Do you have a great idea for a business, and you’d like to give it a shot without sacrificing your current job?
If so, you may be wondering if you’re legally allowed to start an LLC (limited liability company) while employed with another company.
Starting a new business can be a stressful process, and maintaining your traditional employment while doing so can significantly ease the financial burden. However, there are certainly some pros and cons for doing this, and depending on your circumstances, it may or may not be allowable to begin with.
In this article, we’ll discuss the legalities of forming your own business while still holding onto your job. Is this allowed, or is it a matter of choosing one or the other?
Tip: If you decide to start an LLC, there are plenty of online LLC formation services (like LegalZoom and ZenBusiness) that can take care of the paperwork for you.
What Is an LLC?
First off, let’s quickly outline what an LLC is. A limited liability company mixes elements of sole proprietorships, general partnerships, and corporations, essentially giving entrepreneurs the best of these worlds.
LLCs are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.
There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk.
In short, LLCs are so popular because they provide a variety of legal protections for your business, while also enhancing your company’s credibility.
Can I Start an LLC if I Have a Job?
While it may seem like opening an LLC while still holding onto your day job is not allowed, this is actually entirely acceptable in many cases. While state laws regarding LLCs vary quite a bit between states, there is no law or statute in any state that bars people from starting LLCs while still maintaining their current employment.
However, there is one interesting aspect to this question that could make your specific situation a little bit more complicated. That aspect is your contract with your current employer. Whether you have an actual employment contract, or if your employer has a blanket policy covering all employees, there are some situations where an employer can exert some control over what their employees do with their time outside of work.
Some employers have clauses in their contracts that provide them a level of ownership or control over innovations developed by current employees. While these clauses typically only apply to work you do while “on the clock” or while using company resources, it can sometimes be difficult to prove that any work for your own LLC was entirely unrelated to your other job.
Many contracts for employment also have non-compete clauses in them, which prevent any employee from starting a company that directly competes with their current employer. Of course, this only applies if your new LLC operates in a similar market to your job.
How Should You Handle Starting an LLC While Keeping Your Job?
This question has a bit more nuance involved. Should you even tell your current employer that you’re starting an LLC on the side? There are some serious pros and cons to either option on this one, and each situation is probably best handled by analyzing it in the context of your specific role with your employer.
The disadvantages of informing your employer about your new LLC are pretty obvious. Your boss might become concerned that you’re not 100% committed to your job, which could pose some serious problems down the line. In addition, you might find yourself under heightened scrutiny at work, regarding how you’re using your time and whether you’re solely focused on that job.
However, there can be some important advantages as well. First and foremost, it can be difficult to find your first few customers as a new business, and if your employer is aware of your new LLC and willing to give you a shot, you could actually find that your current employer becomes a valued partner and/or client for your new company.
In general, we usually advise that honesty is the best policy regarding starting an LLC while keeping your current job. On the other hand, only you know the specifics of your employment situation, so it’s difficult for us to make any blanket statements or sweeping generalizations about what you should or should not do.
Details to Consider
One aspect we wanted to briefly mention is that under no circumstance should you ever do any work for your new LLC while working at your job. You probably already know better than to do any extensive work for your new business while clocked into your job, but it’s important to be entirely clear that this also means no checking your LLC’s email or voicemail.
It does not matter if it is a major or minor distraction. If you do any sort of work on your new company while working at your other job, you are opening yourself up to some major problems down the line. No matter what arises with your new LLC throughout the day, be smart enough to know that it can wait until you’re off work for the day.
The other detail we wanted to discuss is that you’ll need to make some changes to the way you do your taxes. In addition to your W-2, you will now also need to claim your LLC income on your personal tax return. This can be done by completing Schedule C on Form 1040. For more information, check out our guide to LLC taxation. If you have any further questions on how to handle the dual-pronged taxation requirements of running an LLC while still holding onto your regular job, we advise speaking to an accountant or tax professional.
The main legal consideration you need to keep in mind is that your employment contract may include some stipulations regarding the formation of your own company. In addition, your employer may have a blanket policy covering all employees that is separate from your contract itself.
The most important thing to remember when juggling a new LLC and an existing job is that under no circumstances should you ever try to complete any work for your LLC while you’re on the clock at your job. If you do this, you might soon find that you don’t have to worry about juggling these responsibilities anymore, because you probably won’t have a job for much longer!
We hope this article helped you expand your understanding of how to start an LLC while holding onto your current job, and we wish you the best of luck with your new business!