If you are making extra money on the side, be it from selling stuff on Craigslist or having a blog, you may want to consider turning your side hustle into a full-fledged business. Starting an official business comes with several benefits such as tax deductions, protecting your personal assets, and much more.

Before getting too eager taking your gig into the next level, you should first consider the costs and benefits of owning a business. In this article, I’m going to go over just what to do when starting your first business.

When to Start A Business

There are a number of different reasons why someone is better off starting a business for their side hustle and certain cases when you’re required to start a business. Below are some cases for this:

You make over $400/year

The IRS classifies any net income made through self-employment as business income if it exceeds $400 in a year. To avoid the hassle of juggling your business and personal taxes together, you may be better off registering a business to keep your incomes and taxes separate.

You want to separate incomes

Having a registered business also allows you to create a business bank account. By keeping all your business income into a separate account it becomes easier to track any income and expenses for your business. Doing this will help lessen the stress when filing your taxes.

It’s more than a one Man show

Whether you are paying a contractor or getting your friend to frequently help, if you are not making a profit solo you will be much better off if you registered a business. Being able to pay people as a business expense will allow you to give that money away as an advantageous tax deduction. Not to mention it’ll eliminate the hassle in taxes if are paying a contractor/freelancer over $600 a year.

Saving Money on Expenses

The beautiful part about owning a business is the tax deductions you can include in it. So long as you are buying something that is business-related, this can count as a deduction. This includes things such as: Buying new computer equipment, going to conferences, and traveling.

Just remember to not go overboard in deductions. If your expenses are grossly affecting your profit then it can flag you for trying to pass off a hobby as a business.

Figuring Out Your Business Type

The type of business you choose is completely dependent on how you want to manage your income. I would advise considering the benefits of the following business types to find what’s best for you:

Sole Proprietorship

One of the most common and simplest forms of business structures. It most basic terms, a Sole Proprietorship means the sole owner and business are considered the same entity.

A sole proprietorship offers certain business tax benefits outside filing them as individual taxes. Such benefits include business tax deductions, receiving a pass-through tax, and not paying payroll tax. You also don’t have to be involved in more complex business type requirements such as such as articles of organizations, bylaws, and annual filings.

However, the main difference between a Sole Proprietorship vs other business structures is that the owner will not have personal liability protection. Any legal action and loses against the owner can affect the owner’s personal assets.

Limited Liability Company (LLC)

LLC’s are defined as a state regulated business that conducts business transactions. Unlike a Sole Proprietorship, an LLC provides it’s owner or owners with liability protections and partnership tax benefits. This means personal assets are safeguarded from any legal action or losses put towards the owners.

For tax purposes, an LLC is not considered a separate entity than their owner(s). Any business tax income and expenses must be reported on their personal tax returns.

S Corporation(S-Corp)

An S-Corp has a bit more layers to it as it’s meant to serve a larger company size. An S-Corp does have liability protection if they engage in misconduct. Shareholders are also required to only pay income on their individual wages, not the business’ entire net income.

Business Cost

Lastly, we’re going to dive into the cost of doing business. I personally feel there are three important cost factors to consider regardless of your business’ income and expense: The cost business registration, tax expenses, your personal site.

Registering your business

Depending on what business you want to register, you go through two processes. Firstly, you will need to secure an Employee Identification Number(EIN), which is essentially your business’ social security number. This is something you will do through federal registration and can complete on the Internal Revenue Service’s official site.

Secondly, you will need to register your business with the state. This will cost you money depending on which business structure you choose and which state you register with. Typically this will cost somewhere close to $100-$200.

Tax Expenses

This is another cost that is influenced by state, profits vs expenses, and business structure. You’ll need to calculate these three variables to know what exact percentage of profit is table. However, if you are just starting out you can shoot for a more general percentage range until you determine the actual percentage. When started out I shot for keeping at least 20-30% of my profits aside for tax purposes which apparently was the safe number I needed.

I would also advise consulting a trusted accountant for your business taxes. While online programs such as TurboTax or eHarmony offer a fairly easy approach for filing taxes, they aren’t the best resources for business taxes. The accountant I go through was able to calculate deductible expenses that manage to greatly increase my tax return that I wasn’t able to do when filing electronically.

Personal Site

While not a business necessity, I personally believe if you want to effectively develop a brand then you need a website. Living in a more digital world, one of the biggest marketing outreaches comes from being online. If you are interested in learning the cost of starting a website I recommend checking out my Cost of Starting a Blog post.

The Next Steps

So there you have! You know know the basic requirements of starting a business. A lot of the next steps of business management comes down to trial and error. As you grow you can start figuring out more if the business structure you chose is right for you or if you need to change it in the future.

Good luck on your next steps in the world of business!

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