One of the most important roles a business lawyer plays in helping small businesses is helping to establish them as the right entity. These entities define a business and allow them to comply with local and state laws. Additionally, the right entity will yield a variety of tax benefits.
With the rise of gig culture and operating side businesses, many people wonder if they need to be set up as sole proprietorships, an LLC or as a corporation?
Sole Proprietorship
This is the simplest business structure and may be appropriate for one-person businesses, or where the business and owner are one in the same.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because similar to a corporation, owners have limited personal liability for the debts and actions of the LLC.
Corporation
The most complex business structure, corporations are often preferred by venture capitalists and other investors because they offer shareholders limited liability protection. A corporation may be an S-Corp or C-Corp.
There are many factors to consider when choosing the right business entity for your small business. Your lawyer can help you understand the pros and cons of each type of entity and help you choose the best option for your business.
What is the Right Entity for Side Gigs?
The IRS allows taxpayers to file as sole proprietors for their side gigs. This is the simplest way to file your taxes and you can do it using a Schedule C.
If you want to create a separate legal entity for your side hustle, you can form an LLC. This will give you personal liability protection and help you keep your business finances separate from your personal ones. You will need to file additional paperwork with the state and pay annual fees, but it may be worth it if you plan to grow your side hustle into a full-time business.
You can also choose to incorporate your side hustle as an S-Corp or C-Corp. This is typically only necessary if you are raising money from investors or plan to grow your business into a large company. Incorporating can be complex and expensive, so it’s important to speak with a business lawyer before making any significant moves.
Examples of Side Businesses
You may be wondering what a good example of a side business might be as it pertains to this post.
- Online freelance work: from copywriting to developing websites, this type of freelance work qualifies as a side gig; most of these gigs are operated as sole proprietorships.
- Leasing real estate: many side businesses entail buying and leasing real estate (i.e., apartment complexes and office buildings). Most of these businesses file as an LLC and employ proper lease management software to keep everything legal.
- Affiliate marketers: affiliate marketing involves writing about or promoting products for the benefit of a retailer. For instance, someone can start a YouTube channel and promote products on Amazon, then earn a commission from Amazon. Most of these businesses file as sole proprietorships.
Final Thoughts
As you can see, there are a variety of business entities to choose from when starting your own small business. Your lawyer can help you understand the pros and cons of each, but if you’re just getting started with a side gig, you’ll probably want to consider a sole proprietorship first.