When Your Side Hustle Becomes A Real Business
July 23, 2018
If you’ve been on the internet lately, you’ve probably read about the rising phenomenon that is 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. You might do some freelance work on the weekend, sell crafts online, or consult 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 testing out new ideas.
Many people have one or two projects going on at once, and 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 of making it so, it’s a good idea to think about it as a small business.
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. Crossing the line
For lots of folks, side hustles start as hobbies. In the beginning, they might generate a modest amount of cash each month. That additional income can cover incidental expenses but it's probably not paying all your bills. Once your side hustle starts generating enough revenue to cover your major monthly expenses (rent, utilities, student loans, etc.) you have a real business on your hands.
Revenue alone is not enough. 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 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.”
You can think about this in terms of your side hustle. As your “side” revenue grows, you’ll need to decide if and when you’d be ready to turn it into your 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 or 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 raising capital adds also new types of risk. 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.
[caption id="attachment_3964" align="alignleft" width="300"] Candy Washington turned her side passion for social media into a real business. Learn more about her story in our Money Diaries by Varo series.[/caption]
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 issue stock and raise capital.
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. You may also need to file estimated quarterly taxes. When you graduate from side hustler to real business owner, you’ll need a more nuanced tax treatment and understanding.
You might be an independent contractor, which is relatively simple for tax purposes. A corporation, as a separate legal entity, will pay taxes in addition to those paid by managers. 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, you will face additional paperwork and regulation.
5. Making the leap
A side hustle might generate a little extra cash each month. A successful side hustle can start to snowball. Once that happens, you need to have a plan in place to scale your business and make sure you’re paying the right taxes and protecting yourself legally. Running your own business is an exciting prospect. Proper planning at the beginning can set you up for long-haul success.
This post is contributed content by Fundbox.com and written by Irene Malatesta.