About 49% of Americans under the age of 35 have a side hustle. It’s the ideal way of creating extra income each month. For some, the hobby becomes successful and has the potential to become a viable business.

Before you take the plunge, be sure to take these six steps.

1. Avoid Conflicts With Your Employer

Check your employment contract and the other documents you signed with your current employer. You may have signed a non-compete, non-disclosure, or other documents. These could limit your ability to leave your current employment and immediately begin working on your new hobby turned business.

Be careful not to use business time or resources on your hobby. Don’t use physical office supplies or intellectual property. This could open the door for your current employer to claim ownership of your side hustle work.

2. Determine Your Tax Liability

The IRS treats hobby and business tax liability differently. If you don’t properly report your business income, you could unknowingly commit tax fraud by underreporting your income. You also don’t want to pay taxes twice by paying business income taxes and then personal income taxes. The available tax deduction change when you transition from a hobby to a business. A tax professional can help you know which deductions are available to you.

3. Form an LLC

Lay the groundwork for your new business by establishing an LLC. This is the name that you will operate under. Doing this establishes your hobby as a legitimate business, protects you from personal liability, and enables you to register as a business in your state. If an LLC doesn’t fit your business model, then consider a sole proprietorship or partnership.

You also need to register with your state to receive an Employer Identification Number (EIN). You will need this for filing your taxes and other business activities.

4. Open Business Bank Accounts

As a hobby, you probably deposited any money you made into your personal bank account. Once you decide to transition into a business, this needs to stop. Otherwise, you put your personal finances at risk. At a minimum, you should have a checking and savings account. You can then pay yourself out of the business account.

You should also establish a centralized accounting system. As a hobbyist, you may have accepted all forms of payment, from cash to Venmo. You can still do this as a business, but you’ll need to carefully track your income and expenses. A centralized accounting system helps you integrate all of your accepted payment forms into one place. You can then enter your expenses and create detailed financial statements.

5. Create a Business Plan

Before you start any business, you need to have a plan in place. This document outlines what your business is about, why you’re starting it, goals, research, and financials. Don’t rush through this step, as it’s crucial you know the market landscape and hardships you’ll face. Include these ten components in your business plan.

  • Executive summary
  • Business description
  • Market analysis
  • Marketing/sales plan
  • Competitive analysis
  • Management and organization description
  • Products and services description
  • Operating plan

If you plan to secure financial backing, you will need this plan to show your potential investors that your business is a viable opportunity for them.

6. Anticipate Risk and Liability

Consult with a lawyer about the laws that apply to your business. For some businesses, these are the standard business formation laws. For others, there are unique legal considerations that regulate business operations.  Look for a lawyer experienced with your industry as they will have the most knowledge of federal, state, and local applicable laws.

Additionally, you take on a new level of risk as a small business owner. Accidents happen, and your business will be held liable. This could be from a faulty product, injury on your business premises, or issues with an employee. Purchasing insurance helps to protect your business from these types of risks.

Protect Your Side Hustle

By taking these six steps, you can effectively protect your hobby turned business. Once you decide to take the leap, you need to think like a business owner. Protect yourself by establishing your hobby as a business legally. Then focus on establishing your business with a business plan and bank accounts.

Contact our office today and let our skilled attorneys guide you through business law.