Updated 3 months ago
During and in the aftermath of the pandemic, one business category grew at a record pace: the microenterprise.
The 4.3 million new businesses started in the U.S. in 2020 was up 24.6% over the year before — higher than any year since 2005, noted the U.S. Chamber of Commerce. Many of these were “side hustles,” or businesses launched by the unemployed or operated in addition to a worker’s day job. For many, these “side hustles” brought career independence and financial security.
No matter the mission, it’s critical that the entrepreneur treat this the same as any other business. Below are some considerations …
- Perform a self-assessment. Entrepreneurship isn’t for everyone. Ask yourself whether you’re cut out for its risk and commitment. Then conduct market research to ensure consumers actually will buy what you’re selling.
- Consider conflicts of interest. If your business 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 with your employer to ensure you’re not violating any noncompete agreement or the spirit of your engagement. If possible, get their acknowledgement in writing.
- Execute a shareholder or operating agreement. This “prenup” for your business plans for possible conflicts with any business partners. It 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.
- Formalize your corporate structure. Incorporation can limit personal exposure, especially if you sell products, and offer salary, tax deductions and other benefits not found with sole proprietorship. An LLC 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. A C-Corporation is better suited to companies that anticipate 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 file as a 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).
- Hire a professional. Some documentation required by the state and IRS to incorporate are userfriendly and self-explanatory. But legal, financial, corporate planning and other intricacies related to business formation can be confusing. If done incorrectly, they can have serious ramifications on the business and owners. Consider an attorney, accountant and business advisor to help with the process.
Most of all, treat your side hustle like the business it is. Your success will depend on it.
For more than 50 years, Tripp Scott has played a leadership role in issues that impact business.
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Tanya L. Bower
Director at Tripp Scott, Bower focuses her practice on corporate and entrepreneurial business and tax matters, including estate planning, asset protection and wealth preservation.