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Legitimizing your side hustle: Is incorporating worth it?

Apr 11, 2022, 8:59 AM | Updated: 9:12 am
second job inflation...
A Bankrate.com survey says it's mostly millennials who are feeling the inflation pinch and looking to a second job for help. Photo: Canva

A record number of Americans left the traditional nine-to-five workforce this year. As their side hustles transform into their primary jobs, many wonder if they should take the next step in legitimizing their business by forming an LLC.

Images of white picket fences, packed lunches, and a sturdy briefcase dominate our perceptions of what work is supposed to look like and have for the past seventy years. So when the pandemic sent people home, most were itching to get back to normal life, with one exception.

A stuffy office, a cubicle, traffic, water cooler small talk, and business attire had all shaped the makeup of corporate work, and more Americans than ever before decided not to rejoin that world. Instead, freelancing has seized the country’s interest.

An estimated 4.3 Americans quit their jobs in December, according to a report from the Bureau of Labor Statistics. With much of normal life restored, an increasing number of people are fighting against one element of the Before Times: the traditional work schedule. Justin McDevitt undefined

Taking career ownership to the next level

Fifty-nine million Americans freelanced in 2021, representing 36% of the workforce, reports Upwork, the popular freelancing platform.

More than half of non-freelancers say they are likely to freelance in the future, suggesting that many opportunities explored during the pandemic will become permanent as the world returns to some semblance of normalcy. Upwork’s Freelance Forward 2021 research also indicates that 70% of freelancers say it took less than a year to earn more as a freelancer than at their past employer.

What does this mean for the economy?

According to Business Wire, freelancers have contributed 1.3 trillion dollars to the U.S. economy, 10 million more than in 2020.

With freelancing on the rise, many wonder if they should incorporate their self-employment enterprises.

“Freelancing offers professionals a chance to be in control of their careers in a way that cannot be matched by traditional employment,” says Upwork. The pandemic changed what we thought work looked like, and while many would prefer never to hop on a Zoom call again, others have made remote work a functional part of their professional lives.

Freelancing offers flexibility, controlled earning potential, and remote working. These are benefits that the traditional work structure cannot accommodate.
Creating Space Between You and Your Business

When deciding whether or not to take the next step with your side hustle, it is important to consider how you would organize your business from a legal perspective.

The first step to forming a Single Member LLC (SMLLC) is to submit Articles of Organization. Once incorporated, the LLC can own property, be sued and sue others, manage bank accounts, borrow funds, and hire workers.

It creates space between your personal finances and business finances, making filing your taxes less of a headache. And you will still be able to use popular tax filing services like Turbo Tax or H&R Block even if you have an entity.

“A limited liability company offers flexibility in managerial division of profits and losses, as well as taxation benefits,” says Tony Grenier, CEO of Instrumental Global.

The benefits of incorporating yourself as an LLC are bountiful: you can attract more business opportunities, appear more credible to potential clients, protect your personal assets, get liability insurance, open a business bank account, and save money on your taxes.

Let’s talk about cost

If you’re just starting as a freelancer, don’t have the money to spend on incorporating, and are working with relatively low liability risk, then it might be more prudent not to form an LLC. But, again, knowing your five-year plan is key. Sometimes, a side hustle can just be a side hustle.

The administrative fees might also be a concern. A freelancer also has to be wary of how you will be seen in the eyes of the law after incorporating. How the law treats corporations is distinctly different from how they treat individuals. In fact, you have more protection as an individual.

The cost of forming an LLC varies from state to state and could impact your incorporation decision. Texas is one of the most expensive, with a filing cost of $300, while Arizona, New Mexico, Iowa, Hawaii, Arkansas, Missouri, Mississippi, Michigan, and Colorado offer a more modest $50 filing fee.

Freelancers shouldn’t feel pressured to incorporate. It won’t impact your ability to do business, and it might be better to ride the freelance wave before making any long-term decisions.
Administrative costs, long-term planning, accounting for potential legal action and maximizing your tax breaks all figure into whether or not you should incorporate your business.

65% of Americans believe their freelance income will increase in the coming year, suggesting that freelance mania might replace the traditional corporate structure forever. However, if you want to play a conservative game, it might be best to wait out the wave to see if freelancing is simply a trend and not a shifting way of life.

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Legitimizing your side hustle: Is incorporating worth it?