Every business has a basic structure that affects how it is taxed and whether its owners are personally responsible for business debts and liabilities.

Main Points to Remember:

– Treat your side hustle as a serious business; it legally operates as one.

– Review your options for business structure to see what best suits your needs.

– Consider potential legal risks and ways to protect yourself from them.

– Take advantage of technology and tools that can support your business.

– Understand that side gigs aren’t quick paths to wealth; they need research, planning,
  persistence, and patience.

Thinking about starting a side hustle? According to the 2024 New Business Formation Report by Gusto, 44% of people who started a business in 2023 did so while still working for another employer – a rise from 27% in 2022.

While a side hustle can boost your income, it can also bring new challenges. Here are seven essential things to keep in mind before starting your side hustle:

1. You Have Options for Business Structure

Each business has a structure that affects taxation and whether you’re personally responsible for any liabilities. By default, small businesses often operate as sole proprietorships, meaning you and your business are seen as the same legal entity. In this setup, you’re fully responsible for all business liabilities and will need to file a Schedule C with your taxes.

Alternatively, you can establish a different structure, such as a general partnership, limited liability company (LLC), C-corporation, or S-corporation. LLCs and corporations offer some personal liability protection, and each type has unique tax requirements.

2. Your Taxes Will Become More Complicated

As an employee, your taxes are likely straightforward: your employer handles part of your Social Security and Medicare taxes, and most of your income taxes are withheld throughout the year. But with a side hustle, your tax situation changes.

“Unlike a traditional paycheck or W-2, taxes aren’t automatically taken out of your business earnings. You’ll need to set aside a portion of your income for taxes so you’re prepared when tax season arrives,” explains Karen Barson, vice president at Intuit’s small business division.

Experts recommend saving about a third of your side hustle income for taxes, although exact amounts vary by business. Consulting a tax advisor can help ensure you’re adequately prepared.

3. A Side Gig Is a Real Business That Needs a Plan

The term “side gig” may sound casual, but it’s a real business that needs planning. Take time to research the market, understand your potential customers, and figure out your business positioning, pricing, and expenses.

“People often have an idea they’re passionate about and dive right in without considering a business plan, goals, or initial costs,” Barson says. “Taking the time to define what your side business will involve can put you in a much stronger position to succeed.”

4. You’ll Face Legal Risks

Being a business owner means being aware of potential liabilities. For instance, if you offer pet-sitting services and an animal gets injured under your care, you might be responsible for vet bills. Or, as a ride-share driver, you could be liable if you have an accident.

If these risks feel too high, you can look into liability insurance or other protections. Additionally, specific business structures may prevent you from being personally responsible for damages.

5. Side Gigs Aren’t Always Easy

While starting a business can be fulfilling, it isn’t necessarily simple. Only about half of new businesses make it past five years, according to the U.S. Bureau of Labor Statistics.

Beyond selling a product or service, you’ll need to manage administration, accounting, marketing, customer service, and other tasks. Business owners can also face issues like fluctuating demand, customer dissatisfaction, fraud, or supply chain delays. Having realistic expectations can help you prepare for challenges.

6. Technology and Tools Can Help Streamline Your Work

Running a business involves many tasks, and seasoned business owners often use tools to boost productivity. “Automation can save you time and help you get your business running smoothly,” says Alice Rowen Hall, co-founder at Rowen Homes.

“For example, automating invoicing, scheduling, and social media posts can reduce manual work,” she adds. Brian Clark, founder of United Medical Education, also suggests tools like Trello or Asana for task organization and QuickBooks or Wave for financial tracking.

7. Effective Time Management Is Essential

Starting a side gig takes dedication, but overcommitting can lead to burnout and negatively affect both your main job and your side business.

Finding a sustainable schedule that fits your life can make all the difference. On the other hand, not committing enough time can also hinder your business.

“One common mistake is underestimating the time needed to run a business. Make sure you have a solid plan and realistic expectations,” Clark advises. Try scheduling dedicated time for your side gig and adjust as needed based on your results.

A Side Hustle Is a Real Business

Most side gigs are not quick-money schemes. They require careful planning, research, patience, and persistence. “Remember, your side hustle is a business, not just a hobby,” Barson says.

“If you’re unsure where to begin, there are excellent free online resources, like those from the Small Business Administration, to help you start step-by-step.”