Your “Side Hustle” Is Serious Business
The “Side Hustle” may sound like a laterally moving disco dance, but it’s actually one of the hottest trends in business today.
This month’s legal opinion is provided by Tripp Scott's Tanya L. Bower.
Bill Davell: What in the world is a “side hustle?”
Tanya Bower: A “side hustle” is a business operated in addition to a worker’s day job, a category that took off at a record pace during the pandemic amid periods of temporary unemployment or working from home with relaxed schedules and supervision. The U.S. Chamber of Commerce reports that 4.3 million new businesses started in the U.S. in 2020, up 24.6% over the year before and the fastest growth rate since 2005. For many, these “microenterprises” brought career independence and financial security.
Bill Davell: What do I need to know to start a side hustle business?
Tanya Bower: The first thing, despite the decidedly casual-sounding label, is to treat your side hustle like the serious business it is. Your success will depend on real focus and commitment to the business and to doing things the right way.
That starts with both a self-and a market assessment. Entrepreneurship isn’t for everyone. Ask yourself whether you’re cut out for the high risk of failure and the hard work a small business usually involves, and if you truly have the potentially long hours to devote given your other job.
Then conduct market research to ensure that there are customers – either consumers (B2C) or other businesses (B2B) – who actually will pay for your products or services, and at a rate that will make the business sufficiently profitable. That means making sure that your income from the business will be well above any additional taxes, shared income with partners and expenses for materials, needed technology, professional services, and possibly office or other operating space.
Bill Davell: Do I need a formal structure for a small business like this?
Tanya Bower: You absolutely should formalize a corporate structure, no matter how small your side hustle is – even if it’s just you and services you provide. Incorporation can limit your personal legal and financial exposure, even as a sole proprietorship but especially if you sell products and offer other benefits.
Different kinds of incorporation are suited to different purposes. An S-Corporation is the simplest option, especially for those providing services, as opposed to goods, and can be structured to provide flexibility and potentially substantial tax benefits for salary, profits and dividends. A Limited Liability Corporation (LLC) offers both protection against legal liability and flexibility in ownership and rights if you have co-owners. A C-Corporation is better suited to companies that anticipate growth requiring investors with ownership shares being created or offered.
Bill Davell: What if my employer finds out?
Tanya Bower: If your business truly is a side hustle, your employer should find out, and from you, especially if it will be in a related field. Don’t risk being fired or worse, sued!
Talk with your employer to ensure you’re not violating any non-compete agreement or the spirit of your engagement. If possible, get an acknowledgement in writing. Also, make sure you are not depriving your employer of a fair work effort and expected time
commitment. And be very, very careful about using your employer’s equipment, materials, subscription services or other property without explicit, written permission.
Bill Davell: Can a side hustle involve business partners?
Tanya Bower: It surely can, whether other “side hustlers” or full-timers in the business. If you partner with others, be sure to execute a shareholder or operating agreement, in essence, a business “prenup” that defines roles and responsibilities, profit distribution, ownership
shares, even how or to whom shares can be distributed if one partner dies or decides to leave the company.
Bill Davell: My side hustle has involved not-for-profit work. Can I make a business out of that?
Tanya Bower: You can create a business that provides a social benefit by filing as a low-profit limited liability company (L3C). This IRS designation simplifies investments in companies that pursue a public good, while seeking a profit (and paying taxes).
Bill Davell: A lot of this organization and administration sounds
complex. Can I do it by myself?
Tanya Bower: Some documentation required by the state and IRS to incorporate or otherwise operate a business are user-friendly and self-explanatory. But many of the legal, financial and corporate planning related to business formation and operation can be intricate and even confusing. If done incorrectly, they can have serious ramifications on the business and owners. You really should consider an attorney, accountant and for more complex businesses, a business advisor to help with the process.
The attorneys in Tripp Scott’s business practice can help with formalities and even assist you in finding other advisors.
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