Should I start an LLC for my side hustle?
If it’s time to make your side hustle official, an LLC could be your next move. Presented by Chase for Business.
Maybe you’ve been driving for a rideshare app, selling handmade goods online or freelancing after hours, and now you’re wondering if it’s time to make it official. Forming a limited liability company (LLC) can be a smart next step for side hustlers looking to legitimize their operations, protect their personal assets and get ready for growth.
Pros of forming an LLC for your side hustle
An LLC is a type of business structure that helps protect its owners from liability. In other words, it helps safeguard your personal assets and limit your risk exposure. It’s a popular type of business structure among freelancers and people who run side hustles, thanks to its flexibility, ease of setup and low startup costs. Pros of forming an LLC for your side hustle include:
Reducing personal liability
Reducing your personal liability is one of the reasons to start an LLC. Say you offer freelance graphic design services and a client claims you missed a major deadline, resulting in lost revenue. With an LLC, any legal or financial claims would target your business instead of personal assets, like your car, home or personal bank account.
Tax advantages
If you’re juggling a W-2 job and a growing side gig, forming an LLC may help streamline your taxes — but it can also introduce complexity. LLCs offer “pass-through taxation,” which means that profits from your side hustle are reported on your personal tax return along with your W-2 income. This can simplify things if you’re filing everything together. But if your side hustle income is high or irregular, you should plan to hire a tax professional to sort it all out, which is an added annual cost.
You can also write off eligible business expenses (like supplies, software or even a portion of your home office expenses), which can help lower your taxable income. That’s possible with or without an LLC, but having a formal business structure often makes it easier to separate expenses and qualify them properly.
If you’re a freelancer with 1099 income, forming an LLC may offer added protection and tax planning options, such as electing S-corp status if your income grows significantly. But it also means filing additional paperwork and possibly paying self-employment taxes, depending on your state. And once again, you should consider hiring a tax professional.
Separating personal and business finances
Every business owner should make a habit of separating their business and personal finances. An LLC can be helpful, especially for owners of sole proprietorships or startups who are prone to dipping into their personal accounts to cover business expenses. Setting yourself up with an LLC for your side hustle can make it easier to track your spending and income separately and keep you in a lower tax bracket.
Easy to form
In general, it’s quick and easy to form an LLC for your side hustle. You can register and file for your LLC status fully online, often with approval in a few days. You’ll need to have some paperwork ready, such as your operating agreement and articles of organization, and to be prepared to pay a filing fee of up to $200 in most states. Once your LLC is established, it’s a good time to apply for an employer identification number (EIN), and you can then set up a business bank account and obtain any necessary business permits necessary for you to operate.
Control over ownership
LLCs offer a high level of flexibility and control over the way you manage your side hustle business. You can form your LLC with just a single member or many more — there’s no maximum number. There also isn’t a board of directors, so members have more control over business decisions.
Cons of forming an LLC for your side hustle
Even though it’s relatively simple, setting up an LLC still takes time and paperwork, which can feel like overkill if your side gig brings in just a few hundred dollars a month or is purely seasonal. And while there are a lot of good reasons to choose an LLC for your side hustle, there are also some potential drawbacks.
Regulation and compliance requirements
Regulations for LLCs vary by state. This can add complexity, especially if your LLC is registered in multiple states. Some types of business, such as medical practices, might not even be eligible to form as LLCs in certain states. It’s important to check with your state so you know what’s required and what’s not allowed.
Less attractive to investors
As an LLC, you might have a harder time securing investors or venture capital for your side hustle. This is because LLCs can’t issue stock, which is one of the primary ways that businesses attract large investments. Trouble attracting investors could make it more challenging to get the money you need to grow.
Tax burdens
If you already file taxes for a W-2 job, adding an LLC to the mix might make your tax return more complicated. You may need to file additional forms, and depending on your LLC’s income, it could shift your overall tax bracket or affect your deductions.
Hiring an accountant may be a worthwhile investment to help you avoid errors and ensure that you’re optimizing your deductions, but it’s another cost to factor into your side hustle budget.
When is it time to form an LLC for your side hustle?
Choosing whether to open an LLC for your side hustle is a personal choice that comes down to your needs and preferences. When do you need an LLC? Here are some of the signs that it might be time to make the change:
You’re making a significant amount of money
Any sole proprietorship is required to pay taxes on additional income of $400 or more from your side hustle, freelance gig or other independent work. But if you start making closer to $40,000, you might consider forming an LLC. At that income threshold, you may start to realize tax benefits from operating as an LLC rather than a sole proprietorship.
You’ve hired an employee
Hiring an employee can be a huge help for your business and a big step toward growth, but it can also open you up to liability. If you’re signing the other side of a paycheck, it’s a sign that you should consider establishing an LLC to protect your personal assets should things go awry.
You’re concerned about business liability
There are many reasons to be concerned about business liability. Maybe your side hustle is in an industry where there’s a high risk of accidents, high standards for compliance or a large amount of risk. Without an LLC, you may be personally responsible for any accidents, legal action or debt incurred on the job. Forming an LLC can provide you with more protection and peace of mind.
You’re planning to expand
If you’re thinking about growing your side hustle into a full-time business, it can be helpful to establish yourself as an LLC early. Maybe your pet-sitting side hustle has grown so much that you’re turning away clients. Forming an LLC early on could help you scale without scrambling later to clean up your paperwork and finances. It also lets you set up separate business accounts and start building business credit.
How to set up an LLC for a side hustle
Setting up an LLC is typically a straightforward process that doesn’t require as much time and paperwork as other business models. The more prepared you are before you begin, the more streamlined your application process will be. Here are the steps to forming your LLC for your side hustle:
- Choose a state. The first step to setting up your LLC is deciding where. Because you will need a physical address, it’s often simplest to register your LLC in your home state.
- Select a business name. If you haven’t already, make your side hustle more official by choosing a business name. Think of something that’s unique and relevant to what you do. For example, if you already sell crafts under your Instagram handle, consider registering that as your business name to build brand consistency. Take a look at your state’s naming conventions, too — you might need to include “LLC” or “Limited Liability Company” in your name.
- Submit your articles of organization. This is an official document that registers your LLC with the state. It includes basic information such as your business name, business address and a statement of purpose. Some states allow you to file online for a fee, and others require paper documents in person or via mail.
- Decide on an operating agreement. An operating agreement outlines how your LLC will be managed. It makes it clear who the main decision-makers are and how responsibilities will be divided. Even if you’re the only one running your weekend landscaping gigs right now, it’s still helpful to have an operating agreement to guide any future expansion.
- Get any necessary licenses and permits. Depending on your state and industry, you might be required to obtain extra documents to run your business, such as a sales tax license or a general business license. If you’re not sure what you need, your local chamber of commerce is a good place to start.
Set up an LLC for your side gig
Your side gig or freelance work is something to take seriously. If you’re ready to take the next steps in growing your business by establishing an LLC, talk with a Chase business banker to learn more.
FAQs about setting up an LLC for your side gig
How much does it cost to start an LLC for my side hustle?
It depends. Filing fees typically range between $50 and $200 depending on what state you’re in. You might owe additional fees for other licenses and permits. Some people might hire legal or professional services to help write their operating agreement and file their articles of organization, which can increase your startup costs but provide peace of mind.
How much should I make before forming an LLC for my side job?
There’s generally no minimum or maximum business income needed to start an LLC. If you make less than $40,000 per year with your side job, you should carefully evaluate whether the potential benefits outweigh the startup costs and extra paperwork to establish your LLC, depending on other factors such as your industry and whether you’re operating on your own or with a partner.
What is the best business structure for a side hustle?
LLCs are one of the most popular business structures for people with a side hustle. They’re flexible, easy to form and offer more control over your day-to-day operations. But they’re still not for everyone. Thoroughly research your options and consult with professionals before making a decision.
Do I need an EIN for my side hustle?
It depends. The IRS has specific criteria to identify which businesses need to file for an EIN, such as businesses with employees or partnerships. Most sole proprietors without employees, such as freelancers or eCommerce retailers, may not need an EIN.
How do I freelance without an LLC?
Most freelancers don’t need an LLC to run their businesses. However, you are still required to file a tax return reporting your freelance income if you make $400 or more per year. Check your state and local requirements for details.
Do I need a business license for a side hustle?
Most side hustles don’t require a business license, especially if you’re operating as a sole proprietor under your own name. However, license requirements vary by state and municipality, and you still might need special licenses and permits to operate legally. For example, some freelance work — like selling baked goods or offering massage therapy — may require local health or occupational permits.
Do I need an LLC to freelance?
No, you generally don’t need an LLC to freelance. You might consider forming an LLC for your freelance business if you start bringing in more than $40,000 or want to protect yourself from risk.
