Key Takeaways
- Know Your Intent. Transition your side hustle into a small business if you have long-term goals and seek sustainable growth.
- Consider the Costs. Side hustles are low-cost and flexible, while small businesses require significant investments of time, money, and energy.
- Explore the Legal and Financial Impacts. Growing side hustles may benefit from formal business structures and careful tax management.
In today’s digital landscape, it’s easier than ever to make money in your spare time. So, it’s not surprising that so many of us have alternative revenue streams. In fact, according to a Bankrate survey, 36% of American adults have a “side hustle” beyond their main source of income. And, between freelance work, Etsy shops, and DoorDash-like delivery services, a growing number of us rely on those side hustles to get by. But how do you know when to transition that side hustle into a small business? Let’s get into it.
1. Consider your intent and long-term goals.
Side hustles are typically hobbies or passion projects that just happen to bring in revenue. However, if you envision a future for your side hustle with sustainable growth, it might be time to transition that hobby into a small business.
2. Consider your costs.
The key qualifier of a side hustle is that it stays on the side. Side hustles require minimal resources and can be done in your spare time. Small businesses, on the other hand, require significant investments of your time, money, and energy.
3. Consider the Legal Ramifications.
As your small business grows, the wisest move may be to restructure your business as an LLC or an S Corporation. Formal business structures like these offer better protection for your assets as well as tax and legal benefits. They also provide more efficient avenues to expand your business as it grows.
4. Consider the income.
Money is one of the biggest differentiators between side hustles and small businesses. The more money you bring in, the more taxable income you have to declare—and keep in mind that any income over $400 must be reported on your taxes. If you earn money for your side hustle as an employee, your employer should withhold tax from your paycheck. If you work as an independent contractor, you may have to pay estimated taxes. To keep things tidy, the U.S. Small Business Administration recommends you open a dedicated business account as soon as you start accepting or spending money as a business.
5. Consider the need.
If you depend on your side hustle to make ends meet, there’s value in treating it like a small business—even if you don’t legally transition to a formal business structure. Successful side hustles require boundaries. So, elevating your hobby into a job can help legitimize the work—even if it is just for yourself. Treat it like a business with goals, marketing, and meticulous records.
6. Consider your worth.
A “side hustle” is so named because you have to hustle to make it profitable. You need vision, direction, enthusiasm, and confidence. But when it comes to running a successful small business, confidence goes well beyond having faith in your product or services. To transition a hobby into a small business, you need to know your worth and stand by it—over and over again. As you negotiate rates and develop new projects, you will need to advocate for yourself. Calculate what it costs (emotionally and financially) to run your business and don’t accept less than you need. Remember that in the long run, it won’t be worth it to sell yourself short.
7. Consider Your Passion.
Finally, one of the most important questions to ask yourself is whether or not you want to make your hobby the focus of your life. Let’s say, for example, you enjoy making cakes. Your friends and family members constantly compliment your decorating skills and encourage you to open a bakery. But should you? Contemplate how much you would enjoy making those cakes seven days a week. It’s not an uncommon story for hobbyists to lose passion for their craft when time and money are on the line. Before you take the leap, consider whether or not pursuing your passion as a job could turn it into a stressful obligation instead of something you enjoy.
Want more small business strategies?
- Check out our article on how to minimize small business taxes (coming soon).
- Learn how to write a business plan.
- Learn about commingling and get some hot tips on how to avoid mixing business and personal funds.