When your side hustle becomes a real business
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You’ve probably heard of the rising phenomenon known as the “side hustle.” By definition, a side hustle is something you do or sell as a project on top of your main source of income. This includes anything like freelance work on the weekend, selling crafts online, becoming a dog walker, or consulting for nonprofits.
A side hustle can be a lucrative way to make extra money on top of your day job while building your skills and trying out new ideas, and many people have one or two side projects going on at once.
It can be tempting to look at your side hustle as “just a hobby” rather than a “real” business. However, if your side hustle is successful, or if you have plans to make it so, it’s a good idea to think about it as a small business and a more long term money-making opportunity.
Treating your side project as a “real” business can set the stage for growing it into something larger. Here’s how you know you’ve reached that point and what to do next.
1. Deciding when you’re ready
For lots of people, side hustles start as hobbies. In the beginning, it might generate a modest amount of cash each month, and while that additional income can cover incidental expenses , it's probably not enough to pay all your bills. Once your side hustle starts generating enough revenue to cover your major monthly expenses (rent, utilities, student loans, credit card payments, etc.) you could have a real business on your hands.
Revenue alone is not enough, however. To be a real business, that revenue needs to be consistent and growing at a predictable rate. If your side hustle generates enough regular revenue to cover your cost of living, and you can forecast future growth, it’s time to consider whether you want to or can take the next steps to grow your business.
As Richard Branson said when he realized his first business was viable, “You have to be able to give the job everything you’ve got every day, or it will easily get the better of you.” Keep that mentality in mind when it comes to determining whether you’re ready to turn your side hustle into a full-time business.
2. Raising capital for your business
As your side hustle transforms into a full-fledged business, it becomes necessary to think about raising capital. Your business will need working capital for day-to-day operations and additional capital for long-term growth. That can take the form of debt, such as a small business line of credit, traditional financing from a local bank, or even a personal loan.
It can also take the form of equity, which means selling an ownership stake in your business. There are also more complicated financial instruments, such as convertible debt, that certain investors may prefer.
There are many potential ways to raise the capital you need, but bear in mind that doing so also adds new types of risk. For instance, too much debt can consume your cash flow, while selling too much equity may mean you no longer control the business. As you consider how and when to raise working capital, take the time to research the many small business funding options available to you.
3. Incorporation and partnerships
As your side hustle grows and you raise capital, it becomes necessary to think about how you will structure the business. There are a number of options with different control and tax considerations.
For example, a partnership can have general and limited partners. General partners own and operate the business, but also assume responsibility for any liabilities. Limited partners who might invest in your business have no control, but also are not subject to the partnership's liabilities.
Another option is to incorporate your small business. Incorporation refers to the creation of a new legal entity with different regulatory requirements. While more closely regulated by the government, incorporating your business makes it possible to both raise capital and issue stock.
Any choices you make about business financing (debt or equity) and specific corporate structures will have a significant impact on your tax rate. A side hustle is taxed as additional income on your annual return, and you may also need to file estimated quarterly taxes. When you graduate from side hustler to real business owner, you’ll need a more refined tax treatment and understanding.
You might classify as an independent contractor, which is relatively simple for tax purposes. Whereas a corporation, which operates as a separate legal entity, will pay taxes in addition to those paid by who manages it. A partnership does not pay separate taxes but must report operating income to the IRS. No matter what corporate structure you select as your side hustle matures, expect to face additional paperwork and regulation.
5. Taking the leap
A successful side hustle has the potential to snowball when everything aligns just right. If that happens, you need to have a plan in place to scale your business, make sure you’re paying the right taxes, and protect yourself legally.
Running your own business is an exciting prospect. Proper planning at the beginning, as well as the necessary due diligence as you scale up, can help set you up for long-term success.
Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.
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