Side hustles are getting to be as common as some of the hobbies which lead people to try to make a little extra from home. Some have used the layoffs of our uncertain economic climate as a push to take it to full-time. With all of the technology at our disposal, it has never been easier to make money without having to take on a second “real” job. Some of the hardest grinders are able to make enough from their gigs that they are considering it to be its own business. But, with the more work that you do while freelancing, the more exposure to liability you and your hustle develop.

Liability? 

Yes. When you work freelance, you – the entrepreneur – are your business entity. It’s considered “Sole Proprietorship”, by default. You are solely responsible for anything that you do. Even if working as an independent contractor, a term of your agreement likely included an indemnity clause wherein you agreed to take full responsibility for your actions and nothing can be blamed on the other company. For example, if you get in a wreck while delivering food through an online company, you are on your own; that company is not responsible for paying anything. It is as though you were just riding around when it happened. A serious wreck could cost more than your insurance covers, in which case your personal assets are on the line.

Can’t Forget About the Taxes

The IRS won’t forget about them. You are responsible for claiming all of the money you make from freelancing. Since the typical employment taxes won’t be taken out of the money you make, you will be responsible for paying that into the system. This can be a double slap in the face if getting started with your hustle wound up costing you more money than you made (such as auto repair, new tires, oil changes), because you still have to pay the tax on the amount you did make.

What Does Entity Formation Do? 

Forming a legal business entity for your side hustle offers many benefits. If we revisit the scenarios above from the perspective of being an independent entity, those benefits shine. Not only does it add credibility to your venture, the economic reasons to make your side hustle an entity can help your personal finances.

Transfer of Liability 

With the exception of intentional fraud or harm, or gross recklessness, a formed entity takes the majority of the responsibility for what is done in the course of your work. If you were to be sued by someone in regards to your work, it’s the entity that would take the hit. If the damages are greater than what the business is worth, your personal assets and accounts are safe.

Tax Credit

Imagine that you form an LLC (one of the more basic entity formations). Rather than being taxed on the entirety of what you made, regardless of how much your business cost for you to run, you are only taxed on the amount that remains after business expenses. Now, those tires and other expenses subtracted from the money you received and you are only taxed on that smaller amount. Should your startup costs exceed what you made, during that year, the loss can be counted against your regular income, resulting in less total tax liability than you would have had without the side hustle.

Professional Image

Imagine that you are looking to hire a writer to help with a project. If two writers charged the similar rates, would you have more faith in the writer who freelances on the side or the writer who has a business? There is something about having a business entity that creates a sense of seriousness about the work that they do. It’s clearly not just a hobby, at that point. If your target customers are businesses, they are more likely to see you as a peer rather than someone off the street. 

When Should I Form the Entity?

That’s entirely up to you. If you are selling cheap trinkets online, and are only making money sporadically, you may not need one. If you are investing your own money into your side hustle, and it’s more than just a tank of gas, it may be time; particularly, if you are thinking long-term.

When it is time to take that next step, let us help you. We make it easy for any start up to form the most common types of corporation – LLC, S Corp, and C Corp. If you are ready to move forward with forming your business entity, you can begin with our online registration form or by contacting us for assistance.