At What Income Level Should You Form an LLC for Your Side Hustle?

At What Income Level Should You Form an LLC for Your Side Hustle?

Every day, you're hustling. You wake up, go to your day job and come home...but you're not off the clock. The hours you aren't at your primary job, you're doing another kind of work – your side hustle. Seventy million Americans report having a side hustle, usually to supplement their full-time job's income, and in 2021, those numbers are on the rise.

If you're earning money from a side business, you might be wondering if and when you can make things official by forming an LLC. Close to 20 percent of side hustlers hope to make it their full-time gig, but the good news is, you don't have to wait for a "magic number" to make your side hustle a legal business entity.

Here, we'll answer all your questions about making your side hustle a legit business with LLC formation.

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Can Side Hustles Be an LLC at a Certain Income Level?

The good news is that your side hustle can become an LLC at any time. There is no income threshold you have to meet before you form an LLC. But there are many considerations you'll need to make to know when it's the right move for you. We'll dive into some of those, but first, ask yourself a few questions about your side business:

What Are My Earning Goals?

Why did you start your side hustle in the first place? There are many reasons people like you choose to work on the side of a full-time or traditional job. Having extra spending money and paying off debt are just a couple.

how employed side hustlers use extra income

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Before you file an LLC for your side hustle, understand your motivation for earning money on the side. If it's to pay off a debt, figure out when you want to have it paid off and then calculate how much you'll need to earn a month. If it's to make ends meet, figure out the gap in your regular income and what you need to fill it. Once you set your goals, you'll know how much time and money you can invest in your business to make it profitable.

How Much Can I Realistically Expect to Make?

The answer depends on where you are in your side hustle journey. The numbers below might look pretty discouraging, but they include data from new side hustlers who are just starting up and haven't yet had the time to grow their side business.

how much can i make on side hustle monthly

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When you look at the stats from established side hustles, the numbers are much more encouraging. In fact, once they're past the startup phase, 43 percent of side hustles bring in $1,000+ a month.

Am I Ready for the Commitment of an LLC?

You know your goals, and you understand your earning potential, but there's one last question: can you commit to operating your side hustle as a legal business entity? Starting an "official" business can seem like an overwhelming prospect, but in reality, LLCs are the simplest and most cost-effective way to make your business legit. They are also an important way to protect your personal assets, which could be at risk if you're operating as a sole proprietor (without a legal entity). Here are some of the advantages of forming an LLC for your side hustle:

  • It helps you separate your personal and business finances, making tax filing easier.
  • It offers liability protection in the case of legal action or litigation.
  • It ensures your business is a totally separate entity, offering you increased privacy and protection.
  • It gives your business credibility and makes you more trustworthy, which could lead to more sales.

Ready to get started? Find out how:

Should I Form an LLC for My Side Hustle?

While there's no income threshold for filing an LLC, there are some criteria that, once met, make legal business formation an easy choice.

Startup and Ongoing Costs

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. However, in many places, there are additional fees to operate your business. For instance, in California, LLC owners must pay an annual franchise tax fee of $800, regardless of whether you're 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 (as long as you're operating in the same state your business is filed in), it's not recommended. Registered Agent service fees can add up, but if you use a formation service, the cost may be free to start.

Many states also require you to file an annual report, which can add fees in addition to your annual maintenance of the LLC.

Bottom line: start your research with your Secretary of State, and look into your state's requirements on our state information page. If you're earning less than it costs to form and maintain your LLC, it might be best to wait until your income increases.

Annual Income

For tax purposes, the IRS considers your side hustle a business once you earn more than $600 in a year. That's when you must start reporting side hustle income on your tax return and paying estimated quarterly taxes.

There are tax benefits you can get when you form an LLC, but you won't see much difference in taxes until you're earning around $30,000–$40,000 per year.

That doesn't mean you should wait until then to form an LLC, though. When you look at your total income (from your full-time job and your side hustle), the combined amount impacts your personal assets and it could all be at risk if your side hustle is sued by an individual or organization. An LLC is the only way to protect your personal assets.

Personal Assets

As mentioned above, an LLC keeps your personal assets safe by creating a separate legal entity for your business. Your business can be sued, but you, personally, cannot.

If you don't have much in the way of personal assets (homes, vehicles, savings, etc.), there may not be as much risk in operating as a sole proprietor. However, the fallout of being sued as an individual rather than as a business could have a profound long-term financial impact, including court costs, attorney fees and time missed from your day job.

Ultimately, no matter the current size of your side hustle, if your income outweighs the startup costs of forming and maintaining your LLC, it's a wise decision to do so. You can even get help filing your business for no cost. 

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