Whether you’re baking cookies, selling handmade crafts, freelancing, or offering services like consulting or tutoring, a side gig can be a great way to boost your income and pursue your passions.
However, the administrative details might seem daunting at first, and it’s tempting to jump in without worrying about formalities. But if you’re serious about making money from your side hustle, skipping the necessary legal steps can end up costing you more in the long run.
Here’s a quick guide to some of the formalities you shouldn’t ignore and why they’re essential to growing your side income.
1. Choose the Right Business Structure
Before you start taking on customers or clients, it’s important to decide on a business structure. The most common options for side hustlers are a sole proprietorship, limited liability company (LLC), or partnership if you’re working with others. Each comes with its own set of pros and cons regarding taxes, liability, and costs.
For instance, as a sole proprietor, you’re personally liable for any debts or legal issues that arise from your business, which means your personal assets could be at risk. Registering as an LLC offers liability protection, which can be crucial, especially if your side hustle involves more risk or liability. Setting up an LLC may involve more paperwork and fees, but it can save you from major headaches later on.
2. Get an EIN for Your Business
Even for a side hustle, it’s often a good idea to get an Employer Identification Number (EIN) from the IRS. An EIN acts like a Social Security number for your business and is essential if you want to separate your personal and business finances. An EIN is also necessary if you plan to hire employees or file business taxes, even if it’s just for a part-time gig.
Getting an EIN is a straightforward process, but if you’re unsure about how to go about it, consider using a service that offers quick assistance with EIN application. Having an EIN allows you to open a business bank account too, making it easier to keep track of income and expenses, which simplifies your accounting and tax filings.
3. Get the Right Licenses and Permits
Depending on your side hustle, you might need specific licenses or permits to operate legally. For example, if you’re selling homemade goods, you might need a food handler’s permit or home occupation permit. Freelancers offering services such as personal training, consulting, or tutoring may need specific licenses, depending on the state or city you’re in.
Not having the right permits can lead to fines or even the shutdown of your business. While it might seem like extra hassle, taking the time to get these permits in place shows customers that your side hustle is legitimate and trustworthy, potentially boosting your income as you attract more clients.
4. Set Up Proper Contracts
If you’re offering services, it’s wise to have formal contracts in place for your clients. A clear contract outlines expectations, payment terms, and timelines and protects you in case of any misunderstandings.
Having these contracts in place not only saves you from potential legal disputes but also makes your business look more professional. Clients are more likely to take you seriously and pay on time when they see that you have formal agreements in place.
