Do I Need An LLC For My Side Hustle? The Answer Might Surprise You

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Whether your side hustle is babysitting, walking dogs or creating websites for others, you may have to pay taxes on the income you generate every year. Of course, it depends on how much you make, but if you’re using your side hustle as a way to up your annual income, then it’s smart to always be prepared for tax season. One part of that? Deciding how to classify your business. If you’ve been asking yourself if you need an LLC or not, here’s your answer.

What’s an LLC?

First and foremost, LLC stands for “limited liability company.” Classifying a business as an LLC typically means that the owner, AKA the “member” in LLC speak, is protected from the LLC’s debts and lawsuits. For instance, if an LLC files for bankruptcy, the member doesn’t have to use any personal money to pay the debts. Additionally, an LLC doesn’t pay income taxes. Instead, the owner files the business’s profits and losses on her own personal income taxes.

Do I need an LLC for my side hustle?

Now, if you’re thinking that you don’t need an LLC, just wait. There are a few things to consider.

If your side hustle is growing, you might want to increase your customer base, hire a friend to help with the workload or more. In that case, establishing your side hustle business as an LLC could help protect you from the business’s debts, lawsuits or any other liabilities.

Then, you might be able to benefit from a tax break. LLCs don’t have their own federal tax classification and actually adopt the same rules as sole proprietors, partnerships, S corporations or C corporations, depending on the number of members. If you’re the sole member of the LLC, then your LLC may be treated as a freelance gig when tax time rolls around, meaning your LLC can then take advantage of pass-through taxation, which means you may be eligible for a 20 percent tax deduction before paying any income taxes.

llc for your side hustle — Unsplash/Thought Catalog

How do I start an LLC?

If all of that interests you, an LLC might be the right move for your small business or side hustle. If you want to start an LLC, you need to file paperwork in the state where your business is located.

You need a few things for the paperwork, including:

A name for your business
A registered agent, AKA someone who can receive lawsuits on behalf of the LLC (this can be the member of the LLC)
An operating agreement
The purpose for starting the LLC

If your LLC is approved, you have to pay a fee (it varies by state) before receiving a certificate from the state. Once that’s done, you can begin running your LLC.

An LLC might be the right move for your side hustle or small business because of the protection and tax benefits that it affords you. However, if you’re not in need of either of these perks, keeping your side hustle classified as a sole proprietorship is probably the best bet. Either way, it’s smart to manage your side hustle the right way so you can continue growing it, making money and being a total boss at what you do.

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