How to Make Your Side Hustle a Legitimate Business

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side hustle a legitimate businessThis article is about the moment in your life where your extra income becomes a serious business.

A side hustle is basically a way you earn extra money in addition to a full-time job. Popular side hustles include: tutoring, freelance writing, dog walking, blogging, selling things on Etsy, detailing cars, etc. Side hustles start as just small snowflakes of cash. The amount is enough to perhaps pay your month cell phone bill but it’s not enough to cause any real change in how your finances are organized.

But as the months go by, you begin getting more clients and/or making more sales. At a certain point, this begins to feel like a legitimate business – both for yourself and for the IRS.

You must report ALL income to the IRS. And once you earn more than $400 with your side hustle, you must file a Schedule SE and pay Social Security and Medicare taxes on the income. At this point, it begins feeling serious.

Many people look to turn their side hustles into legitimate businesses for tax efficiency. However, there are other reasons to do so:

  • You can bring on a partner or shareholders
  • You can trademark a fictitious name you can use for your business i.e.: eCookies Bakery instead of just telling your clients to “Make the check out to Margery Peabody.”
  • You can protect your personal assets by creating the right type of business.

side hustle a legitimate businessThere are many options for creating a business. You can choose to create a C-Corporation, S-Corporation, LLC (Limited Liability Company), a Partnership or a Solo Proprietorship.

Without boring you with all the details (I researched this for about 3 hours), the best option for a one person side hustle is definitely a solo proprietorship. It’s easy, cheap, effective and you can even set up a sweet retirement plan for yourself and any employees you choose to take on.

Here is your action plan for creating a sole proprietorship:

Step 1: Do nothing.

Okay, so maybe you have to do something. But you actually don’t need to do anything in order to begin operating as a sole proprietorship. Once you begin earning income from your side hustle, you’re already a sole proprietor.

Step 2: View this 50 state guide for learning how to get established in your state.

If you relocate, you can always transfer the business later. Do anything that is specific to your state. Where I live, Nebraska, there is nothing state-specific I needed to do for my particular business. This is true of many businesses/states. But complete this step just to be sure.

Step 3: Decide if you’ll use a trade name or your own name.

Either works fine. But as mentioned earlier, using a company name will make your business look more legitimate.

Step 4: Get an Employer Identification Number

Do so on this page of the IRS website. It’s a simple process.

And There You Have It

Those are the 4 steps for turning a side hustle into a legitimate business. Easier than you thought, huh?

Moving forward, there are still smaller things to consider. First, which retirement plan would you like? You can choose a SEP-IRA a SIMPLE IRA or an Individual 401(k). Next, if you chose a fictitious name for your business, you’ll want to update clients and let them know to make payments to that entity instead of your own name. You should also open a business checking account. This will help keep your personal and business income/expenses separate. Always a good idea. And finally, make sure to change your legal structure if you begin doing activities outside of the world of sole proprietorships.

Congrats on this life change! You’re officially a business owner! Be sure to ask any and all questions below:

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Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

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