Should You Incorporate Your Side Hustle?
“I just started a new side hustle. Do I need to incorporate right away?”
As tax professionals, this is just one of many questions we get from our clients when it comes to forming their business entity. In today’s blog post, we’re answering the five most common incorporation questions we get so you’ll know exactly what to keep in mind the next time you’re faced with this big business decision.
*Disclaimer: we are not attorneys, so none of this is legal advice - only legal information.
1. Do I need a corporation in order to start a business?
No, you do not! You can get a fictitious business name - a DBA - and simply use that and a business license. That allows you to open a business account, create a logo, and make money.
2. When does it make sense for me to incorporate?
You don't need to incorporate until you're profiting over $50,000. That's because the tax benefits don't really kick in to outweigh the fees before that point. For example, in California, you’ll be faced with an $800 bill when you first incorporate, so you want to make sure it’s worth it.
There are some exceptions: if you have a risky business with a lot of liability or valuable assets to protect, you may want to incorporate right away, so consult with your attorney.
3. What should you never forget when incorporating?
Don't forget to designate how to tax your LLC! If you don't make a designation, the IRS is going to select a sole proprietor for you (yikes!). Who you designate as a member or a manager can make a huge difference to your business operations. So make sure you discuss that with an attorney or tax professional. When you try to do it all yourself, you may feel “busy,” - but the actual growth of your business ends up being completely neglected.
4. How do you decide between an S-corp and LLC?
First, speak to a tax professional to evaluate whether setting up an S-corp makes financial sense for you and your business. You'll need someone to calculate your reasonable compensation by looking at your expected net income, salary, and growth in order to see whether the S-corp designation will actually help you save on taxes.
5. How can I avoid paying fees for my LLC?
Stay compliant with required maintenance so you don't end up paying fees. We've seen clients paying up to $800 in penalties or getting their corporation suspended because they missed a deadline their state required to stay incorporated.
At the end of the day, the best thing for you to do for your business is to get professional help.At Prominence Business & Wealth Management, we’re here to guide you and take the difficult decisions off your plate.
By outsourcing your bookkeeping, tax preparation, and IRS communication to us, you’re buying back your time, energy, and head space so you can invest them all back into your business - and yourself.
If you’re ready to delegate all things finance in your business to top professionals in the industry, we are here to help: just click the link down below to schedule your free discovery call with us today.
We look forward to meeting you! See you in the next blog post.
Warmly,
The Prominence Team
P.S. If you enjoy our content, be sure to check out our podcast, YouTube channel, and Instagram account.
