How to Legally Turn a Side Hustle into a Small Business

June 8, 2021

This article is for educational and entertainment purposes only. This is not legal advice and should not be relied on as such. Every case is different. Consult a licensed professional in your state. Viewing this website or its content does not create an attorney-client relationship with Lyda Law Firm or any of its lawyers.

If you’re ready to take your side hustle and turn it into a legitimate small business, there are a few things you can do to legally protect yourself and the business.

We have done a whole playlist called The Legal Checklist for Startups that outlines several steps you might do if you're really starting a true small business in earnest. But if you've got a side hustle going and you're just looking for a few quick and easy things that you can do to make your side hustle more business-like, here are four of the top steps you can take quickly and easily.

Step 1. Register an LLC

The first step is to register an LLC. You can do that, usually, on your Secretary of State's website. In Colorado, it costs $50. Just go to your Secretary of State’s website, choose your name, fill out the form, and you put in your credit card information — voila, you've got an LLC.

For more information, read about the different types of LLCs and how to register an LLC.

Creating an LLC for your side hustle is important because it creates a legally distinct identity. In other words, it legally separates you, as an individual, and your business. That distinction creates a little bubble of protection from certain, but not all, legal liabilities. That means if your business gets sued, your personal assets could be protected.

Another thing you can do within step one to strengthen that liability bubble is to get what's called an operating agreement. Even a single-member LLC, meaning a one-person LLC, can benefit from having an operating agreement. This will only further legitimize your operation. What you are saying to the world is, "Don't sue me, sue the business," just in case something goes wrong. So that's step one, get your LLC.

Step 2. Get an EIN from the IRS

Step two, get your EIN from the IRS. An employer identification number (EIN) is is like a social security number for your business. EIN stands for Employer Identification Number. It's also known as a tax ID.

Getting an EIN is free and can be done in less than five minutes. To get an EIN, go to the IRS website and fill out their simple form. You’ll need your LLC information from your state and basic information about the owners of the LLC (which will probably just be you.)

Once complete, you’ll get your EIN immediately. Now you have the equivalent of a social security number for your business!

One thing to think about when getting your EIN is taxes. You need to determine if you want to be taxed as a sole proprietor, which is the default method, or as a corporation.

Getting taxes as a sole proprietor is the same as how you would be taxed as a regular freelancer. But you can also elect to be taxed as an S corporation, which is often a great idea for businesses that make more than a full-time income. We suggest consulting with a tax professional in your state to determine if this is the best decision for your unique situation.

Step 3. Create a Separate Bank Account

Once you have your LLC set up with your state and an EIN from the IRS, you can use that information to open up a separate bank account for your business. The reason for this is because you want to separate all of your business funds from your personal funds.

Separating your personal and business funds makes things much easier for accounting purposes. And if you’re ever audited or sued, this will help protect your personal funds.

This is a simple step that can be down, once again, completely online.

Step 4. Get an Insurance Policy

The fourth thing you should do to legitimize your side hustle is think about getting an insurance policy. A commercial general liability policy or a business owner's policy is probably a lot less expensive than you might think.

What a commercial general liability policy protects you even more if you get sued. So if your business gets sued or something goes wrong, then the insurance company should cover you by providing a lawyer and by paying out any damages you have to pay as a result of the lawsuit. That way, not only are you separating yourself from the business so that you're creating that bubble of legal liability, but you're also protecting the business inside of that bubble with its own insurance policy.

Those are the four quick and easy things you can do to protect your side hustle and turn it into a legally recognized small business:

  1. Register an LLC
  2. Get Your EIN From the IRS
  3. Set up a Bank Account
  4. Get a Commercial General Liability Insurance Policy

Take those four quick and easy steps and, all of a sudden, your side hustle is a small business.

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