Starting a side hustle can be an exciting way to earn extra income while pursuing a passion. But before you dive in, it’s important to consider whether forming a limited liability company (LLC) makes sense for your business.

What Exactly is an LLC?

An LLC is a legal business structure that combines aspects of partnerships and corporations. Unlike a sole proprietorship, an LLC protects your personal assets from liability if your business is sued.

An LLC provides liability protection for your personal assets while allowing you to maintain control over your business. This differs from a corporation, where shareholders own the company and the board of directors controls major decisions.

With an LLC, the owners (called “members”) manage the company directly or appoint managers to handle day-to-day operations. This flexibility makes LLCs a popular choice for small businesses and side hustles.

Forming an LLC establishes your business as a separate legal entity from yourself. Any lawsuits or claims against the LLC only put the business’s assets at risk, not your personal possessions.

This liability protection is a major perk for side hustlers. Your home, car, and retirement savings are shielded if your LLC faces legal action or debt.

LLCs also provide tax flexibility not available with sole proprietorships or partnerships. LLC owners can choose to be taxed as a corporation, partnership, or as sole proprietors. This allows you to select the most advantageous tax treatment.

The Benefits of an LLC for Side Hustles

Starting a side hustle as an LLC offers several key advantages:

• Liability protection – An LLC shields your personal assets from business lawsuits and claims. This protection safeguards your home, car, and savings.
• Tax flexibility – LLCs allow you to choose corporate, partnership, or sole proprietor tax treatment. This can minimize your taxes.
• Credibility – Forming an LLC establishes your side hustle as a legitimate business. This can increase credibility with customers and partners.
• Separate finances – With an LLC, you keep your personal and business financial matters separate. This improves accounting and helps limit personal liability.
• Long-term scaling – LLCs provide flexibility to grow your side hustle. You can take on investors and business partners when the time is right.

For many side hustles, especially those with significant liability risks, forming an LLC is a smart way to operate. The protections are worth the relatively small upfront investment and ongoing administrative work.

How to Form an LLC for Your Side Hustle

If you decide an LLC is right for your side project, forming one is a fairly straightforward process. Here are the key steps:

1. Choose a Business Name

First, select a name for your LLC. You’ll need to include an identifier like “LLC” or “Limited Liability Company” in the official name.

Check your state’s database to ensure the name isn’t already taken. Pick a few options in case your first choice isn’t available.

Your LLC name should be distinct and represent your brand. Avoid generic names that are too common.

2. File Articles of Organization

To legally form your LLC, you’ll prepare and file Articles of Organization with your state. This document names your LLC, lists owners, and provides key details about the structure and purpose.

While not required, it’s smart to have an attorney assist with this document to ensure it meets all legal requirements. There are also services that can help you create and file the Articles of Organization.

Each state has slightly different rules and paperwork requirements for forming an LLC. Do your homework to ensure you take the right steps.

3. Obtain Licenses and Permits

Depending on your side hustle, you may need special business licenses or permits from your state or local government. For example, transportation services, childcare providers, restaurants, and retailers often need licenses.

Take the time to research which licenses and permits apply to your LLC’s business activities before getting started. Failing to obtain necessary licenses can lead to penalties or being shut down.

4. Set Up Accounting and Banking

With your LLC formed, it’s time to get the business infrastructure set up:

• Open a business bank account – This keeps your LLC’s finances separate from your personal accounts.
• Obtain an EIN – An Employer Identification Number identifies your LLC for tax and banking purposes.
• Set up accounting – Use bookkeeping software or work with an accountant to track the LLC’s income, expenses, taxes, and filings.

Keeping your LLC’s accounts and money separate from your personal finances is key for liability protection. Consider using a credit card just for LLC expenses as well.

By following these steps, you can ensure your side hustle LLC is properly established as its own legal entity. But your work as an LLC owner doesn’t end there.

Pros and Cons of Forming an LLC for a Side Hustle

Deciding whether or not to form an LLC for your side project comes down to weighing the key pros and cons:

Pros

• Liability protection – The top benefit of an LLC is protecting your personal assets from the business. Lawsuits, debts, and claims only affect the LLC’s assets.
• Tax options – LLC owners can choose how they are taxed – as a sole proprietor, partnership, or corporation. This flexibility can reduce taxes.
• Credibility – Operating as an LLC looks more professional to customers than a sole proprietorship. This can build trust and grow your business.
• Separate finances – Keeping LLC money and accounts distinct from your personal funds improves accounting and limits liability.

Cons

• Filing costs – The costs to form an LLC vary by state, but typically range from $50 to $500. There are also ongoing state fees.
• Administrative work – An LLC requires more record-keeping, paperwork, and compliance work than a sole proprietorship. Expect to spend a few extra hours per month.
• Self-employment taxes – Regardless of your LLC’s tax structure, you’ll still pay Medicare and Social Security taxes on company profits.
• Right business structure? – For very simple side hustles, an LLC may be overkill. Sole proprietorships require less work for low-risk projects.

While forming an LLC can provide liability protection and tax benefits, it may not be necessary for every side hustle. Consider your specific situation before making a decision.

Maintaining and Managing Your Side Hustle LLC

Once your LLC is up and running, you’ll need to handle ongoing filings and compliance tasks. This administrative work keeps your LLC in good legal standing.

File an Annual Report

Most states require LLCs to submit an annual report and pay a fee to maintain their active status. Due dates vary, but reports are typically due by April or May each year.

Failing to file the annual report can result in your LLC being dissolved. Make sure to calendar the due date so you don’t miss this critical task.

Comply with State and Local Requirements

In addition to the annual report, your LLC will need to comply with other state and local rules. This may include obtaining a business license, paying taxes, and meeting filing deadlines.

Stay on top of the requirements in your state to keep your LLC compliant and legally protected.

Keep Your Operating Agreement Updated

An operating agreement outlines the ownership, structure, and rules for your LLC. When anything changes – adding an owner, restructuring, bringing on investors – update this document.

Maintaining an accurate operating agreement prevents legal and organizational issues down the line. Review it annually.

File Taxes for Your LLC

How your LLC is taxed will determine what tax returns you need to submit:

• Sole proprietor – Include a Schedule C with your personal 1040 tax return. Pay self-employment taxes.
• Partnership – File a Form 1065 return for your LLC, with income passed through to owners’ personal tax returns.
• Corporation – File a Form 1120 corporate income tax return. Earnings are taxed at the corporate level.

Work with an accountant or tax professional to ensure you complete the appropriate tax filings for your specific LLC. Deductions and election rules can get complicated.

While handling administrative tasks may not be exciting, it’s essential to keep your side hustle legally compliant and protected. Stay organized and on top of due dates.

Alternatives to Starting a Side Hustle as an LLC

While an LLC is a popular choice, it’s not the only way to structure a side hustle. Sole proprietorships and partnerships are simpler options.

Sole Proprietorship

This is the easiest business structure. There are no formation requirements – just start conducting business as an individual. Income and losses flow through to your personal tax return.

Sole proprietorships offer low startup costs and administrative needs. But you have unlimited personal liability if sued.

Partnership

You can team up with one or more people to form a partnership. This allows you to combine resources and split ownership and profits. Partners jointly manage the business or hire managers to oversee operations.

Partnerships require some paperwork like a partnership agreement outlining ownership stakes, duties, and profit distribution. You’ll also need a separate business bank account and EIN.

Income, losses, and liabilities pass through to the partners based on ownership percentage. Each partner pays taxes on their share of profits.

Partnerships allow side hustlers to pool resources and talent. But your personal assets aren’t fully protected like with an LLC structure.

Key Takeaways on LLCs for Side Hustles

Deciding whether to form an LLC for your side hustle depends on weighing factors like liability risks, taxes, and administrative needs. Here are some key takeaways:

• LLCs protect your personal assets from business lawsuits and claims. For riskier side hustles, this protection is critical.
• You’ll have ongoing paperwork and compliance tasks as an LLC owner. Be ready to spend a few extra hours each month.
• LLCs allow you to choose how your business is taxed – as a sole proprietor, partnership, or corporation. Consult a tax advisor about the best structure.
• For very simple or low-risk side hustles, an LLC may be unnecessary. Sole proprietorships require less work.
• An LLC gives your side hustle credibility and room to grow. As a separate entity, it can take on investors and transition to a larger company.

Whether you choose to form an LLC or not, taking the time to understand your options can help you make informed decisions about your side hustle. Do your research and consult legal and tax experts as needed.

With the proper business structure and compliance practices in place, you can focus on growing a successful side hustle. Take the administrative steps to operate legally, limit liability, and reduce taxes so you can turn your passion into profits.

Final Tips for Forming and Running an LLC

If starting your side hustle as an LLC makes sense, here are some final tips to set yourself up for success:

• Research your state’s specific rules thoroughly. LLC laws and paperwork vary, so understand your state’s unique requirements.
• Hire a lawyer or use an LLC formation service. Getting expert help to set up your LLC ensures everything is done right legally.
• Open a dedicated business bank account. This keeps your LLC’s finances organized and separated from your personal money.
• Set up accounting software or work with a bookkeeper. Careful financial tracking is essential for every LLC.
• Update your operating agreement as needed. When anything changes in your LLC’s structure or ownership, amend this document.
• Stay on top of annual filings and paperwork. Missing deadlines can put your LLC at risk of penalties or dissolution.
• Consult tax professionals about the best tax structure. How your LLC is taxed has significant financial implications.
• Purchase the right insurance policies. LLCs need customized general liability and errors & omissions insurance.
• Meet all licensing and permit requirements. Research what your side hustle needs before starting operations.

By taking the time to form and run your side hustle’s LLC properly, you gain invaluable liability protection and financial benefits. Consult experts, stay organized, and be diligent with legal compliance.

Conclusion

Starting a side hustle can be incredibly rewarding, both financially and personally. But smart side hustlers know it’s important to consider legal structures and protections too.

Forming a limited liability company shields your personal assets from business risks and claims. LLCs also provide tax flexibility unavailable to sole proprietors and partnerships.

However, LLCs do come with added administrative duties and filing requirements. You’ll need to weigh whether these cons are worth the protections for your specific side hustle.

With education and guidance from legal and tax professionals, you can make an informed decision about the best business structure. Carefully set up your chosen entity and make sure to stay compliant with all necessary filings and paperwork.

Most importantly, secure the right protections so you can focus on growing a successful side hustle. A properly formed LLC provides the peace of mind that your personal finances and assets are separated from your business risks.