Some of the items involved in setting up a business involve legal issues and liability insurance. As you prepare your side hustle, you want to make sure that it doesn’t impact/endanger your personal finances and lifestyle. The worst thing that could happen would be for you to have a liability issue, and find your homeowner’s or personal insurance doesn’t cover it – or to find a state or local government suddenly “interested” in what you are doing, and potentially issuing taxes and penalties. Better to get it right “out of the gate” and account for it in your pricing.
Registering your Business
One of the first items in registering your business, if you intend to make a profit. Of course, most states (as well as the federal government) want to make sure they get their cut of your profits. Typically, you need to register your business, and there are all sorts of legal classifications:
- Single Proprietor: Simplest one, where it is you in business. Easy to do, but not good for shielding personal assets.
- S-Corporation: The big one, which most companies are. A lot of paperwork, but very good for handling large amounts of money and shielding people within the organization
- LLC – Limited Liability Corporation: This is the standard one that most “side hustles” end up going with. It has the benefit of lower fees, lower paperwork requirements, and shielding personal assets from liability. This is what I’m choosing to go with.
Don’t try to get around this, and not pay! You may survive for a while, but eventually they’ll get you, and they will go back years in order to get their cut (and add penalties as well).
My state (New Jersey) has the ability to register your LLC online (most states do) and the fee is $125. It gives you the opportunity to test your name out to see if its already taken. This basically records the name of your business entity, registers it for tax and employer purposes, and allows you to do work for the state (if called upon). My plan is to register as an LLC in the next couple of weeks.
The next step is to set up a separate account at my bank for the business, once it is registered. One of the ways that a lawyer could “pierce the veil” of protection of an LLC, and sue the personal assets of the owner, is if the owner does not keep the finances separate. By opening up an account specifically for the LLC, it will also better assist me in managing the finances of it.
Finally, I need to look into liability insurance. Since I am planning to produce a product (and some products like cutting boards will involve food) there is always the potential of liability. In checking with my insurance company (also my bank, USAA) I found that my homeowner’s and Umbrella insurance policies would not cover me if I sold a product and it was defective. For that, I’ll need liability coverage for my LLC. This is another of those fixed costs I wrote about earlier.
All these details! I’m trying to write about them all in the hopes that it will assist others in their attempts to build side hustles and pursue their own FIRE journeys. Good luck!