Starting a side job is a great way to make extra money. You might do photography, sell products online, clean homes, repair cars, design websites, deliver food, or offer another service after your regular job.
At first, you may simply accept payments under your own name. But as your side job grows, you may start wondering, Do I need an LLC?
There is no single amount of money that automatically means you need an LLC. Instead, the decision usually depends on how much your business is growing, the type of work you do, and how much financial or legal risk is involved.
What Is an LLC?
LLC stands for Limited Liability Company. It is a type of business structure that creates a legal separation between you and your business.
One of the main reasons people form an LLC is liability protection. If the business owes money or faces certain legal problems, properly maintaining an LLC can help protect the owner’s personal assets.
An LLC can also make a side business look more established. You can operate under the business name, open a separate business bank account, and keep your business income and expenses organized.
However, an LLC does not automatically eliminate your personal responsibility for everything that happens in the business, and it does not replace appropriate business insurance.
How Much Should You Make Before Getting an LLC?
There is no specific income level required to form an LLC. You do not have to wait until you make $10,000, $20,000, or $50,000. You can form an LLC when your business is small, or you may continue operating as a sole proprietor while you determine whether your side job will become a long-term business.
Instead of focusing only on income, ask yourself questions such as:
- Am I making money consistently?
- Am I getting more customers?
- Could a customer potentially sue me?
- Am I signing contracts?
- Am I buying equipment or taking on business debt?
- Do I want to keep my business and personal finances separate?
- Do I plan to turn this side job into a larger business?
The more your side job starts operating like a real business, the more it may make sense to consider forming an LLC.
Consider an LLC When Your Risk Increases
Some side jobs have more risk than others. For example, someone selling a few handmade products occasionally may have different risks than someone entering customers’ homes, working on vehicles, providing professional services, hiring workers, or signing large contracts.
As your business grows, you may have more customers, larger transactions, more expensive equipment, and more responsibilities. That can increase the financial consequences if something goes wrong.
An LLC may provide an additional layer of separation between your personal finances and business activities. Depending on your type of work, business liability insurance may also be important.
An LLC Does Not Automatically Lower Your Taxes
A common misunderstanding is that creating an LLC automatically means you will pay less in taxes.
That is not necessarily true. For federal income tax purposes, a single-owner LLC is generally treated like a sole proprietorship unless the owner chooses another tax treatment. You still report the business’s income and expenses and may owe income tax and self-employment tax on the profit.
As the business becomes more profitable, there may be other tax options worth discussing with a tax professional. The important point is that forming an LLC and choosing how your business is taxed are two different decisions. You should also remember that your side-job income may be taxable even if you never create an LLC.
Talk to Local Tax Before Your Side Job Gets Bigger
If your side job is starting to make regular money, it is a good time to start treating it like a business. Keep records of the money you earn, save receipts for legitimate business expenses, and consider using a separate bank account for your business activities. Good records can make tax time much easier.
You should also understand your tax responsibilities before the business becomes much larger.
Local Tax can help side-business owners understand their income, expenses, deductions, estimated taxes, and other tax responsibilities. We can also help you understand how different business structures may affect your taxes so you can make an informed decision about your growing side business.
Whether you are making extra money on weekends or trying to turn your side job into a full-time business, getting your taxes organized early can save you headaches later.
Local Tax
9429 Somerset Blvd
Bellflower, CA 90706
(562) 925-2203
