In today’s “gig” economy so many of us have a “side hustle”. We may be selling some type of multi-marketing product that we believe in, using our skills from work to do some non-competitive consulting, or pursuing our passions through art, music, or some other talent. Many of us dream of the day when we can leave the “9 to 5” and turn our “side hustle” into our own business, but opening your own business is a big step. It is important that you lay the foundation correctly to avoid future problems.
For most people, you cannot quit your day job until you make enough money to support yourself, but when is it time to turn your “side hustle” into an actual legal business? When does the IRS require that you form a business? As with any government regulation, there are no simple answers, but if you are showing a regular profit that is a good indication that you should formalize things with your side business. Because this is a complex issue which could lead to tax complications and could expose you to legal actions, it is important to work with your accountant and to seek the advice of a business attorney.
Why Use a Business Attorney?
If you google how to start a business, you will get millions of results in a second – ads that want to sell you something, government agencies that want to give you free information, non-profits that want to help but also want your donation, and tons of private companies that say they can help. If you have the time to sort through all these options, this information could be helpful in pointing you in the right direction. You can form a business entity online, but there are so many variables that making the wrong choice could have negative effects on your business in the future. To eliminate some of the uncertainty, contact an experienced business attorney who can advise you on the best course of action for your unique situation.
Consequences of Making the Wrong Decision
A friend of mine gave me permission to share a story in hopes of helping potential business owners. She started a small business with her son who was a musician. As might be expected, in the first few years they were losing money. She had formed the legal entity herself and was working with her accountant at tax time. She was funneling money into the business from her investments to keep the business afloat. Finally, her son realized that, although he loved music and was exceptionally talented, he had to make a living. So, they closed the business, but he continued to play while working at a day job. Two years after they closed the business, she got a letter from the IRS and one from the State of Maryland, presenting her with tax bills of over $10,000. If she had been working with a business attorney, this may have been avoided. The moral of her story is that in business what you don’t know can hurt you.
Steps for Making Your “Side Hustle” a Business
One of the first things you will need to do is to form a business entity. It is relatively straight-forward to form a business entity but there are many different types of entities and each entity provides different protection and has different tax implications. Next you must get a federal tax ID number, and in some cases, you may need a license. You are going to want to make sure you understand your tax liabilities and how to protect your personal assets, which may be done through different types of insurance. You could research all of this online yourself, but the quickest and safest form of action is to contact a business attorney. The advice of a business attorney can help you understand, identify, and avoid problems that may surface in the future. There is a mug that is a popular gift for attorneys with the saying, “Please do not confuse your Google search with my Law Degree.” Google is a great resource but if you are thinking about opening a business, the safest course of action is to contact a business attorney.