Turning a Side Gig Into a Business
Dana Robinson
Managing Partner @ Verde Equity Partners a San Diego-based PE Firm (Giving away what I've learned in three books, and Linkedin Learning courses)
So you’ve started your side gig. You’re making some decent money and starting to put in more than a few hours a week. Now, it might be time to ask yourself a crucial question. Are you interested in making this your business? If so, there are some aspects you’ll need to consider.
Do You Want a Business?
This might seem like a silly question, but it’s actually the most important one here. Before you do anything, you’ve got to ask yourself if you want a business. There’s no shame in saying “No.” Just because you enjoy a side hustle or it’s lucrative doesn’t necessarily mean that you should start a business.
Businesses are complicated, time-consuming, and expensive. If you’ve already got a regular or part-time job in addition to the side gig, you might be okay with keeping things the way they are or maybe just scaling back your hours at work. Maybe you just want to enjoy the extra income without the hassle.?
Remember, if you transition a side gig, you’re making a huge commitment. If you have other responsibilities that might not be feasible on top of your other job(s). There’s no harm in letting something be for fun and some spending money.?
Should You Incorporate?
One of my mentors had a rule of thumb that if an entity was doing more than $30,000 per year on a consistent basis, then it was worth the cost of incorporation.
In his mind, until a business reached that point, it was better to stay unincorporated and just buy insurance and keep things simple. No entity. No extra tax filings.? No hassles. There’s a lot that goes into making a decision to incorporate. If you are running a small side gig that makes a few hundred dollars per month, it may not make sense. However, once your business makes a steady income, the benefits add up, and it is probably worth the cost.
Forming a corporation has a cost of formation, a cost of annual filing, a cost for state taxes, and a cost for filing annual tax returns.? This cost might easily be $2,000 per year. Is it worth the $2,000 per year in cost in order to gain the benefit of partial limited liability?
Does Your Side Gig Involve Contracts with 3rd Parties?
Are you doing contract work for third parties?? If so, then having a corporate entity will make it easier on those relationships.? The hiring company will not have any hesitation over employment laws; they will not be required to hold “backup withholding” for the IRS, and they may not even need to send you a 1099.? If you are an individual, then the entities that hire you may have hesitation over these things.
If a company makes a sufficient income to justify the expense, then you should incorporate.? If not, then you can probably gain almost as much protection by simply staying a sole proprietorship and buying a commercial general liability policy.
What If It’s Just Me?
A corporation provides for multiple owners because without a corporate entity, all businesses with more than one owner would be a partnership.? Partnerships are complicated. Partners each have a say-so in the management of the business. Each partner can create obligations of the company.??
What is unique about corporate entities is that they provide a way to have owners who share ownership but do not share in the management of the company.? The owners are limited to ownership of a share of the company but not necessarily involved in management. Thus, as part of the feature that provides a means for multiple owners, corporations also provide a form that separates ownership from management.
A corporation provides for limited liability of corporate owners by allowing an owner to only lose what the owner invests in the entity.? If you buy Apple stock and Apple fails, you only lose your stock, you don’t owe the creditors. If Apple gets sued, you can only lose your stock and not be sued for Apple’s activities.??
If you were an owner in a “partnership” rather than a corporate entity, then you would be personally liable for these things, and so would your other partners. You are all jointly and severally liable for the partnership’s activities, losses, legal risks, etc.
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When it comes to a one-owner business, should you form a corporate entity?
You don’t need the first part of corporate law because you don’t have multiple owners.? You also don’t have management that is separate from owners. It is just you. You own it all. And you run it all. So, you don’t need to incorporate the way you would if you had other owners involved in your business.
Scaling Your Business
Another aspect of transition is that of scale. For most people, a side hustle is something that they alone do. If it’s something only you can do, you’re limited by your own time and energy. At a certain point, you won’t be able to continue scaling because you only have so many hours each day to dedicate to your work.?
If it’s possible, look into outsourcing some of the work. That might mean hiring offshore people from places like Fiverr or Upwork (hint: they’re much cheaper!) to do some of the stuff you don’t need to have eyes on. You could try automation software as well.?
When you start having more than a couple of clients, you’ll also want to have everything as streamlined as possible. You can’t just accept payment willy-nilly from every app under the sun. Pick one (like PayPal or Stripe) and get it set up. The same thing goes for meetings. Have a designated calendar or scheduling app and do everything in one place.
Money
One of the most challenging aspects of starting a business, even one that you’re familiar with and is already earning some revenue, is that of money. It makes the world go round. Taking your side hustle to the next level will likely involve some money.?
Maybe you can borrow from friends or family, but there are other ways. You could apply for a loan, a government grant, or start a crowdfunding campaign.?
Most people wait until they’ve saved up a decent nest egg (either from their regular job or the side gig) before deciding to transition. That way, you’ll be covered. Keep in mind that unexpected costs may play a part, so always save a bit more than you think you need before making the leap.?
Another monetary aspect to consider is separating your personal and business expenses. If you’re freelancing, that might be difficult to do, but keeping accurate and detailed records is crucial if you want to turn it into a business.?
Marketing
You may have done some marketing already, but if not, now is the time to learn. You don’t have to be an influencer to inform people about your product or service effectively. Of course, you could always hire someone to manage your PR for you, but it’s not too complicated to do on your own.
Continuing Education
Just like how many traditional jobs offer continuing education courses, you’ll want to consider finding some for your side hustle. If you’re doing freelance editing or proofreading, track down courses at a local college or library on different writing and editing styles.?
In addition to taking courses or picking up books, you can usually find communities (both online and in person) around your field. Joining these associations may not lead directly to clients or jobs, but you’ll have opportunities to meet people already successful and learn about their journeys. Maybe they started doing it as a side gig, too!