If your side hustle is beginning to take off, should you incorporate it? Entrepreneurs that have a part-time gig in addition to a full-time job may be hesitant to legitimize their side job for a variety of reasons.

Maybe it was started for fun and not necessarily as a potential business. Maybe they’re struggling with the work-work-life balance already and are not sure how much longer they’ll keep seriously doing it. Or maybe deep down, they know that their side hustle can and should be their full-time career — and it scares them a little.

Whether your side gig is for fun or something you plan on pursuing further, incorporating or forming an LLC is actually the smartest move you can make as an entrepreneur. Here’s a look at all the benefits forming a legal entity brings your business.

Working on a side hustle

Separates personal assets from professional ones

A lot of entrepreneurs opt for sole proprietorships as their legal formation of choice because this entity makes the owner the business and tends to be more affordable than LLCs or Corporations. However, incorporating as a sole proprietorship also means that the owner is held responsible for everything related to the business because it is not a separate entity.

By incorporating or forming an LLC for your side hustle, you are able to protect your personal assets with liability protection and keep these assets separate from that of the business. And depending on the kind of side gig you’re running, an LLC can also be quite useful in the event of unforeseen circumstances. Whether that means damaged rental equipment or injuries of any kind, incorporating as this entity will keep you, the owner, from being held personally responsible.

Forming an LLC provides big tax benefits

Who doesn’t love to save money on their taxes? If you decide to form an LLC for your side hustle, keep in mind that you’ll be able to choose either an S-Corporation or C-Corporation as your tax entity.

For companies that qualify as an S-Corporation, entrepreneurs must be sure to use careful planning to avoid paying significant employment taxes. And as an added bonus, by forming an LLC there is a reduced risk of your business being audited during the next tax season.

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photo credit: Simon Holland

Corporations offer up a formal business structure

Let’s say that the side hustle you’re working on is one that you dream of seeing taking over and becoming a household name, like Starbucks. If you already know that you want outside investment firms to work with you or that you want to establish a larger base of operations, like a franchise, forming a Corporation is your best bet.

Incorporating as a Corporation instead of an LLC provides the added benefits of a formal business structure. This kind of structure is attractive to potential investors looking to invest capital and is also an entity that can accept this kind of money from investors too.

Incorporating makes you credible

Ultimately, one of the biggest perks that come with incorporating is having a business that is legitimized and credible. Customers will notice this and feel much more at ease doing business with your brand, ensuring that your side hustle can make the leap to successful startup.