How to Start an LLC for Your Side Hustle? | Complete Guide

In today’s dynamic economy, the allure of the side hustle has captivated many aspiring entrepreneurs. Whether it’s crafting handmade goods, offering freelance services, or diving into the gig economy, the possibilities seem endless. However, regardless of the enthusiasm, a critical question often arises: Should I start an LLC for my side hustle?

Recent trends reveal a surge in side hustles, with over 45 million people actively pursuing additional income streams outside their primary employment. However, as the gig economy thrives, so do the risks associated with operating a business. From potential legal liabilities to tax implications, navigating the entrepreneurial landscape demands careful consideration.

In this article, we will explore why you should start your LLC for your side hustle, exploring its benefits, drawbacks, and the pivotal factors to weigh before taking the plunge.

What is a Limited Liability Company (LLC)?

A Limited Liability Company (LLC) is a business structure that combines the simplicity and flexibility of a partnership or sole proprietorship with the limited liability protection typically associated with corporations. In an LLC, owners are referred to as “members,” and they enjoy limited liability protection, meaning their personal assets are generally shielded from the company’s debts and liabilities.

Some key points to know

• Forming an LLC in seven simple steps: choose a distinctive name, appoint a registered agent, complete and file the relevant papers, create an operating agreement, and get tax ID numbers.
• Obtain the necessary licenses/permits to lawfully operate the business and comply with state rules for long-term success.

How to Start a Limited Liability Company?

The following steps you need to follow to start an LLC includes:

Select a Name and Register it

When naming your LLC, it’s crucial to follow state-specific regulations to ensure compliance. Typically, your chosen name must be unique and distinguishable from other registered business entities in the state. Adding words like “limited liability company,” “L.L.C.,” or “LLC” is often mandatory to indicate your business structure.

Considerations when selecting your LLC name include:

• Availability and Trademark Risks: Ensure the name is not already trademarked and doesn’t infringe upon existing trademarks to avoid legal issues.
• Clarity and Memorability: Choose a name that’s easy to remember, spell, and pronounce to enhance brand recognition.
• Positive Associations: Avoid names with negative connotations that could deter potential customers or partners.
• Reflective of Services: Ideally, your LLC name should indicate the nature of your business, helping customers understand your offerings.

Additionally, many states allow temporary name reservations if you’re not ready to file LLC formation paperwork yet. By following these guidelines and conducting thorough research, you can select a name that not only represents your brand effectively but also complies with legal requirements, setting your business up for success.

Prepare a Articulated Business Plan

Creating a business plan for your side hustle, though not mandatory, can significantly enhance your chances of success. It serves as a comprehensive roadmap, guiding your efforts towards growth and sustainability. Here’s what your plan should include:

• Executive Summary: A concise overview of your business goals, target market, and key strategies.
• Business Description and Mission Statement: Define what your side hustle is about and articulate its purpose and values.
• Market Analysis: Research and analyze your target market, including demographics, trends, and competition.
• Marketing and Sales Strategy: Detail your approach to attracting and retaining customers, as well as your sales tactics.
• Financial Projections: Estimate your revenue, expenses, and profits over a specific period, typically the first few years of operation.
• Supporting Documents: Include any relevant documents, such as resumes, licenses, or market research data.
• Management Structure: Explains how your business will be organized and managed, including roles and responsibilities.
• Product or Service Offering: Clearly define what you’ll be selling and how it meets the needs of your target market.

Hire a Registered Agent

A registered agent, also known as a resident or statutory agent, plays a crucial role in your LLC by receiving legal documents and ensuring they reach the right person promptly. Each state has specific requirements for who can serve as a registered agent, typically either a state resident over 18 with a physical address or an authorized company.

In situations where your business lacks a physical presence, no one is available during regular hours, or you prioritize privacy, hiring a registered agent service is beneficial. These services offer flexibility, protecting your privacy, providing expert legal advice, and aiding with compliance.

By utilizing a professional registered agent service, you ensure timely handling of important notices, safeguard your personal information, and access valuable legal support, ultimately streamlining your LLC operations.

Prepare an official LLC agreement

An operating agreement is a crucial document for LLCs, detailing operational and financial procedures, ownership interests, and profit distribution. While not always legally required, it’s essential for clarifying management roles and responsibilities, especially in multi-member LLCs. While single-member LLCs might create one independently, it’s wise for those with multiple owners to seek legal assistance. The agreement outlines member and manager powers, profit/loss distribution, and procedures for buyouts or dissolution.

The benefits of a comprehensive operating agreement are manifold. It helps prevent conflicts among members, adds an extra layer of personal liability protection, ensures smoother LLC operation, and safeguards personal assets. In essence, it’s a foundational document that promotes clarity, efficiency, and protection within your LLC structure.

Prepare an Article of Organization

To form an LLC, you’ll need to complete several steps, starting with choosing a unique name and appointing a registered agent. Once these are in place, handling the paperwork is the next crucial stage. Online LLC filing services can streamline this process, ensuring accurate submission of the necessary formation documents.

These documents, often referred to as articles of organization, vary slightly by state but typically require details such as the LLC’s name, address of the main place of business, duration and purpose of the LLC, management structure, registered agent’s name and address, and organizer’s signature.

Here’s a summary of the process:

• Research the appropriate state agency for filing.
• Complete the paperwork following state instructions.
• Pay the filing fee online or by mail.
• Wait for processing, which varies from instant to several weeks depending on the state.
• Optionally, pay extra for expedited processing.
• Upon approval, receive a certificate of formation, confirming your LLC’s existence.

Secure an EIN

An EIN, or Employer Identification Number, is how the IRS identifies your organization. Consider it a social security number for your side hustle turned enterprise. An EIN is necessary in certain situations and provides various benefits:

• File your business taxes individually.
• Makes it easier to acquire a company bank account or credit.
• Give you the opportunity to hire and manage staff, including their taxes.
• Reduces your chances of being harmed by fraud or identity theft.
• You can apply for an EIN with the IRS or utilize an EIN provider to get and save your EIN for future use.

Obtain a Business License & Permit

Mastering your company’s legal obligations might be confusing, but knowing which licenses and permissions you need is critical for operating properly. Here’s an overview of some of the more common ones.

• Seller’s Permit: If your firm sells taxable products or services, acquiring a seller’s permit enables you to collect and pay sales tax, guaranteeing compliance with state requirements.
• Registration in Other States: If your company works in states other than the one where it is registered, you will most likely need to register as a foreign LLC in those states to comply with local regulations.
• General Business Licenses: Certain states require all enterprises to get a general business or operating license. In addition, your local government, such as your city or county, may demand a special company license.
• Industry-Specific Licenses: Depending on your company activity, you may require a variety of licenses, including liquor permits and occupancy certificates. These are granted by federal, state, or municipal authorities to guarantee compliance with industry rules.

Registered Office Address

Since one of the benefits of forming an LLC is secrecy, you probably don’t want your home address associated with it. Your side hustle might profit from employing a virtual address provider, which provides you with a street address in the state where your LLC is registered. You’ll be able to utilize this address throughout the registration process and receive mail digitally from anywhere in the globe. This makes it easy to inspect, keep, and manage your critical papers.

Additional LLC Implications for Side Hustlers

Once your LLC is formed, several key considerations come into play:

• Business Taxes: Be mindful of your tax obligations. While you can earn up to $400 annually without paying taxes, beyond that, you’ll need to file annual business taxes with the IRS. With an LLC, you’ll face pass-through taxation, where income is reported on your personal tax return.
• Business Insurance: Protect your side hustle with adequate insurance coverage. Even as a small business owner, you’re exposed to certain risks, and having the right insurance can mitigate them effectively.
• Growing Your Business: Many side hustles aspire to evolve into full-time ventures. Achieving this goal requires meticulous planning and market research. Learn how to market your business effectively to reach the right audience and fuel growth.

Remember, operating a side hustle makes you a bona fide business owner. Celebrate this accomplishment and take the necessary steps to formalize your LLC.

Benefits for Setting up an LLC for Your Side Hustle

• Limited Liability Protection: Shield your personal assets from business debts and liabilities. This ensures that your savings, home, and other personal belongings remain protected in case of legal issues or financial setbacks.
• Perpetual Existence: Forming an LLC ensures the continuity of your business beyond individual ownership changes. Even if members leave or new ones join, the LLC can continue its operations seamlessly.
• Tax Flexibility: LLCs enjoy pass-through taxation, allowing business profits and losses to “pass through” to the owners’ personal tax returns. This simplifies tax filings and avoids double taxation commonly associated with corporations.
• Credibility and Professionalism: Operating as an LLC adds credibility to your business, instilling trust and confidence in potential customers, clients, and partners. It signals a commitment to professionalism and accountability.
• Passing on the Business: Planning for the future, an LLC allows for the smooth transfer of ownership or succession planning. This feature ensures that your side hustle can endure for generations to come.
• Flexible Management Structure: Unlike corporations with rigid management hierarchies, LLCs offer flexibility in organizational structure. Members can choose how to manage the business, whether through direct involvement or appointing managers.
• Operational Autonomy: LLCs provide owners with autonomy and control over business decisions and operations. You can adapt and pivot your side hustle as needed without extensive bureaucratic processes or shareholder approval.

Final Thoughts

Forming an LLC for your side hustle can be an exciting and fulfilling process for you that may bring various benefits, including liability protection, tax flexibility, and simplicity of creation. You can determine whether a limited liability company is the best option for your company endeavor by following our detailed step-by-step tutorial, analyzing various LLC structures, and taking into account the potential downsides and tax effects.