Why Creating an LLC Makes Sense

Do you have a hobby that’s turned into a second job? Maybe you sell knit hats on Etsy, or you budding standup comedy career is finally starting to pull in some money. Are you a proud member of the “gig economy,” or someone with a “side hustle?”  

If so, you may benefit from forming a Limited Liability Company, or LLC.

LLCs are corporate entities that help protect its members (aka owners) legally, while offering some tax breaks (thanks to the latest tax law’s efforts to reduce taxes on wealthy business owners). It may seem like overkill to turn your hobby or side gig into an official business, but it’s actually very easy to do, and the benefits could far outweigh the costs.

Start With A Business Plan

Before jumping into the waters and registering as an LLC, you should take time to draw up a proper business plan. This will get you in the right mindset to start treating your hobby as a business. It will also act as a bit of a formal evaluation of whether or not it’s worth the expenses of creating your LLC.

Here’s what a solid business plan should contain:

  • An executive summary of your business that includes a mission statement
  • A company description that provides information like your business location, your name, the company’s legal structure, and an overview of what it is you’re selling
  • Detailed information about the products and/or services you’re offering
  • A marketing plan that describes how you’re going to reach your potential customers
  • A description of the management structure and operational plan that tells people who’s running this business, and how they’re going to run it
  • A financial plan, and projections that show how much capital you’re going to need to run your business, and when and how you expect to be able to pay back investors and lenders

Once you’ve come up with all of that, you’ll know whether or not you have the makings of a formal business. Just keep in mind—if you’re making more than a few hundred dollars a year on your hobby, the IRS wants a slice. As always, if you want a professional opinion on whether or not an LLC makes sense for you, consider contacting a tax pro.

Creating Your LLC

The rules for registering an LLC may vary from state to state, but in general you’ll have to choose a name, fill out some paperwork, and pay a fee. You might also be required to publish a public notice or apply for licenses and permits that are relevant to your type of business—for example, if you’re going pro with your cupcake bakery, you’ll need to take care of health codes, kitchen requirements, and more.

Once you decide to take the plunge, sites like LegalZoom have made it incredibly easy to form your LLC. They offer step by step instructions that provide everything you need. Of course, you could always choose the old-school route and sit down with a lawyer in person as well. Either way, the important thing is to have your business plan together, and to have a few options for what to name your new LLC. Remember, the LLC name can be different from the customer-facing name of your business.

Enjoying the Benefits of an LLC

Once all the paperwork is processed, it’s time to kick back and celebrate becoming a new business owner! Congratulations in advance. Your new LLC will offer a lot of benefits, especially come tax time. Speaking of which, remember that the costs of forming your LLC count as deductions!

To maximize your tax savings, get in the habit of recording every detail of your purchases, expenses, and income. Save your business-related receipts. And be sure to meet with a qualified tax professional before filing your return. Business taxes are different (and often more complicated) than individual taxes, and you’ll appreciate the extra help. Just don’t forget to deduct the expense of hiring an accountant!

You’ll also get to enjoy all of the limited liability promised in the name. That means that your personal finances are protected should someone take your business to court. This can be a literal life-saver, as you’re no longer personally liable should something go awry.

Setting up an LLC is easy, and the benefits are huge. If you’re making at least a few hundred dollars a year on a hobby or side hustle, it could very well be worth your time to register as one!