I am doing quite a bit of sidework this year and wondering at what point would it be a good idea to "start a business" and bill through that.
The major reason to start an LLC for side work is if you want the additional personal liability protection afforded by one. If you're operating as a sole proprietor, you may be exposing yourself to liability: debts and judgments against your business can put your personal assets at risk!
So, if you're intending to continue and grow your side work in the future, you ought to consider the LLC sooner than later.
It's also an important legal decision and you should consider seeking a professional opinion.
The Wall Street Journal has a brief guide titled How to Form an LLC. Here are some notable excerpts:
A limited liability company, or LLC, is similar to a partnership but has the legal protections of personal assets that a corporation offers without the burdensome formalities, paperwork and fees.
Some states charge annual fees and taxes that can diminish the economic advantage of choosing to become an LLC. Among LLC advantages: pass-through taxation – meaning the profits and losses “pass through” the business to the individuals owning the business who report this information on their own personal tax returns. The result can be paying less in taxes, since profits are not taxed at both the business level and the personal level. Another plus: Owners aren’t usually responsible for the company’s debts and liabilities.
Also check out onstartups.com's Startup 101: Should You Form An Inc. or An LLC?
Here are some additional articles that discuss the advantages / disadvantages of forming an LLC:
An LLC is overkill for 99% of 1 man small businesses.
Side-businesses should remain as sole proprieterships until they get much larger and need the benefits of the LLC laws.
You can still bill through a company name if you want to start building a brand:
- Register your company name downtown for $15.
- Open a free business checking account using your company name.
- Have your customers write checks made out to your company name.
And set aside 25% of your gross income for Uncle Sam. He wants you to file a Schedule C with your regular 1040 at tax time. He doesn't care about your company. He just wants your social security number with a big fat check stuck to it.
Be sure to maximize your tax savings by tracking your expenses like a hawk. Every mile is worth 50 cents. I recommend using a tracking system like the TaxMinimiser.com (buy the $4 version to see if you like it).
Bottom line: EARN MONEY. Don't set up a "corporation".
Not all of the reason to start an LLC is liability (although that is implicit). There are two main reasons as far as I have experienced it:
- Structural: There are many perks to having a registered company. Firstly, there are frequently tax incentives for small companies which you can take advantage of to lower your tax liability. You can also gain a credit rating on both yourself and your company. I've noticed that credit terms offered to businesses can be lower than those offered to individuals.
- Personal: Setting up a company with its own physical space - its own bank account, financial statements and the like - allows you to operate more professionally. It changes the expectations of clients for starters. It also allows you to create distance between yourself and your company. Too many people operate their company expenses and accounts out of their personal bank accounts. It becomes very difficult to tell if you're subsidising your company if your pay-cheque is in the same bank account.
I always recommend that people set things up properly from the beginning. If you do start to grow, or if you need to cut your losses, it can be very difficult to separate yourself from the company if it isn't set up entirely apart from you.
I was once told, "Run your small company as you would wish it to be." Don't get into bad habits at the beginning. They become bad habits in big companies later on.
It really depends on the type of business you are running. If there is any chance of liability, you should protect yourself with an LLC. Then it is much more difficult for them to sue and take personal assets. For example, if you are a wedding photographer, you would want to be an LLC in case you lose someones pictures.