes and to open a business bank account.
Conclusion
In conclusion, while forming an LLC for your side business might seem like a big step, it can provide a number of benefits, particularly around legal protection and tax advantages. However, it’s important to evaluate your business’s specific needs and consult with a legal or business professional before making the decision.
FAQs
What is the main advantage of an LLC for a side business?
The main advantage is the protection of personal assets. If the business incurs debts or is sued, the owner’s personal assets are generally protected.
Are there any disadvantages to forming an LLC for my side business?
Yes, there can be. Costs for forming and maintaining the LLC, as well as potential complexities in raising capital, can be considered disadvantages.
What are some common types of side businesses?
Common side businesses can range from freelance work like writing or design, selling handmade products, blogging, or even running a YouTube channel.
What steps do I need to take to form an LLC?
Steps include choosing a unique business name, filing the Articles of Organization, creating an operating agreement, and obtaining an EIN.
Can I run a side business without forming an LLC?
Yes, you can. Many side businesses are run as sole proprietorships. However, this does not offer the same legal protections as an LLC.
