Do I Need an LLC for My Side Hustle?

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Whether you work for a ride-sharing or delivery service like Uber, Lyft, or DoorDash or have a side gig such as tutoring or babysitting, you may consider an LLC.

If you manage real estate, rental properties, or short-term vacation rentals such as Airbnb, there are more compelling reasons to form a limited liability company (LLC), namely for personal liability protection.

Many small business owners begin as sole proprietorships. A sole proprietorship is a single individual owning and operating a business. The business owner reports any income or loss on their personal tax return. However, the business owner’s personal assets are at risk.

Advantages of an LLC for a Side Hustle

You may consider forming a business entity for personal asset protection. However, an LLC has many more benefits, including tax savings, ease of business formation and operation, legitimacy, and independence.

Personal Liability Protection

An LLC is a business structure that protects your personal assets from your business debts and liabilities. It is a legal entity that separates you from your business. So, for example, if you rent out your vacation home, and a renter claims they were injured on your property, they can only sue for your business assets. They cannot go after your home, car, or other personal assets.

Flexible Tax Structure

As an LLC, you can choose how you want your business taxed. For example, you can opt to pay taxes as a sole proprietor, corporation, or partnership. Many entrepreneurs like to include their income or losses on their personal income tax returns, called pass-through taxation, to avoid double taxation.

You may want to talk to a tax professional about your circumstances and which structure may be best for you.

Easy To Start and Maintain

Forming an LLC is easy to do with your Secretary of State’s office. You complete and file articles of formation with the following information about your business:

• Business name and address

• Registered agent name and address

• General business purpose

• Names of members and managers

You then submit the articles of formation with the filing fee and receive confirmation of your filing. The official proof of your LLC filing is a Certificate of Formation.

The ongoing and annual requirements of an LLC are much less burdensome compared to those of a corporation. While you may benefit from putting together an operating agreement for your LLC, most states do not require it. You do not have to maintain bylaws or minutes of meetings. However, you may have to file an annual report with the state and a Business Owner Information Report (BOIR).

Legitimacy

A sole proprietor either operates under their name or a DBA (doing business as) registration. For example, Joshua Jones can run his car detailing business as “Joshua Jones” or file for a DBA such as “Xpert Auto Detail.” However, an LLC at the end of a business name, “Xpert Auto Detail, LLC” makes the business seem more established.

Even if you are a single-member LLC, the LLC business entity conveys a sense of permanence and continuity. Customers will not know from the name that Xpert Auto Detail, LLC is a one-person operation.

Proof of Independence

Forming an LLC creates a separate legal entity from you personally, which is crucial for businesses seeking to hire you as an independent contractor rather than an employee. This distinction is important because if the IRS classifies you as an employee, the company hiring you is required to provide benefits and adhere to wage and overtime laws, increasing their operational costs. Engaging with your LLC serves as evidence that you are not an employee but an independent contractor.

This separation is especially beneficial if you transition from being an employee to a contractor for the same company. By establishing an LLC, you clearly distinguish your role as an independent contractor, helping to prevent misclassification as an employee.

After You Set up an LLC for Your Side Business

Once you form an LLC for your side hustle, there are some additional steps to take:

Apply for an EIN

An Employer Identification Number (EIN) acts like a Social Security Number for your business. You use it on business bank or credit card applications, business license applications, etc. It is easy to apply for an EIN online with the IRS.

Open a Business Bank Account

To protect your personal assets, keep your personal finances separate from your business activities. Open a bank account under the name of the LLC for your business activities. You should only put business income and pay business expenses from the business bank account.

Check Business License Requirements

Depending on your type of business, you may need to apply for a business license or permit. Check with your state and city to find out their requirements. If you operate from home, you may need a home occupancy permit or permission from your homeowner’s association (HOA).

Even if you start small, you should plan ahead in case your side hustle turns into a full-time occupation. Forming an LLC for your side hustle not only protects your personal assets but also offers tax flexibility, ease of formation and maintenance, enhanced business legitimacy, and clear proof of your independent contractor status, making it a smart choice for many.