Should I Start an LLC for My Side Hustle?

Running a side hustle is not the same as getting a part-time job. It also doesn’t technically qualify as a small business, unless you choose to classify it as one by registering it as a Limited Liability Company (LLC). This article will explore whether it's a good idea for you to form an LLC, what that looks like, and when you should do it.

Some key takeaways:

• An LLC provides liability protection and can enhance your business's credibility.
• There's no minimum income requirement, but it is important to consider whether the costs outweigh the benefits.
• The process is straightforward, but compliance requirements vary by state.

According to a report released by the US Small Business Administration in 2024, there are over thirty-four million small businesses in the United States. 21.6 million of those are LLCs. The information contained in this article is compiled from their experiences.

Should I Start an LLC for a Side Hustle? What to Consider First

There’s no legal requirement in any state to register your side hustle as an LLC. Many operate as sole proprietors indefinitely, regardless of income. Others choose to become a business when they reach a certain income threshold. While some experts suggest considering an LLC when you're earning $1,000 or more per month, the real factors to consider are:

• Risk exposure: If your side hustle involves any possibility of customer injury, property damage, or professional liability, an LLC provides crucial protection.
• Credibility: Clients and customers often view LLCs as more professional than sole proprietorships. This can be particularly important if you're seeking larger contracts or working with established businesses.
• Tax planning: An LLC offers flexibility in how you're taxed, which can become valuable as your income increases.
• Asset protection: If you have significant personal assets to protect, like a home, investments, or other business interests, an LLC creates a legal barrier between your personal wealth and business liabilities.

Getting liability insurance for your side hustle might be a good idea even if you remain a sole proprietor. Insurance is particularly important if you have assets to protect, like a primary home or income property. Think of this as an additional way to manage risk.

When Should I Start an LLC for My Side Hustle?

Everyone’s side hustle is different. The answer to the question of “When should I start an LLC for my side hustle?” depends on your specific circumstances. Here are some clear indicators:

1. You're consistently profitable: If your side hustle has moved beyond occasional income to regular monthly profits, it's worth considering the protection an LLC provides.

2. You're working with clients directly: Service-based businesses like consulting, freelance writing, or home services face higher liability risks than someone selling products online.

3. You're using business equipment or property: If you're using expensive equipment, vehicles, or working from client locations, the liability protection becomes more valuable.

4. You want to build business credit: An LLC allows you to establish business credit separate from your personal credit, which can be valuable for future growth.

Benefits of Forming an LLC for Your Side Hustle

It’s important not to listen to people who tell you that “you should” form an LLC without giving you a valid reason. There are several benefits to this business entity structure, but there are also some drawbacks. Let’s look at the pros first:

Liability Protection

The “limited liability” part of an LLC is the most appealing feature. What it means is that your personal assets won’t be at risk if someone sues your company. Without it, the aggrieved parties could target your house, cars, and bank account.

Tax Advantages

LLCs are classified as “pass-through entities” by the IRS, meaning that business profits and losses pass through to your personal tax return. That’s better than a C-Corp, where you’d pay two levels of taxes, but possibly less appealing than an S-Corp with preferred tax status.

Enhanced Credibility

Listing your business as an LLC rather than a sole proprietorship gives you more credibility in the eyes of certain clients and vendors. It’s a sign that your side hustle has “grown up” into a legitimate business enterprise, and it opens doors to business credit opportunities.

What Are the Disadvantages of an LLC?

Now that you’ve reviewed the advantages, let’s take a look at the potential drawbacks. It’s important to study these carefully if you’re asking, “Should I start an LLC for my side hustle?” There are many reasons that you should, but LLCs aren't without drawbacks.

• Costs: Filing fees range from $40 to $500, depending on your state, plus potential ongoing annual fees and registered agent costs.
• Paperwork: You'll need to maintain corporate formalities, file annual reports in most states, and keep business records separate from personal finances.
• Self-employment taxes: LLC owners typically pay self-employment tax on all business profits, which can be higher than what employees pay in payroll taxes.
• Limited life: In some states, LLCs dissolve when an owner leaves, though this can be addressed in your operating agreement.

Can I Start an LLC By Myself?

Yes. Single-member LLCs are common and legal in all 50 states. You don't need partners or employees, and there are no minimum income requirements. That’s why this structure is ideal for side hustlers, most of whom work alone. LLCs can also be converted into C-Corps if you grow to a point where that’s justified or want to attract investors.

Steps to Form an LLC for a Side Hustle

Forming an LLC for your side hustle is a simple three-step process:

• Choose a Business Name: Your business name must be unique in the state where you live, and it must include “LLC” or “Limited Liability Company” in the title. Check your state's business database to ensure availability, and consider registering a domain name to match if you haven’t already done so.

• File Articles of Organization: The articles of organization are part of the official documentation you need to file with the local Secretary of State’s office. The process is fairly straightforward and can usually be done online.

• Create an Operating Agreement: The operating agreement outlines how your LLC will operate. It’s not required in all fifty states, but it’s a good idea to create one anyway. An operating agreement clarifies what your business does and can protect you from certain liabilities that could arise during your day-to-day operations.

Costs and Considerations

Filing fees vary significantly by state. Delaware charges $90, while California charges $70 plus an annual $800 minimum tax. Factor in potential costs for:

• Registered agent services ($100-300 annually)
• Operating agreement drafting ($500-1,500 if using an attorney)
• Business licenses and permits (varies by industry)
• Annual report filing fees

On a legal and compliance note, remember to keep business finances separate from personal finances, maintain proper records, and file annual reports when required. These actions aren’t particularly burdensome, but they do require ongoing attention.

Discover Wise: The Easy Way to Manage Business Finances

As your side hustle grows, managing business finances becomes more complex, especially if you're working with international clients. Wise offers solutions designed for growing businesses:

Managing multiple currencies and international transactions doesn't have to be complicated or expensive. Wise makes it simple to focus on growing your business while handling the financial complexity behind the scenes.

Open a Wise Business account online

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in 40+ currencies. You can get major currency account details for a one-off fee to receive overseas payments like a local. You can also send money to 140+ countries.

	Editor & Business Expert:
	Panna is an expert in US business finance, covering topics from invoicing to international expansion. She creates guides and reviews to help businesses save time and make informed decisions. You can read more useful business articles on her author profile.

	Author:
	Kevin D. Flynn is a retired financial professional, business coach, and financial writer. He lives in Leominster, Massachusetts with his wife Evelyn, two cats, and ten wonderful grandchildren. When he’s not working, you’ll find him at the golf course or on his back porch reading classic sci-fi novels.

Sources:

1. Frequently Asked Questions About Small Business, 2024
2. How Many LLCs Exist in the United States? A Deep Dive into America's Most Popular Business Structure