While business closures amid the pandemic forced millions from U.S. payrolls, one enterprise grew at a record pace: the side-hustle.
New business applications jumped to record levels in 2020. Whether started by unemployed workers or those looking to turn part-time freelancing, a hobby or a passion into a bona fide business, the side-hustle has gained favor as a way to pursue financial stability.
The catchy moniker, however, belies the critical importance of treating a side-hustle just like any business. After performing a self-assessment to determine whether you’re cut out for entrepreneurship’s risk and commitment, and a market analysis to ensure consumers want what you’re selling, these tips can help protect you …
- Execute a shareholder or operating agreement. Think of this as a “pre-nup” for your business. When launching a business with a partner, no one plans for irreconcilable differences. However, if you have one or more business partners, like a relative or a friend, conflicts can arise. These agreements define roles and responsibilities, profit distribution, ownership shares, even how or to whom shares can be distributed if one partner decides to exit the business.
- Consider conflicts of interest. If your gig truly is a side-hustle, what will your current employer think, especially if your business will be in a related field? Don’t risk being fired or sued. Talk to your employer to ensure you’re not violating any non-compete agreement or the spirit of your engagement.
- Formalize your corporate structure. If you’re taking your growing business beyond the sole proprietor stage or find yourself hiring vendors or sub-contractors, consider incorporation. This can limit personal exposure, especially if you sell products, and offer salary, tax deductions and other benefits not found with sole proprietorship. Common options include an LLC, which offers both liability protection and flexibility in ownership and rights; an S-Corporation is the simplest option, especially for those providing services, as opposed to goods, and offers flexibility and tax benefits for salary, profits and dividends; and a C-Corporation, which is better suited to companies that see growth requiring capital, investors or ownership shares being created or offered.
- Not-for-profits or cause-related enterprises. Businesses that fall between providing a social benefit and seeking a profit can seek the low-profit limited liability company (L3C). This IRS designation simplifies investments in socially beneficial, for-profit ventures, allowing them to pursue a public good, while seeking a profit (and paying taxes).
- Get counsel on board. The forms and documents required by the state and IRS to incorporate can be user-friendly and self-explanatory. But legal, financial, corporate planning and other intricacies related to business formation can be confusing, and if done incorrectly, can have serious ramifications on the business and owners. Line up your attorney, accountant and business advisor early in the process.
Most of all, if it’s time to grow your gig into a bona fide business, give it the attention it deserves. No less than the CEO of a Fortune 500 company, it’s your hustle to steer to success.
Tanya L. Bower is a director at Tripp Scott and focuses her practice on corporate and entrepreneurial business and tax matters, including estate planning, asset protection and wealth preservation.
For more than 50 years, Tripp Scott has played a leadership role in issues that impact business. Learn more at TrippScott.com.