Should You Incorporate Your Side Hustle? Absolutely, if you want to protect your work and save money.
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The "side hustle" emerged in popularity after the Great Recession. With millions of people unemployed, many found extra ways to supplement their income. As the economy slowly recovered, the side hustle became more than just moonlighting – it redefined how we earn beyond our full-time jobs.
Today, you can drive for Uber, walk a dog with Wag, or host someone's storage with Neighbor. With each month, there seems to be another service that helps people monetize their skills and passions. And these side hustles can pull in main hustle kinds of money. With just a laptop and internet connection, you can manage a $10M/year e-commerce business. Freelancers can travel the world, building websites and shipping code. Marketers can optimize campaigns ten time zones away from their team.
Protecting your ideas and creative work
For many freelancers and contractors, dealing with clients is often a time-intensive, back-and-forth process. Revisions, contract negotiations, subjective performance evaluations, all can jeopardize the ability to be paid in a timely manner. There are numerous cases where a project is handed over only to have the client withhold final payment. In an instant, lines of code, unique inventions, and proprietary research, can all legally become someone else's. When all your work belongs to the client, establishing a legal entity is the best way to protect all of your ideas and hard work.
Let's take an example of a freelance developer. He accepted some extra work from a startup and began excitingly coding during the weekends, in addition to his regular job. This extra work helped him supplement his rent payments. As a market-fit test, the startup asked him to prepare some code for a new feature. The feature was later absorbed into the startup's larger platform and became a massive success. With no legal entity protecting his development work, the developer was left vulnerable – unable to own his own work that led to the startup's success. Had he incorporated a business entity and engaged the startup under a contract between his business and theirs, he would've been able to legally protect his work and even financially gain from it.
Despite intellectual property rights upheld in the US Constitution, it's still much easier to create a legal entity that you control, and that owns your intellectual property to prevent costly disagreements over ownership.
Scale your marketability by getting official
As your side hustle grows, it's important to position yourself beyond just an individual-for-hire. Apple, Khan Academy, Twitter all started out as small weekend projects that turned into, well you know the rest.
From a marketing and branding perspective, having your own business entity equips you with a truly professional look and feel. Growing as an incorporated business makes marketing much more effective too. You can give your business a memorable name, create unique branding, and delight customers. Ask yourself, would potential e-commerce customers buy from John DoeSmith or from Fresh&Tasty, with its own branded website?
"Nothing is certain except death and taxes"
When starting a business, taxation is usually one of the last things considered. If you like saving money, then incorporating a business is one of the best ways to separate your company's assets from your personal ones - and take advantage of significant tax savings along the way.
As a business, you'll naturally incur expenses. These can include start-up costs, operating expenses, and capital expenses. As just an individual, these expenses must be paid out from your own pocket as a personal expense. However, as an incorporated business, these expenses can be tax-deductible, adding up to significant tax write-offs and savings.
For many businesses just getting started, the first year is often unprofitable. As an individual, you absorb these losses immediately. But as a business, you can spread these losses out over time through tax deferment. This grants your business the critical cash it needs to stay in business and ultimately prosper.
Get started the right way
Many side hustles become main hustles with consistent focus and a bit of luck. With so much energy required, it's more important than ever to set yourself up for success by establishing a business entity first. Protect your work. Build a vessel that scales with your talents. Save money by taking advantage of numerous taxation benefits. So if you're thinking about freelancing, contracting, or launching a business as a side hustle, there's simply no reason not to incorporate your business and lay the right foundation for your growth.