While side hustles are often seen as part-time gigs that provide additional income alongside a main job, it’s important to note that they can actually be highly lucrative and demanding of your time. In fact, in certain scenarios, side hustles can generate more income than your primary job.
Because of this reason, it’s important to take your part-time work seriously. It’s said that the best way to protect your work and yourself is to incorporate your side hustle. This is especially helpful when dealing with clients who withhold payment, use your work unlawfully, and other legal issues that you may encounter.
It is important to emphasize that the following information does not constitute financial advice. For personalized and accurate guidance, it is advisable to consult with a qualified accountant or lawyer.
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What Is Incorporation?
Incorporation is the act of establishing a corporate entity or company through a legal process. This results in the creation of a distinct legal entity that separates the business’ assets and earnings from those of its owners and investors.
Typically, corporations are recognized by the use of identifiers such as Incorporated (Inc.) or Limited (Ltd.) in their names. Ultimately, incorporation is the formal process of legally recognizing a corporate entity as a separate entity from its owners.
In a corporation, the assets and income of the business entity are separate from those of the owner(s) and/or investors, which is known as a limited liability. A business does not need to be incorporated in order to operate, but it can be helpful for those looking for liability protection and to protect their creative work through trademarking.
Why Should You Incorporate Your Side Hustle?
The Internal Revenue Service (the US taxation agency) reports approximately 27 million informally organized businesses, compared to only 6 million incorporated businesses. This means that fewer than 20% of small businesses are registered as corporations, despite the advantages of incorporation. This statistic is likely due to the lack of information available to those with side hustles on the benefits of creating a legal business entity.
If you’re contemplating the idea of incorporating your side hustle, it’s crucial to understand the advantages it can offer. Here are five compelling reasons why you should consider incorporating your part-time gig.
As discussed earlier, corporations have the added benefit of limited liability. Essentially, this means that the business is considered a separate entity in the eyes of the law, and you as the owner are not responsible for any liabilities incurred by the business. This protects you from your own assets being seized in the event of an unforeseen circumstance.
Displaying the fact that your business is registered as a corporation can be beneficial when dealing with potential clients. This can add to your sense of professionalism and can quell any doubts that potential clients may have about working with a self-employed individual.
Protecting Your Work
It is much easier to protect your intellectual property as a corporation rather than as an individual. For example, say you are a freelance developer, and you write code for a tech startup building an app. This app ends up becoming extremely popular overnight, all because of your code, and makes millions of dollars for the startup. However, you as an individual may not get any of this revenue for yourself, as you did not trademark it at the time.
This can be rectified in some cases, but it may take a lengthy legal process and require a lot of time and money. If you had been registered as a corporation, however, your work would automatically be protected, as it would be owned by the company.
Depending on your location, incorporating your side hustle could provide some tax benefits, such as allowing you to deduct business expenses, like equipment or travel, from your income taxes. You may also be eligible for lower tax rates as a corporation, but this depends on your country’s tax laws.
Access to Financing
If you choose to try to obtain financing, such as loans or lines of credit, lenders may view your business as more stable and creditworthy with a formal structure in place. Investors are also covered by limited liability in this case, significantly reducing the financial risks.
Incorporating your side hustle may seem like a daunting task, but the benefits can be substantial. Not only can incorporation offer limited liability and tax benefits, but it can also add credibility to your business and can protect your intellectual property.
Incorporation can also provide access to financing and help protect you from legal issues that may arise. Ultimately, choosing to incorporate your side hustle can help you take your part-time work seriously and provide peace of mind knowing that your business and your work is protected.