top of page

Should I setup an LLC for my side gig?

You are finally doing it! After years of working for someone else you have made the decision to start a side hustle for yourself to either make some extra income or replace your W-2 job all together.

Should you setup an LLC (Limited Liability Company) though for your new side hustle?

Our arguments are in large favor of setting up an LLC regardless of the size of your or new business. Below we are going to explore the pro's and con's of an LLC, and the benefits of setting one up.

If you you have a specific question on a type of industry you are in (Real Estate, Manufacturing, Etc.) reach out to and we will do our best to help you find the best entity choice for your needs.

What does filing for an LLC get you?

The biggest item that an LLC will provide is Limited Liability protection for your personal assets while you conduct your business. In most circumstances (consult an attorney for your specific situation if you have questions), if you and a client are unable to come to an agreement and need a court to get involved, your personal assets are untouchable when considering the best remedy for the situation. This way your house, vehicles (if they are not used in the business) and personal cash reserves can be protected in the event of a lawsuit.

Your second benefit is there are no limits to the partner structure unlike an S-Corporation. If you create an LLC with the intent of having partners, there are certain laws and regulations in place if you ever plan to incorporate. To have an LLC though, there are no rules when it comes to the type of partner that you will have in the business with you. You can have a corporation, a trust, another LLC, your siblings (if older than 18), or anyone of sound mind and has not declared bankruptcy as your partner. This benefit is great if you have limited capital, but have a friend that would be willing to invest at 50% allowing you the capital you would need to build your LLC.

The third benefit is related to the management structure of LLC's. With LLC's you have a lot more flexibility than you would with a corporation when it comes to who is running the business. In a corporation you would have officers and a board of directors running the day to day operations of the business. In an LLC though, the partners run the day to day operations, and depending on the operating agreement all of the partners can have equal say in accordance with their ownership %, or deemed certain responsibilities.

What are the disadvantages of an LLC?

The state registration fees in setting up an LLC are generally an ongoing expense each year that can range depending on the state from $0-500 each year. If your business grows and you have to register in another state due to conducting business there, that can easily increase your ongoing expenses each year for your business. Alongside the state registration fees, the legal fees in setting up an LLC sometimes are more than what you have already made in income if you are just starting out. Attorney fees for filing the required documents, EIN Application Form, and initial consultation can cost between $1,000- $3,000 just to get it setup. Then you add in your marketing expenses, website and domain setup, and any software needed for your company you can easily spend $6,000 or more in your first month of your side gig. These expenses, however; should NOT deter you from setting up an LLC. In your initial year of business you are allowed to write off up to $5,000 of the setup expenses against your income including legal fees and registration charges.

Depending on if you have partners or are by yourself can complicate your LLC for tax season. If you are by yourself you can keep your side gig on your personal tax return with no effect to your current situation. However, if you have partners you will now have to keep track of an additional tax return, and you will be unable to file your 1040 until the LLC has been filed for the partners. To mitigate the time aspect of waiting for your K-1 from the LLC if you have partners, we recommend trying to keep your LLC with your 1040 in the same tax firm for cheaper fees and faster service on your tax needs.

LLC's generally do not have many disadvantages. The biggest disadvantage is when you add partners. If there is a falling out among the partners, and one of the partners is no longer providing the agreed upon service/capital that was stated in the operating agreement, then legal action may be needed. This can be mitigated to a certain degree if the operating agreement between the partners is clear and properly worded on the duties and expectations of each of the partner, and the consequences for failing to meet the standards set forth in the operating agreement. For more complicated operating agreement, we would recommend seeking out reputable attorneys that can properly setup the operating agreement to mitigate this as much as possible.

What are the tax consequences of an LLC?

LLC's are special because they can qualify for three separate tax treatments depending on the way they are setup for your business. If you are the only owner, you do not have a partner, and you do not incorporate, the LLC will still go on your personal 1040 tax return under Schedule C. This generally makes things easier for most people as instead of having to pay for multiple tax returns for your tax advisor to do, everything exists on one tax return providing lower tax fees for your business, a portion of which can be deducted on your 1040 against your self-employment income.

If you are the only owner, or you meet the special requirements to qualify for incorporation, you can also file the LLC as an S-Corporation. S-Corporations have the same benefits of an LLC, with the exception that as a true corporation you can take a salary from them and get the benefits of passthrough income.

The other tax consequence for LLC's are if you have a partner, you can file form 1065 as a partnership. This has it's pro's and con's that are not covered here. Essentially thought he LLC return would be treated as Passive Income (unless certain conditions are met) and your income and losses would be passed down to your individual 1040 tax return. This has its benefits of not being on your personal tax return as an additional layer of protection from lawsuits, as the assets of the business would be better protected if you personally were sued.

Reach out to today for additional questions on the tax consequences of an LLC and your unique situation so we can better assist your needs.

Our recommendation is to setup an LLC

Based on the above, we genuinely believe the best course of action now that you are trying to make your own money is to setup an LLC to protect your investment. The benefits protect your personal assets, provide you ways to gain capital without taking on loans, and a much more flexible management structure than what other legal entities are allowed.

As for the disadvantages, most of these can either be mitigated or taken advantage of when you file your tax return in the following year after setting up the LLC. At Deep South our goal is to assist you in investing in your success starting today. The best path forward is to setup an LLC for your side gig to ensure you are protected while running your business. Contact us today and we can get you started on setting up your LLC.



bottom of page