Starting a side business

If you want to set up a business as a secondary trade, there are some important points you need to consider to make sure everything runs smoothly and legitimately.

Note

A side business is different to a side job. A side business is run by you as opposed to you working for someone else as an employee.

A survey conducted by The Hartford revealed that around 57 million Americans own a side business that isn’t their main source of income. 61% of the business owners surveyed said that they worked full time elsewhere. 49% spent 10 hours or less on their side business whereas only 2% spend over 40 hours on it.

There has been rapid growth in the number of people becoming entrepreneurs. In a recent study from Bentley University, over 66% of those aged 18-34 said they wanted to start their own business although as of 2013, only 3.6% of US businesses were owned by people under 30. The most common reasons for people not following through and starting their business is a lack of confidence, lack of necessary resources, and a lack of motivation. So in order to make sure your side business is as successful as possible, you need to have a proper plan in place to decrease the likelihood of things going awry.

Why start a side business while being employed elsewhere?

Almost two thirds (72%) of people surveyed by The Hartford said that financial gain was the main reason for starting their own business. 19% said it was to make a change, and around 10% said it was to pursue a passion.

According to the Small Business Association (SBA), around 30% of new businesses fail during the first two years, 50% during the first five years, and 66% during the first ten years. Since the likelihood of failing is still there, many business owners choose to hold onto their full time job so they can test the waters, but also have something to fall back on should anything go wrong.

Make sure your contract allows it

States don’t look at your employment status when you submit the application to start a side business, since whether you are allowed to work on the side is irrelevant to your state’s regulations. It’s your responsibility and is therefore of utmost importance to check that your current work contract allows it. Even if you’re technically allowed, there might be a clause stating that you’re forbidden from starting businesses that could be in direct competition with the company you’re currently working for.

It’s up to you whether you tell your employer that you’re setting up a side business. They might worry that your commitment to their company is wavering or that you might use work time to complete tasks for your company. On the other hand, your new business might be beneficial to your employer’s company or even complement it. Weigh up the pros and cons and decide if honesty is the best policy. This article on part-time self-employment gives you more detailed information on coordinating with your employer and other points to bear in mind when it comes to your full-time job.

When does a hobby become a business?

You might think that earning a few dollars here and there by having ads on your blog or by selling on eBay counts as a hobby and this profit doesn’t need to be declared, but it actually does. The Internal Revenue Service (IRS) states that you have to report any income that you receive. The IRS then decides itself whether your activity counts as a business or a hobby. According to their criteria, making a profit in three of the past five years deems you a business. If it’s your first or second year running the business, then obviously you can’t fulfill this criteria: the IRS still needs to see that you are expecting to make money with your business. In this way, you can deduct the expenses directly from your income as well as deduct any business losses from your total income.

How to make sure your side business is legally registered

When setting up a side business, you have to make sure you register it properly to avoid any problems with the tax authorities. Here’s a step-by-step guide to make sure you don’t miss anything out:

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Step 1: Create a formal business structure

Your side business will automatically be structured as a sole proprietorship (or partnership if there is more than one owner). The downside with this structure is that your personal assets will be at risk if your business runs into trouble. It might be worth changing it to a Limited Liability Company (LLC) or corporation to protect your assets if your business doesn’t do as well as you’d hoped. LLCs also require less paperwork to form and there’s less legal red tape to worry about.

Step 2: Register your business name or a fictitious name/DBA

Whether you choose to use your real name or you make one up is up to you. If you’re setting up an LLC you will automatically be registering your business’ name with the state. If you wait to decide on your business structure, you will have to register it using a fictitious name, also known as a DBA (“Doing Business As”). This is usually filed with the state and/or county.

Step 3: Obtain all the necessary permits

The type of business and which state you’re in will decide which business permits you need whether they’re on a state, local, or even federal level. The SBA website will give you more detailed answers on which permits you need e.g. sales tax license, general business license, etc.

Step 4: Get the federal tax ID number

Also known as Employer Identification Number (EIN), a federal tax ID is the equivalent of a social security number for businesses, since the IRS uses it to keep track of a business’ transactions and activities. It is mandatory for LLCs and corporations to get this ID number, but not for sole proprietors. Having it makes sense, since it means you won’t have to use your own social security number for business matters. The tax ID number is issued by the IRS for free.

Click here for important legal disclaimers.


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