A side hustle is an increasingly common way to make extra money. People of all ages and backgrounds are spending their nights and weekends selling goods and services online and in person. From selling candles on Etsy to tutoring math at a local school, these side hustles offer experience and money, and for some, turn into a lucrative full-time business.
However, a side hustle is not without its risks. As an entrepreneur, offering a product or service may open you up to the possibility of a lawsuit from dissatisfied customers, contractors, or employees. If you have a successful side hustle or small business, keep your assets protected with these eight tips from Swyft Filings.
1. Form the Right Business Entity
The most important step of protecting your assets when working a side hustle is to structure your business using the appropriate entity. There are several options to select from when choosing a business entity, each with advantages and disadvantages. However, forming a Limited Liability Company (LLC), C Corporation, or S Corporation will likely be your best option for protecting your assets. Most side hustles start as sole proprietorships, but this won't protect your personal assets. An LLC will limit any liability to your business investment in most cases.
2. Set Up Separate Accounts
Even after you set up your LLC, you will need to maintain a strict separation between you and the company. Create separate business and personal accounts for checking and savings. Make sure the official business name appears on all documents, and when necessary, place assets, such as properties or vehicles, in the name of the LLC.
3. Always Use Contracts & Service Agreements
Anytime you perform work for a customer, be sure to protect yourself by using a written contract or service agreement. Using a contract helps both parties keep to an agreed-upon price and timeline. Plus, they serve as evidence if a client ever decides to take legal action against you.
4. Stay Covered With the Proper Insurance
To determine what types of insurance your side hustle will require, assess your risk tolerance and do research about your particular industry. Some common types of business insurance include the following.
If you visit customers' properties or clients come to see you, you'll likely need general liability insurance. This type of insurance helps protect against claims of injury on your property or if a customer claims you damaged their property.
Business Personal Property
If you use extensive equipment or tools to run your side hustle, business personal property insurance can help cover items that have been stolen or damaged. This can include anything from tools and vehicles to office equipment like computers and smartphones.
Errors & Omissions
Also known as professional liability insurance, this coverage is often used by consultants, designers, marketers, and accountants. This type of insurance helps protect people when a mistake or error is made when providing a service. If you have to defend yourself in a lawsuit, errors and omission insurance will help cover your legal fees and any costs you may end up owing.
Commercial umbrella insurance is an additional layer of coverage that can help fill the gaps other policies leave behind. It typically costs around $500 annually for up to $2 million in coverage. This amount of coverage will help pay for costs that exceed your other liability policy limits, helping you avoid paying out of pocket.
5. Follow All License Requirements & Laws
While forming an LLC and getting insured will help keep your personal assets protected, you must always operate legally and professionally to keep these protections in place. If you act negligently, your LLC and even insurance coverage may be voided. To avoid any impropriety, learn the licenses you need to maintain and laws your business must follow in your industry.
6. Ask For Advice When You Need It
Knowing everything when you are first starting out is nearly impossible. Don't be afraid to reach out for help and advice if and when you need it. Business lawyers can be an excellent resource for seeking professional advice to keep your assets protected. Likewise, many online resources can provide you with details and tools specific to your side hustle.
7. Don't Forget About Taxes
As you get paid for your work, be sure to set aside the appropriate money for taxes. Not planning ahead for your taxes can put you on the hook for a large tax bill at the end of the year. Owing the IRS money is one sure-fire way to put your personal and business assets at risk of being taken.
Forming an LLC can help provide ways to lower your potential tax bill and help keep your liability separate. Be sure to consult with your trusted financial advisor or a tax lawyer if you have any questions regarding how to prepare for taxes connected to your side hustle.
8. Take Advantage of a Homestead Exemption
Most states offer some form of a homestead exemption. These exemptions can help protect a portion of your home's value from creditors and bankruptcy. This can be helpful if a lawsuit forces the sale of your home. In these cases, the homestead exemption ensures that any selling fees, mortgage balance owed, and the homestead exemption amount is paid out first and foremost.
Swyft Filings Is Here to Help
If you are ready to take the first step in your asset protection plan by forming a proper business entity, Swyft Filings can help. We've guided thousands of side-hustling entrepreneurs as they formed their first LLC. Our easy-to-use online service was created with small business owners like you in mind, and we do all we can to minimize costs and time spent filing. Just continue doing what you love, and we'll handle the rest!