While you can operate your side hustle as a sole proprietorship without turning it into a legal business entity, getting an LLC for your side business can provide added protection and credibility.
Here, we'll give you all the reasons to consider an LLC for your side business, plus tips on when and how to get started.
When Are You Required to Have an LLC?
You are not required to have an LLC or legal business entity in order to run your side business, so the timing is up to you. However, whether you're still in the planning phases or have been running your side hustle for some time, forming an LLC is typically a smart, cost-effective choice.
Ask yourself these questions if you need help deciding when to create an LLC:
How much money am I currently making? If you're earning more than $400 a year for your side hustle, you're required to pay taxes. Having an LLC can help you file those taxes and minimize your tax obligation.
Can I commit to an LLC? LLCs are generally low-cost and easy to manage. But if you haven't formed one before, you should examine the startup costs and take a look at ongoing compliance requirements like Annual Reports.
What are my goals? Start setting goals for your side hustle now. You don't have to do everything all at once, but you do need a plan for how you'll continue to grow.
Should You Set Up an LLC for Your Side Hustle?
To cut straight to the chase, the answer is a definite "Yes!" In fact, that's exactly what small business experts said when we asked them the same question.
Barry Moltz is an entrepreneur, author, and small business consultant who says when it comes to making a decision about starting an LLC, the answer is easy. "Yes — you have the legal protection of the LLC in case something goes sideways in your business (i.e., someone sues you or you can’t pay your bills). It also separates your business from your personal finances so you can take business tax deductions."
Wondering what those tax deductions might be? Here are some of the possibilities:
Home office deduction
Equipment needed to run the business (computers, materials, office supplies, etc.)
Ivana Taylor, podcast host and publisher of DIYMarketers, agrees with Moltz. "A side hustle is a business," she says, "and if you're starting a business, you'll want the benefits and protection an LLC can give you."
Should you start an LLC before making money? Taylor says that while there are costs associated with business formation, it's always worth it in the long run. "Starting a business takes money. You'll be spending money on software, marketing materials — all kinds of things. An LLC will allow you to write those expenses off — and save money on taxes."
If you still need some convincing, let's look at the pros of having an LLC for your side gig.
Benefits of Forming an LLC for Your Side Hustle
There's nothing wrong with starting and running your side hustle as a sole proprietorship. In fact, many successful businesses have gotten their start this way. However, there are some things a sole proprietorship simply cannot do for you that an LLC can:
This is the biggest and most significant benefit of becoming an LLC. "An LLC will protect your personal assets from any issues that might come up in your business," Taylor says. And she's right: Having an LLC ensures you have the least risk to your personal belongings and finances if someone takes legal action against your business (e.g., a lawsuit).
Separation of Personal and Business Finances
Taylor also touts the next largest benefit of an LLC: the required separation of personal and business finances, which is one of the foundational principles of business ownership and can make it easier to take deductions and write-offs. "On the financial front, an LLC basically means that you're setting up a separate entity from your personal Social Security number," Taylor says.
Separating your finances will make it easier to file your taxes and see what your business expenses were in order to get the maximum amount of deductions and write-offs possible (more on that below). Plus, your personal money will be protected in case your LLC faces a lawsuit.
Not only will forming an LLC help you avoid the tax complications mentioned above, but it could also help you save money elsewhere — even if you haven't started turning a profit yet.
Moltz says, "[LLCs] cost very little, and even if you don’t have revenue, you can deduct expenses now on future revenue." And once you do start making income, he says, "You can deduct business expenses against your business income and pay less in tax." Every deduction you make will reduce your overall tax burden, so when you're able to claim legitimate expenses, it could ultimately result in you owing less money at tax time.
Privacy and Protection
As a side hustler, you likely work out of your home or under your own name. This makes it easier for customers to find information on who you are and where you live. If someone takes legal action against you, you would likely be served at your home residence. Forming an LLC gives you some level of anonymity and ensures your identity is only as available as you want it to be.
Credibility and Legitimacy
Taylor says that if you want your customers and the general public to think your side hustle is a legitimate business, you need to treat it like one.
"From a marketing perspective," she says, "an LLC is a business and, hence, a brand. An LLC adds a level of legitimacy to your business, which can help you attract customers and partners. An LLC provides a more professional image and can help build your brand's reputation, which can lead to greater customer trust and loyalty." Creating a brand is critical to your business's success and growth trajectory, and having an LLC is an important step in the process.
How to Set Up Your Side Hustle as an LLC
It's time to launch your side hustle LLC. Follow these steps to get started:
Name Your Business
As a side hustler, you're probably operating under your own name or perhaps using a DBA to operate under a name different from your own. As an LLC, you'll need to have a legally registered business name. Here are a few rules to keep in mind about your business name:
Cannot be used by any other business in your state of formation
Should be unique from the competition, attention-getting, and memorable
Should not contain potentially offensive wording, slang, or complicated language
Should be as close to your website URL as possible (if you have one) and easy to spell for those searching or typing
Creating a business plan is a great practice for any small business, even if it's a side hustle (for now). A business plan acts as your blueprint to make your side biz a success, and it could be the roadmap you need to grow your hustle into a full-time gig.
Make sure your plan includes the following:
An executive summary
A description of your business and a mission statement
An analysis of your market
The management structure you'll use
What you're planning to sell
A strategy for marketing and sales
Data on financial projections
Any relevant supporting documents
You are not required to have a business plan for your side hustle, but it can help you down the road if you need to find investors or secure business funding or credit.
Secure an EIN
An EIN or Employer Identification Number is how the IRS recognizes your company. You can think of it as a Social Security number for your side hustle turned business. An EIN is required in certain situations, and it offers numerous benefits:
Files your business taxes separately
Makes it easy to get a business bank account or business credit
Give you the ability to hire and manage employees and their taxes
Reduces your risk of being affected by fraud or identity theft
You can file for your EIN with the IRS or use an EIN service to acquire and store your EIN to be used whenever you need it.
Get a Business Address
Since one of the perks of having an LLC is privacy, you probably don't want your home address attached to it. Your side hustle might benefit from using a virtual address service, which gives you a street address in the state in which your LLC is formed. You'll be able to use this address during the registration process and receive mail digitally from anywhere in the world, making it easy to check, store, and manage your important documents.
Research Licenses and Permits
It's possible you'll need a license or permit to legally operate your LLC, in which case you must acquire it before you can continue running your business.
Licenses and permits may be determined by your profession, industry, or the type of product/service you're selling, and they will be issued at one of the following levels:
Remember that professional licenses and many types of permits need to be renewed regularly, so you'll have to maintain them in order to avoid consequences like fines or even the dissolution of your business.
If you're uncertain, you might benefit from our Business License Research Package, which can help determine exactly which licenses and permits you need and how to obtain them.
Register Your Business
Once you've gone through all these steps, you're ready to officially start your LLC by registering your business. Here's how:
Find out where you need to file. Typically, you'll need to file with your Secretary of State, but there may be a state-specific business formation agency.
Decide how to file. Many states offer different filing options, which may include online, mail, or in-person options.
Gather your information. You'll need the names and addresses of all business partners, an available business name, your business address, and the name of your Registered Agent.
Pay your fees. LLC registration fees vary by state, so you'll find them anywhere between $50 and $500+.
Wait for approval. Wait times also vary by state. Most state agencies offer expedited processing for an additional fee.
If you don't want to go through all these steps or handle all the paperwork entailed, you may choose to use a business formation service like Incfile, which can form your LLC for $0 + state fee. Plus, you'll also get your first year of Registered Agent services completely free, saving you $119.
Other LLC Considerations for Side Hustlers
Once you've formed your LLC, there are a few other factors you'll need to consider. Here are some of the biggest considerations when managing your new LLC:
When tax season rolls around, you might be wondering, "How much money can I make on the side without paying taxes?" You can only earn up to $400 annually without needing to pay taxes on your earnings. Beyond that, you'll need to file annual business taxes with the IRS. When you have an LLC, you'll be subject to pass-through taxation where income passes through to your personal tax filing. Take advantage of our small business accounting service to start planning now.
Small business owners on the whole are painfully underinsured. But remember — your side hustle is a legitimate business, and it comes with certain risks. You can minimize those risks by getting the proper business insurance for your side gig.
Growing Your Business
For many side hustlers, the ultimate goal is to grow into a full-time business. This takes a lot of work and planning, but it can be done if you conduct market research and learn how to market your business to the right audience.
If you're operating a side hustle, you're already a business owner, so give yourself a big congrats. Then, get down to business and make things official by filing your LLC. If you form your LLC with Incfile, you'll get lifetime customer support, a free Registered Agent for the first year, a dashboard to access all of your documents, and more.
Wendi is a freelance writer based in Indianapolis, IN, with over a decade of experience writing for a variety of industries from healthcare to manufacturing to nonprofit. When she isn't working on solutions for her clients, she can be found spending time with her kids and husband, working in the garden or doing more writing (of the fiction variety).