Are you aware of all the possible types of business formations? The answer is probably no. However, just a grand idea for a side hustle or knowing how to start a side business isn’t enough. It would be best if you decided early on the legal format you want your business to have because the type of business formation affects everything from your professional and personal liability to the structure of your company to how you pay your business formation taxes.
If you are committed to getting your side hustle going, you must choose a legal format that best suits your business ecosystem type and interests. It might sound a bit overwhelming to you. So, here’s an article to help you look at the most common types of business formations. Hence, let’s get started!
What Is Business Formation?
When setting up a side hustle, you must choose the legal format under which you want to operate your business. Selecting a legal format is one of the most crucial decisions to arrive at an early stage because the type of business format you choose will determine how you will operate your side hustle in the future. Although there are several legal formats, each with its advantages and disadvantages, you need to choose the best out of them, one that would ideally suit your side hustle.
Hence, merely having a list of the best side hustles isn’t enough. You need to anticipate a legal format that best suits each side hustle idea. While choosing a legal format for your business, you need to consider the following factors –
- Tax structure
- Legal liability
- Structural complexity
- Capital in
- Extent of control
- Flexibility
Top 5 Types Of Business Formation For A Side Hustle
Although all five types of business formations listed below are suitable for a side hustle, you need to choose one of them according to your business type and interests.
Sole Proprietorship
A sole proprietorship refers to a business structure solely owned and managed by an individual. It is an ideal business structure for your venture if you want to own and control your side hustle. Due to its simple design, you can easily set it up. However, since you’re the sole owner, you will be solely responsible for your business’s financial obligations, like debt and losses.
This structure is ideal for a home-based or retail, low-risk business venture.
This business structure allows you to have complete control of your side hustle. You do not need to consult with other shareholders, directors, or partners. You can quickly launch your side hustle without having to go through an elaborate form-filling procedure or paying any fees to the government. Since your side hustle won’t be considered a separate entity, your income tax return will include your income and expenses. A sole proprietorship business structure is ideal for starting online side hustles or side hustles from home.
General Partnership
A partnership business structure involves two or more people joining to run a business venture. In general partnerships, each of the involved partners agrees to equally share all the liabilities, profits, and assets of a business venture. Since general partnerships do not have any liability protection, each partner is financially and legally responsible for the other partner’s actions. Regarding taxes, each partner has to pay their taxes.
A partnership is ideal for launching a side hustle because it doesn’t involve extensive paperwork with the federal government, though you might need to fill out some forms with your state government. Since you don’t need to pay taxes on the business income directly, there is no need to file business tax returns. If you are considering launching your side hustle with one or more partners, it will also lessen your financial burdens. You can split overhead costs and purchases among yourselves. In addition, banks are more willing to lend loans to multi-owner business entities.
Limited Liability Company
A Limited Liability Company (LLC) has a hybrid business structure. An LLC allows you to reap the benefits provided by both a corporation and a partnership. If you choose an LLC business structure for your side hustle, you need to do some paperwork with the State Secretary of the state where you are planning to open your business. This business structure is ideal for medium-to low-risk businesses. If you wish to safeguard your assets and pay a lower tax rate, then you must choose an LLC.
Since an LLC acts as an independent entity, you won’t be held liable for lawsuits or debts filed against the company. If your business venture goes bankrupt, your assets won’t be affected, though you might lose the money you invested in your side hustle.
Instead of having to pay corporate taxes, your business’s expenses and income will be passed on directly to your tax returns. Then you need to pay income tax on the profit accrued. However, since you’ll be considered self-employed, you can even claim the self-employed tax credit. An LLC is a highly flexible business structure as compared to a corporation, and it will help you efficiently manage the daily business operations with your board of directors.
S Corporation
The S corporation business structure is ideal for small business ventures because it has the feature of liability protection similar to a corporation and also enjoys added tax benefits. However, the business must meet certain IRS criteria to be listed as an S corporation. An S corporation has two limitations – the number of shareholders cannot exceed 100, and all the shareholders should be US citizens.
Since, in a corporation, owners are not held accountable for a corporation’s debts, your and your partner’s assets, such as house, car, and savings, are safe. Although, as an independent entity, a corporation might receive and file lawsuits, that doesn’t make you personally liable for such legal actions. Even if a shareholder leaves, it won’t affect your business venture. This is because corporations base ownership on the stock percentage held by each shareholder. Corporations also can sell company stocks to raise funds in times of need. Hence, a US citizen can opt for an S Corporation, irrespective of whether they are thinking of side hustles from home or starting an online side hustle.
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Conclusion
Choosing the best business formation for your side hustle might be tricky but not impossible. Once you select a legal format for your business, build a business website to strengthen your online presence. A business website is particularly very crucial for the success of online side hustles. Shopivana is the best website builder platform and is exceptionally pocket-friendly too. This no-coding website builder allows you to choose a template ideal for your business type. It offers various other features also, such as – 0% commission fees, secure hosting, an integrated payment gateway, and shipping options, and an integrated platform to manage orders and customers.