When your side hustle starts making real money, or gaining serious momentum, you’ll eventually ask yourself: Should I turn this into a “real” business? That usually leads to one big decision: LLC or not?
At first glance, running your hustle as a sole proprietorship feels simple and cheap. But forming an LLC can protect your personal assets, unlock tax perks, and legitimize your business in the eyes of customers, banks, and potential partners.
In this guide, we’ll break down:
- The legal protections you gain (or risk),
- The tax options that could save you thousands,
- How each structure impacts your growth potential, and
- The costs and complexity involved with forming an LLC.
Let’s clear the fog, so you can make a smart, confident call.
LLC vs. No LLC: Key Differences
Feature | No LLC (Sole Proprietorship) | LLC (Limited Liability Company) |
Legal Protection | No legal separation, your personal assets are on the line | Shields personal assets from business debts and lawsuits |
Taxes | All income flows to your personal tax return | Flexible: taxed as sole prop, partnership, or corporation |
Business Credibility | May appear less formal or professional to clients and vendors | More trust from clients, platforms, and lenders |
Financial Separation | Business and personal funds often mixed | Required separation; simplifies taxes and tracking |
Startup/Ongoing Costs | No filing fees; minimal cost to operate | State filing fees, annual reports, and potential franchise taxes |
Administrative Tasks | No paperwork beyond taxes | Requires official filings, EIN, and sometimes an Operating Agreement |
Scalability | Can feel limiting when hiring, partnering, or raising capital | Built to grow with you, easy to add partners or investors |
Quick Callout: Are you running a small, low risk hustle with minimal income? A sole proprietorship might be fine, for now. Â
But if you're handling customer data, shipping products, making 4 - 5 figures a month, or dreaming bigger? The LLC path deserves serious thought.
Benefits of Forming an LLC for Your Side Hustle
Personal Asset Protection
The moment your side hustle starts interacting with the outside world, customers, contracts, shipping, or services, you’re exposed to risk. An LLC creates a legal barrier between your personal assets (like your home, car, and savings) and your business liabilities. If something goes wrong, your personal bank account isn’t on the chopping block.
Tax Flexibility and Optimization
LLCs offer one of the most flexible tax setups out there. By default, you’ll be taxed like a sole proprietor, but you can elect to be taxed as an S-Corp or C-Corp to potentially lower your self employment tax or reinvest more into the business. As your side hustle grows, this flexibility can translate into serious savings.
Boosted Credibility with Clients, Banks, and Platforms
“LLC” after your business name signals that you’re not just testing the waters, you’re swimming laps. Clients feel more confident, banks are more likely to offer business accounts or credit, and even platforms like Stripe or PayPal may view you as more legitimate. It’s like adding a suit and tie to your business handshake.
Simplified Business Finances and Expense Tracking
LLCs are expected (and sometimes legally required) to keep personal and business finances separate. That might sound like a hassle, but it’s a blessing in disguise. It makes bookkeeping easier, tax deductions cleaner, and financial planning more strategic. No more mixing Amazon purchases with ad spend.
Easier Scaling, Hiring, and Investment Potential
If you plan to grow, an LLC sets you up for it. Want to bring on a co-founder, hire a virtual assistant, or pitch to investors? LLCs make it easier to formalize those relationships, create equity structures, and open the door to funding, all without rewriting your entire business setup.
Downsides of an LLC
Startup and Annual Costs
Unlike a sole proprietorship, forming an LLC comes with costs. You’ll need to pay a state filing fee (anywhere from $40 to $500 depending on the state), and possibly ongoing fees like annual reports or franchise taxes. It’s not a budget breaker, but it’s something to factor in.
Admin and Paperwork Responsibilities
You can’t just wake up and run your LLC, you’ll need to file Articles of Organization, draft an Operating Agreement, and get an EIN (Employer Identification Number) from the IRS. It’s not overly complex, but there’s a learning curve and a time commitment.
State by State Compliance Requirements
Every state has its own rules. Some require annual filings, some charge extra fees, and others have publication requirements. Staying compliant means reading the fine print, or hiring someone who will.
When Is an LLC a Smart Move?
Forming an LLC isn’t mandatory for every side hustle, but for many, it’s the right move at the right time. Here’s how to know when it makes sense:
Income Threshold Considerations
If you’re consistently earning $40,000 or more per year, many experts recommend forming an LLC. At this level, you're no longer in "extra cash" territory, you're running a small business. With that income comes tax implications, liability risks, and the need for a more strategic financial structure.
Risk Exposure (Physical Goods, Services, or Data)
Selling physical products? Offering hands on services? Collecting client data or payments? These all come with risk. If there’s any chance of being sued, held liable, or facing disputes, an LLC is your legal safety net.
Branding, Hiring, or Partnering Intentions
Thinking long-term? Planning to build a brand, bring on a partner, or hire your first virtual assistant? These are signs that your hustle is outgrowing sole proprietorship status. An LLC gives you a professional foundation for contracts, payroll, and business development.
Tax Strategy and Long-Term Planning
Once your revenue grows, so does your tax bill. An LLC gives you the option to be taxed as an S-Corp, which can reduce self-employment taxes and let you pay yourself a salary. It also sets you up for more deductions, better bookkeeping, and smoother audits.
Pro Tip: If your hustle is still sporadic, low-risk, and only pulling in a few hundred bucks a month, you may not need an LLCÂ yet. But keep an eye on growth, it might be closer than you think.
How to Form an LLC
Starting an LLC might sound intimidating, but it’s easier than most people think. Here's a streamlined breakdown:
1. Choose Your Business Name
Make sure it's unique in your state and follows the required naming rules (usually includes “LLC” at the end). Check domain name availability while you're at it.
2. File Articles of Organization
Submit this form to your state’s business filing agency (often the Secretary of State). You’ll pay a filing fee, which varies by state.
3. Get an EIN (Employer Identification Number)
Think of this as a Social Security Number for your business. It’s free from the IRS and needed for taxes, banking, and hiring.
4. Draft an Operating Agreement
Some states require it; all businesses benefit from it. This document outlines ownership, roles, and decision making processes, even if you’re a one person show.
5. Open a Business Bank Account
Separate your personal and business finances from day one. This step makes tax time smoother, boosts your professional image, and is required for keeping your liability protection intact.
Final Thoughts
Choosing whether to form an LLC for your side hustle is more than just a legal checkbox, it’s a signal that you're serious about your business.
Here’s the quick framework:
- Low risk, low income, just testing things out? Staying solo may be fine for now.
- Steady income, exposure to risk, or big plans ahead? Forming an LLC could be your smartest next step.
No matter where you are on the journey, one truth holds: there’s no one size fits all, but informed beats winging it.
Think ahead. Protect your assets. Build a foundation that matches your ambition. Â
And remember, your hustle isn’t “just” a hustle. It’s the seed of something bigger.
