You’re already putting in the work, it’s time to reap the benefits.
There are plenty of good reasons to start a side hustle. Extra money can build savings, pay off debt, or go towards a goal, such as buying a house or taking a big trip. Making money in a way that doesn’t feel like “work” can help avoid burnout and be truly rewarding. Plus, with social media, side hustles may have a readily available platform.
While side hustles bring many rewards, turning that side hustle into a real business can bring even more. So, when is it time to legitimize a side hustle? Regardless of whether a person has been doing it for years, or has just started making money, they must report income earned even from hobbies on their tax return. Why not benefit the various tax advantages awarded to business owners?
When a business becomes incorporated, it often comes with a perceived permanency and reputability to customers and investors. This can also make it easier to raise capital when needed.
Choose a Business Structure
Ready to get official? Forming a legal business entity is generally a good idea for any business, big or small.
“One of the biggest reasons to form a legal entity is liability protection,” says Sunny Adams, CPA with Apple Growth Partners.
“Separating liabilities is definitely one of the biggest advantages,” A’Shira Nelson, CPA at Apple Growth Partners, agrees. “Forming a legal business entity can also simplify taxes, allows hiring of employees rather than contractors when the time comes, and helps with credibility and branding, to name a few of the other benefits,” Nelson concluded.
In addition to the legal benefits of securing a formal company name, entrepreneurs can then begin to capitalize on critical, but not as much paperwork, components such as securing a website domain, establishing social media profiles, and designing a logo.
There are several types of business structures, and each comes with their own advantages and disadvantages. The most common examples that would apply to a side hustle or small business are Limited Liability Corporations (LLC) and S Corporations. The pros and cons of each, along with the business type and structure should be considered when selecting which will deliver the right balance of legal protection and benefits.
Register the Business
Location and business structure determine how a business needs to be registered. In most cases, it is as simple as registering the business name with the state and local government. Skipping this step could mean missing out on legal and tax benefits.
Apply for an Employer Identification Number (EIN)
Once the business has a legal name and has been officially formed as an LLC or S Corporation, the business owner will need to apply for an employer identification number (EIN). The prior two steps need to be completed first to avoid any need to re-file, as the IRS will ask for the business formation date and the legal business name as approved by the state. It is recommended, and often required, to have an EIN when opening a business bank account, hiring employees, or to build business credit. Using an EIN instead of a personal social security number with clients and vendors also reduces identity theft and personal liability risks.
Apply for Licenses, Permits, and Insurance
Most businesses need a combination of licenses and permits from federal and state agencies. Fees and requirements are dependent on business type, activities, location, and government laws. Once registered, business owners should begin exploring insurance components with a certified agent. In some instances, hobbies-turned-businesses may require insurance to perform the service.
Open A Business Bank Account
Once a business is ready to begin accepting and spending money, it’s time to open a business bank account. Utilizing a business bank account provides additional personal liability protection and helps a business remain legally compliant. A business bank account also offers an additional sense of professionalism since customers will be able to make payments to the business rather than the individual business owner. An important added benefit is establishing a credit history for the business which can be used in case of emergency, to build inventory, or for large equipment purchases. As mentioned before, a federal EIN will be necessary for this step.
Registering a company can be one of the best ways you can expand your business and help ensure its success. Not only is liability limited, but lower tax rates mean that the owner can focus on turning the business into the lucrative venture that they want it to be.
“We understand the complexity of launching a business, and how overwhelming it can feel,” says Adams.
“Helping minority entrepreneurs overcome these hurdles and become success stories is what inspired the creation of our IMPACT team,” Nelson commented. “We can help take your side hustle to an established business without the headache. If you’re unsure how to turn your side hustle into a registered business on the path for growth, contact our IMPACT team today to discuss how we can help.”
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