Should I incorporate my side hustle
Short answer
Incorporating your side hustle means forming a separate legal business entity, like an LLC, to protect your personal belongings and possibly gain tax benefits. Whether to incorporate depends on your side hustle’s size, risks, and future plans. It can make your side hustle more professional and safer but requires paperwork and fees.
What Does It Mean to Incorporate a Side Hustle?
Incorporating a side hustle means legally registering your business as a separate entity from yourself. This means the business has its own legal identity, which can sign contracts, open bank accounts, and be responsible for debts or lawsuits. Common business types for incorporation include Limited Liability Companies (LLCs), corporations, and partnerships. Most small side hustles choose LLCs because they are relatively simple to set up and provide personal liability protection.
Personal liability protection means that if the business owes money or faces a lawsuit, creditors generally cannot take your personal belongings such as your phone, bike, or savings account to cover business debts. For example, if a teen sells custom phone cases and a buyer claims a case caused allergic skin irritation, having an LLC means the buyer would sue the business, not the teen personally. Without incorporation, the teen could be personally responsible for any damages awarded.
Incorporation also allows you to open a business bank account, making it easier to separate your business money from personal funds. This separation helps with managing expenses, tracking profits, and filing taxes later. It can also make your side hustle appear more official and trustworthy to customers.
How Does Incorporation Work?
To incorporate, you file paperwork with the government, usually at the state level. The specific forms and fees depend on the state where you live. For instance, forming an LLC might require submitting “Articles of Organization” and paying a filing fee ranging from $50 to a few hundred dollars. The state then issues a certificate confirming your new business is legally recognized.
After incorporation, you should apply for an Employer Identification Number (EIN) from the IRS. The EIN is like a social security number for your business and is used to file taxes and open a business bank account. You can apply for an EIN online for free on the IRS website.
Once incorporated, it’s important to:
- Open a separate business bank account using your EIN and business name
- Keep detailed records of all business income and expenses
- File any required state reports or renewals, which may be annual or biennial
- Follow local business laws, including any licenses or permits needed for your side hustle
For example, a teen running a graphic design side hustle forms an LLC, gets an EIN, opens a business bank account, and tracks all payments and expenses. When tax time comes, the teen can report business income separately, which helps with tax deductions and clear accounting.
Why Does Incorporation Matter for Teens?
Teens often start side hustles like selling crafts, tutoring, or running social media accounts. Incorporating can protect personal belongings in case something goes wrong, such as a customer claim or business debt. For example, if a teen sells homemade soap and a customer has an allergic reaction, incorporation can limit the teen’s personal financial risk.
Incorporation also helps teens build a professional image, which can attract more customers or even future business partners. It shows a level of seriousness and responsibility beyond simply selling something informally.
Managing money becomes easier too. Mixing business income with personal money can cause confusion and make it difficult to know how much you earned or spent. Having a separate business account and records simplifies this. This is important when filing taxes or applying for loans down the road.
However, incorporation is not necessary for every teen side hustle. If the business is very small or low risk, starting as a sole proprietor—meaning the business and the person are legally the same—can be simpler. Teens can later incorporate if the side hustle grows or involves more risk.
What Are Some Related Terms People Mix Up?
Understanding common business terms can help avoid confusion:
| Term | Meaning | Relation to Side Hustles |
|---|---|---|
| Sole Proprietorship | Business owned and run by one person, no legal separation | Simple setup, no personal liability protection |
| LLC (Limited Liability Company) | Business entity providing personal liability protection | Common choice for small businesses, protects assets |
| Corporation | More complex entity type with shareholders and formal structure | Often used for larger businesses, offers liability protection |
| DBA (Doing Business As) | Registering a business name without forming a new entity | Lets you use a business name but no legal separation |
| EIN (Employer Identification Number) | Tax identification number for a business | Needed for taxes and opening business bank accounts |
Many people confuse incorporating with just registering a business name or using a DBA. Incorporation means creating a separate legal company, not just choosing a business name. This makes a big difference in liability and tax treatment.
What Are the Benefits and Drawbacks of Incorporating?
Benefits:
- Protects personal belongings: Keeps your phone, savings, and other personal items safe from business debts or lawsuits.
- Builds trust: Customers may see your business as more professional and reliable.
- Tax advantages: Some business expenses can be deducted from income, reducing taxable profit.
- Clear finances: Separate business bank accounts and records make tracking income and expenses easier.
Drawbacks:
- Costs: State fees to form and maintain the business, which vary by state but can add up. For example, a state might charge $150 to form an LLC and $50 annually to maintain it.
- Extra paperwork: You must file formation documents, annual reports, and possibly hold meetings or keep records.
- Complex taxes: Business taxes may require filing additional forms or paying self-employment taxes.
- Time commitment: Managing the legal and financial aspects means spending time learning and staying organized.
Teens should weigh these pros and cons with their side hustle’s size and goals before deciding.
How to Decide If You Should Incorporate Your Side Hustle?
Answer these questions to help decide:
- How much money do you make or expect to make? If your side hustle earns only a small amount occasionally, incorporation may not be necessary. If you earn regularly or plan to grow, incorporation might help.
- What risks are involved? If your side hustle involves physical products, services with liability risk, or contracts, protection may be important.
- Do you want to grow or partner with others? Incorporation can help with formal partnerships, loans, or investors.
- Are you ready for extra paperwork? Incorporation means more management of documents, fees, and finances.
For example, a teen selling homemade jewelry online part-time might stay a sole proprietor. But if the teen plans to expand with multiple product lines, hire helpers, or open a website store, forming an LLC could be wise.
Talking with a trusted adult, teacher, or local small business resource center can provide personalized advice. Many communities offer free workshops for young entrepreneurs.
What Should You Do Next If You Want to Incorporate?
Follow these steps:
- Check your state’s rules: Visit the official state business or secretary of state website to learn how to form an LLC or corporation.
- Choose a business name: Pick a unique name that fits your brand and confirm it’s available in your state’s business registry.
- File formation paperwork: Submit the required documents (such as Articles of Organization for an LLC) and pay the filing fee.
- Apply for an EIN: Go to the IRS website and apply online for free.
- Open a business bank account: Use your EIN and business documents to open an account separate from personal funds.
- Set up recordkeeping: Use a notebook, spreadsheet, or accounting app to track all money coming in and out of your business.
- Stay on top of requirements: Note deadlines for annual reports, fees, and any permits or licenses your business needs.
If this seems overwhelming, ask a parent, teacher, or small business counselor for help. Incorporation can be done gradually—starting simple and adding structure as your side hustle grows.
Frequently asked questions
Can a teenager incorporate a business alone?
Many states require business owners to be 18 or older to incorporate. If under 18, a parent or guardian may need to form and manage the business until the teen becomes an adult. Check your state’s rules.
How much does it cost to incorporate?
Costs vary by state but generally include a one-time filing fee from $50 to a few hundred dollars and annual fees ranging from $20 to $100 or more. Additional costs include business licenses or permits.
Will incorporating affect my taxes?
Yes. Incorporated businesses must file separate tax forms. Some business expenses can be deducted, which may lower taxable income. It’s helpful to learn about business taxes or ask an adult for help.
Can I keep my side hustle without incorporating?
Yes, you can operate as a sole proprietor without registering a business. This is simpler but offers no personal liability protection.
What if I want to change my business type later?
You can convert or dissolve your business and form a new entity later, but this involves paperwork and possible fees. Planning ahead helps reduce changes.