Does a Side Business Need an LLC_These days, it seems like everyone has a side hustle.

Whether it’s driving for a rideshare company, delivering food, providing tutoring services, writing a blog, or any of a number of other pursuits, more and more people are supplementing their primary income with secondary streams.

One question we often hear from our readers is whether or not your side business needs a limited liability company (LLC). The answer might have more nuance than you’d think — for some side hustles, you might be able to get by with a sole proprietorship or general partnership, but for most, you should probably form an LLC.

Which side businesses should form an LLC? What are the factors that go into this decision? And when is the best time to form an LLC, if necessary? In this article, we’ll answer these questions and more, as we develop your understanding of how the LLC works with side businesses.

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.

Does My Side Business Need an LLC?

Next, let’s take aim at the question of whether your side business needs the LLC business structure. In short, we do recommend that most side businesses use an LLC to protect their personal assets. After all, it would be a truly unfortunate situation if someone sued your business and successfully pursued your house, car, and personal bank accounts in the lawsuit.

Consideration 1) Cost to Start an LLC

One aspect to consider is the cost to set up an LLC. There are fees associated with forming LLCs in all 50 states, although those fees can vary from as little as $50 to several hundred dollars.

Also, most states have annual reports or franchise tax payments that are due every year, and in the vast majority of cases, those annual reports also have fees attached. So, if your side business doesn’t bring in much money, it may not be worth the expense to form an LLC.

Consideration 2) Do You Have Assets to Protect?

Another factor is whether you actually have any assets that need protecting. If you’re a low-income individual who doesn’t own a car, rents your home or apartment instead of owning, and doesn’t have much money in the bank, it might not be necessary to protect assets you don’t actually have. It’s also not terribly common for low-income people to get sued, because there’s simply not much to sue for.

Consideration 3) Amount of Liability

The next item to consider is how much liability you have. For many bloggers, for instance, the content of your blog posts may not burden you with much (if any) liability. As long as you’re not plagiarizing anything, stealing anyone’s content, or writing slanderous material, it’s possible that there isn’t much to sue you over in the first place. (And, even in this circumstance, we would still recommend forming an LLC ten times out of ten.)

There are many cases where it is a good idea to protect yourself with an LLC. If you sell any products, you should definitely register an LLC. If you have a physical place of business where customers are served, you will need to protect yourself from the liabilities that come with that — for instance, you’ll need to protect yourself against simple accidents, like a slip and fall situation.

Consideration 4) Employees

In addition, if your side hustle has any employees — even if someone just helps you out for a few hours a week — forming an LLC is strongly recommended. Furthermore, if you have any plans to expand your business beyond the side hustle level, or if you would like to someday transition into operating your side business full-time, it’s advisable to register your business as an LLC.

Consideration 5) Taxes

Finally, there are some taxation considerations to think about. As a sole proprietorship or general partnership, your only option for taxation is the pass-through method, in which your business profits “pass through” the business itself, and you claim that money on your own personal tax return — there is no corporate-level business tax paid.

With an LLC, you actually have three options for how your business can be taxed, including the aforementioned partnership-style pass-through method. You can also choose to be taxed like a C corporation, which would require you to pay taxes at both the corporate and personal levels, but avoids self-employment tax — a 15.3% tax rate that encompasses both the employer and employee portions of Medicare and Social Security.

However, this option doesn’t allow you to claim the 20% pass-through tax exemption that was put in place by the Tax Cuts and Jobs Act of 2017, which enables you to claim only 80% of your business income for tax purposes.

Additionally, the S corporation taxation method is an option. This method is similar to the pass-through method that is the default option for LLCs, but it allows you to invest some of your income back into your business without paying self-employment taxes on it — you’ll only need to pay those taxes on the money you pay yourself as a salary from the LLC.

There are a number of restrictions on S corp taxation, but the vast majority of side businesses will have no problem adhering to them. For example, your business must have 100 or fewer owners, all owners must be United States citizens, etc.

How to Set Up an LLC for a Side Business?

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There are three main options for setting up your LLC. You can set it up yourself, you can hire a lawyer to form it on your behalf, or you can hire a business services company.

Especially for a side hustle, we don’t particularly recommend hiring a lawyer because it’s such an expensive option — attorney’s fees for an LLC formation can cost hundreds or even thousands of dollars.

If you want to give the DIY method a shot, we recommend you read our comprehensive guide to forming your own LLC. In short, you’ll need to complete the following steps:

If you’re looking for assistance with your formation without breaking the bank, we recommend hiring an LLC filing service. There are dozens of reputable online services that can save you a ton of time, while also costing far less than hiring a business lawyer to form your LLC.

Frequently Asked Questions

When Is the Best Time to Start an LLC?

We think you should start an LLC before you begin conducting business. While it is entirely legally acceptable to operate your business as a sole proprietorship or general partnership before forming an LLC, doing so subjects you to a number of risks that LLCs don’t have to worry about.

For example, informal business structures don’t have limited liability protection, so any lawsuit filed against the business can include the owner’s personal assets as well as the business assets.

Should I Use an LLC Service, Hire an Attorney, or Form My Own LLC?

The answer to this question lies in your personal preferences, but we can give some general pointers. An attorney will cost the most by a mile, but also provides expertise you won’t find with the other options. The DIY route is free of charge but can require quite a bit of legwork and provides no peace of mind that the process is being completed correctly.

Using an LLC service means your business will be formed by professionals who know what they’re doing, while also costing significantly less than a lawyer. This “best of both worlds” attribute is what makes LLC services our preferred option.

How Do Online LLC Services Work?

Using an online LLC service removes much of the hassle from the business formation process. With these services, all you need to do is provide them with the name, location, and industry your business operates in, along with some info about yourself and your registered agent.

The service then creates your articles of organization and files them with your state to create your new LLC.

Are LLC Formation Websites Legit?

Absolutely. There are quite a few reputable companies offering LLC formation services these days, including the three best LLC services we discussed earlier.

In fact, while we certainly have our opinions about which ones offer the best pricing and features, every one of the incorporation services we discuss on this website is entirely legitimate and trustworthy.

Should I Form an LLC or Corporation?

This is an impossible question to answer in an across-the-board manner, as each business type has its own advantages and disadvantages. That said, the LLC is typically the more suitable option for small businesses and solo entrepreneurs, while the corporation is usually a better fit for large companies. For more info, check out our complete comparison guide between LLCs and corporations.

In Conclusion

All told, the answer to the question “Does a side business need an LLC?” is largely situational. If your business doesn’t have much liability, you might be able to get away with simply operating as a sole proprietorship or general partnership.

However, if you sell any products or services, or if you generate any liability through your side hustle, it’s probably advisable to register an LLC for your business. This is especially true if you have any expansion plans.

We hope this article helped you expand your knowledge of how the LLC business structure can help your side business!

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