Should I Start an LLC For My Side Hustle (not really)

Should you start an LLC for your side hustle?

At what point should you consider this?

Maybe you want to (or already) sell your handmade crafts, become a freelancer, or launch that blog you’ve been thinking about.

If that sounds like you, then you’re in the perfect spot.

Side hustles are a blast—they let you explore your passions while earning extra cash. But here’s a fun fact: forming an LLC for your side hustle can elevate your game.

But it’s NOT necessary.

Do You Need to Start an LLC for Your Side Hustle?

Deciding whether to form an LLC for your side hustle can depend on a few factors. Forming an LLC could offer personal liability protection if you’re selling handmade jewelry or providing freelance services. This means your personal assets, like your home or savings, would be shielded if your business faces legal issues.

Additionally, having an LLC can enhance your credibility. When potential customers or clients see that you operate as an LLC, you’re serious about your business.

There are also tax benefits to consider. With an LLC, profits are typically taxed only at the personal level (pass-through taxation), helping you keep more earnings if your side hustle becomes profitable.

However, forming an LLC does involve costs and responsibilities, such as filing fees, ongoing paperwork, and annual maintenance.

You might want to hold off if your side hustle is small and not yet generating significant income. However, if your side hustle is bringing in around $10,000 a year or more, it might be time to consider an LLC. At this point, the protection, tax advantages, and added credibility could be worth the investment.

Why is Starting an LLC for Your Side Hustle Important?

Here are some key reasons why establishing an LLC is essential for your side hustle.

Personal Asset Protection

Personal asset protection is one of the most significant benefits of forming an LLC. This structure shields your assets, such as your home and savings, from business liabilities and debts. If your side hustle faces legal issues or financial challenges, creditors can only pursue the assets owned by the LLC.

Pass-through Taxation

LLCs enjoy the advantage of pass-through taxation, meaning that business income is reported on the owners’ tax returns. This avoids double taxation in corporations, where profits are taxed at both the corporate and personal levels. This simplifies tax reporting for side hustlers and can lead to overall tax savings, allowing you to keep more of your hard-earned money.

Enhanced Credibility and Professionalism

Establishing an LLC adds a layer of professionalism and credibility to your side hustle. Clients and customers often perceive LLCs as more trustworthy than sole proprietorships, which can be crucial for attracting new business. This enhanced reputation can increase sales, partnerships, and growth opportunities, setting the stage for future success.

Flexibility in Management Structure

An LLC offers flexibility in managing your business. Unlike corporations with strict governance requirements, LLCs allow owners to choose how they want to run the business. This flexibility can be especially beneficial for side hustlers who may need to adapt their management approach as they scale their operations.

Ease of Formation and Maintenance

Forming an LLC is generally straightforward and involves minimal paperwork compared to other business structures. This ease of formation and maintenance makes it an attractive option for busy side hustlers looking to formalize their operations without overwhelming administrative tasks.

Starting an LLC for Side Hustle: Step-by-step Guide

Starting an LLC for your side hustle is smart and can provide various benefits, including liability protection and tax advantages.

Here’s a step-by-step guide to help you through the process.

1. Choose a State to Register Your Side Hustle LLC

When choosing a state to register your side hustle LLC, consider where your customers are for easier compliance and taxes. Look into the registration costs and ongoing fees, as some states like Wyoming and Delaware offer lower expenses.

Tax laws matter, too—states like Texas and Florida have no personal income tax, which can benefit your profits.

Consider your industry’s legal requirements, as some states have stricter regulations. Finally, pick a state with resources and support for small businesses to help your side hustle thrive.

2. Choose an LLC Name

Next, select a unique name for your LLC that reflects your business and complies with state naming rules. Typically, the name must include “Limited Liability Company” or abbreviations like “LLC.” Before finalizing your choice, check your state’s business registry to ensure the name isn’t already in use, as this can save you legal headaches later.

3. Designate a Registered Agent

A registered agent acts as your LLC’s official point of contact for legal documents and government notices. This can be yourself or a third-party service. Choosing a reliable registered agent is vital, as they ensure you receive important communications, which can help you maintain compliance with state requirements and avoid missing critical deadlines.

4. File Articles of Organization for Your Selected State

The next step is to file your Articles of Organization, sometimes called a Certificate of Formation, with the appropriate state agency. This document contains essential information about your LLC, including its name, address, and registered agent. There is usually a filing fee, which varies by state, so be sure to check the specific requirements for your location.

5. Obtain an Employer Identification Number (EIN)

An EIN is a Social Security number for your business and is required for tax purposes, especially if you plan to hire employees. You can obtain an EIN for free from the IRS, and it’s advisable to do this soon after forming your LLC. This number is essential for opening a business bank account and keeping your personal and business finances separate.

6. Consider an Operating Agreement (Optional)

Although not required in all states, an operating agreement is a valuable document that outlines your LLC’s management structure and operating procedures. Clarifying roles, responsibilities, and profit-sharing arrangements can help prevent disputes among members. Even if you are a solo entrepreneur, having an operating agreement can serve as a helpful reference as your business grows.

7. Obtain Business Permits and Licenses (If Necessary)

Before launching your side hustle, you may need to obtain specific business permits and licenses depending on your industry and location.

For example, if you’re starting a food-related venture, you’ll likely need a food handler’s permit or a health department license. If you’re offering freelance services, check if you need a professional or general business license.

Don’t forget about local permits, such as zoning or sales tax permits, to ensure you’re fully compliant and ready to roll.

8. Open a Business Bank Account for Your Side Hustle LLC

Finally, separating your personal and business finances is important by opening a dedicated business bank account for your LLC. This will make tracking expenses, filing taxes, and managing cash flow easier. When setting up the account, bring your LLC formation documents and EIN to streamline the process.

Additional Resources and Other considerations for Side Hustle LLC owners

Utilize an LLC Formation Service

Opting for an LLC formation service can significantly simplify the setup process for your side hustle.

These services, like Northwest Registered Agent, handle the paperwork, ensure compliance with state requirements, and save you time and potential errors. By outsourcing this task, you can focus on growing your business while ensuring everything is set up correctly.

Stay Informed About Ongoing Requirements

Once your LLC is established, it’s crucial to understand the ongoing maintenance requirements, such as filing annual reports and paying franchise taxes. These obligations can vary by state, so being proactive in meeting them helps avoid penalties and keeps your business in good standing.

File a Beneficial Ownership Information Report (BOI)

Depending on your state, you may need to file a Beneficial Ownership Information Report, which discloses the individuals who own or control your LLC. This report helps improve business operations transparency and may require certain jurisdictions to comply with federal regulations.

Consider Obtaining Insurance

Insurance is an important consideration for your LLC, as it can protect your business from various risks, including liability claims and property damage. Depending on your side hustle, you might need general liability insurance, professional liability insurance, or specific coverage tailored to your industry.

Consider Establishing a Side Hustle Holdings LLC

If your side hustle is gaining traction, consider creating a Side Hustle Holdings LLC to manage multiple income streams or investments. This structure can offer additional asset protection and may provide tax advantages. By consolidating your various ventures under one entity, you can streamline management and improve operational efficiency.

Seek Professional Guidance When Necessary

Navigating the complexities of running an LLC can be daunting, so don’t hesitate to seek expert advice when needed. Consulting with an accountant or a business attorney can provide valuable insights into tax planning, compliance, and operational best practices.

What is the best state to open an LLC for Side Hustle?

When starting an LLC for your side hustle, your home state is usually the best place to begin.

Registering your business where you live simplifies the process, as you’re likely already familiar with the local laws, regulations, and market conditions.

Some other states are well-known for their business-friendly environments, which can be appealing if you’re considering expansion or different opportunities.

For instance, Delaware is a popular choice for many entrepreneurs due to its flexible business laws, low initial filing fees, and the well-established Delaware Court of Chancery, which specializes in corporate matters.

Nevada is also attractive, mainly because it has no state income tax and robust privacy protections for business owners, making it a favorite among those who value confidentiality.

Then there’s Wyoming, which offers low fees, strong asset protection, and no state income tax. All these factors contribute to a supportive environment for side hustles looking to grow into something bigger.

Can I live in a state different from my LLC?

Yes, you can live in a state different from where your LLC is registered. Due to favorable business laws, many entrepreneurs form their LLCs in states like Delaware, Nevada, or Wyoming.

However, if your LLC operates in your home state, you may need to register as a foreign LLC there. This requires filing additional paperwork and possibly paying fees. You should also consider tax implications. You may owe taxes in both states depending on where you conduct business and your LLC’s activities.

What is the best business structure for a side hustle?

When starting a side hustle, choosing the right business structure is crucial.

The decision between an LLC, sole proprietorship, or corporation can impact your liability, taxes, and how you operate your business.

Business Structure	Liability Protection	Taxation	Complexity
Sole Proprietorship	No	Pass-through taxation	Low
LLC	Yes	Pass-through taxation	Moderate
Corporation	Yes	Double taxation	High

A sole proprietorship is the most straightforward option. You operate as an individual, which means no formal setup is needed. However, this also means you have unlimited personal liability for any debts or legal actions against your business, putting your assets at risk.

An LLC, or Limited Liability Company, provides personal asset protection while still allowing for pass-through taxation. This means the business isn’t taxed, and profits are reported on your tax return.

A corporation offers the highest level of liability protection, separating personal assets from business liabilities. However, corporations face double taxation, meaning the company pays taxes on its profits, and shareholders are taxed on dividends.

Frequently Asked Questions

Do I need an operating agreement for my Side Hustle LLC?

While not always legally required, an operating agreement is highly recommended. This document outlines the LLC’s management structure and operating procedures, helping to clarify responsibilities and reduce potential disputes among members.

How do I pay myself from my Side Hustle LLC?

You can pay yourself from your LLC’s profits in a few ways, depending on how your LLC is taxed. You typically take an owner’s draw if taxed as a sole proprietorship. If your LLC elects to be taxed as a corporation, you can receive a salary or dividends, depending on your situation.

Is it necessary for a Side Hustle to have several members before they can form an LLC?

No, having multiple members to form an LLC is unnecessary. A single individual can establish a single-member LLC, which provides the same liability protection and benefits as a multi-member LLC.

What annual fees are associated with a Side Hustle LLC?

Annual fees vary by state but often include filing an annual report and paying an annual franchise tax. Check your state’s requirements to understand the costs involved.

Can I form an LLC in a state different from where my Side Hustle is located?

Yes, you can form an LLC in a state different from where you operate your side hustle. However, this may require you to register as a foreign LLC in the state where your business is physically located, which can involve additional fees and paperwork.

Can I use my bank account for my Side Hustle LLC?

It is not advisable to use your bank account for your LLC. Instead, you should open a separate business bank account for your LLC to maintain clear financial records and uphold the liability protections of your business structure.

What are the tax benefits of forming an LLC for a Side Hustle?

Forming an LLC can provide tax benefits such as pass-through taxation, where profits are taxed only at the member level, avoiding double taxation. Also, LLCs may qualify for certain tax deductions that are unavailable to sole proprietors, potentially improving tax efficiency.

Can I hire employees for my Side Hustle LLC?

Yes, an LLC can hire employees just like any other business entity. This allows you to scale your operations, delegate tasks, and expand your side hustle.

Can I serve as my LLC’s registered agent?

Yes, you can serve as your LLC’s registered agent if you have a physical address in the state where your LLC is formed. However, many business owners hire a registered agent service for privacy and convenience.

Why should I hire an LLC service when I can form my own LLC?

Hiring an LLC formation service can simplify the process by handling the paperwork, ensuring compliance with state requirements, and providing ongoing support. This can save time and reduce the risk of errors.

Are permits or licenses required for a Side Hustle?

Depending on the nature and location of your side hustle, you may need specific permits or licenses to operate legally. Researching local regulations and obtaining any necessary permits before launching your business is important.