Chris Eichmuller shares what you should consider when starting a side business.
Are you considering starting a side business? The business plan is drafted, your concept is solid and you’ve acknowledged the time commitment and the financial risk. Now what? Where should you start? Here’s what you should know to set a strong foundation to grow upon.
Should I incorporate or form an LLC?
This is a popular first question for those considering starting a side business. Answer these questions:
- Is this a side business, not just a hobby (meaning: you’re going to make money)?
- Will you have employees?
- Do you foresee the need for bank financing in the future?
If you answered yes to those questions, chances are you will want to incorporate your business. Now, let’s look at how to select proper business entity.
Choosing the right business entity allows an entrepreneur to reduce liability exposure, minimize taxes, and ensure that the business can be financed and run efficiently. Limited liability companies and S corporations are the two most popular options for small businesses considering incorporation.
If your answer was no to any of the above, then not incorporating and simply reporting your side hustle income on your Form 1040 Schedule C is the way to go.
What paperwork and regulations can I expect?
It’s important to get the proper licenses, registrations, and insurances in place before launching your side business. This is true even if you aren’t going to incorporate. It’s always best to make sure you are protected and insured.
Set a budget and plan for taxes.
The financial foundation of your side business is important. Start by making a list of start-up costs and calculate your expenses. The final thing to consider is taxes. How will you pay taxes on your additional income? A simple solution for paying taxes on your side income is to have your current employer withhold more in taxes. When it comes time to file your taxes at the end of the year the decision you made of whether or not to incorporate will decide if you have one tax return to file or two.