In today’s dynamic business landscape, side hustles have gained significant traction. What starts as a passion project or a way to earn extra income often has the potential to evolve into a fully-fledged business. Turning your side hustle into a business entity is a pivotal step that can bring structure, legality, and growth opportunities to your venture.

If you’ve been working on a side hustle outside your 9 to 5, you may be wondering if and when you need to turn it into an LLC or other legal business entity. According to the IRS, your side hustle is considered a business if you are making more than $600 a year with the products or services you are offering.

So if you’re meeting this threshold, which type of business entity is best for your needs?

Types of Business Entities

Sole Proprietorship

 A sole proprietorship is a type of business entity that is owned and operated by a single individual. In this business structure, the owner and the business are considered the same legal entity. This means that you are able to report your business’s income or losses on your personal tax returns. You will, however, have to keep separate books, records, and bank accounts. This is the most common business entity type for your side hustle if you want to turn it into a business.

This type of business entity does not require complex legal formalities for establishment, making it the easiest business structure to start and operate. The lack of legal separation between the business and the owner’s personal finances, however, can expose the owner to significant personal financial risk in the event of business-related problems or liabilities. As a result, many business owners consider alternative structures, such as limited liability companies (LLCs) or corporations, to achieve greater liability protection and operational flexibility.

Limited Liability Corporation (LLC)

Many revenue-generating owners of side hustles starting out who want to protect their personal assets, establish a Limited Liability Corporation (LLC). This is a popular type of business entity, as it combines the limited liability protection of a corporation and flexibility of a partnership or sole proprietorship. The LLC structure offers legal protection in the case of a lawsuit. A prevailing plaintiff would only be able to have access to company funds and not personal assets or funds. 

Setting up and managing an LLC involves complying with state-specific regulations, filing the necessary formation documents, and adhering to ongoing reporting and compliance requirements.

C Corporation (C Corp)

A C Corporation is a legal business entity that is recognized as a separate legality entity from its owners, known as shareholders. One of the most common business structures in the United States, this type of business entity provides limited liability protection to its shareholders as well as the ability to deduct a wider range of business expenses. C Corps also have greater flexibility in raising capital through issuance of various classes of stock.

One of the drawbacks for this type of business entity is the potential for double taxation. C Corps are separate taxable entities, and they are subject to federal income taxes on their profits. Shareholders also pay taxes on any income that they receive from the corporation. This means that the same profits are taxed at both the corporate level and the individual shareholder level.

In general, a person starting out with a side hustle isn’t making enough income for a C Corp to be the most suitable option. C Corps are best for businesses with growth aspirations, complex ownership structures, or the need to attract investors. While the potential for double taxation is a consideration, certain tax planning strategies and deductions can help mitigate this impact.

 

S Corporation (S Corp)

The IRS defines S corporations as “corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” By reporting corporate income and losses to their personal tax returns, shareholders avoid double taxation on their taxable income. 

S Corps, similar to C Corps, provide limited liability protection to its shareholders. It’s important to note that while S Corps offer tax advantages, they also come with certain administrative requirements and restrictions on ownership and operations.

 

Next Steps

Now that you have a high-level idea on what may be the best business structure to establish for your side hustle, contact me with any specific questions that you have and we will work together to help you choose the right business entity that matches up with your goals, as well as move forward with the appropriate corporate filing procedure for your respective state.