So You Want to Start a Side Hustle – Part 2: LLCs
As we discussed in part 1 of this series, many people are talking about and exploring starting a side hustle. Extra cash can be great, but there are many legal pitfalls that are often not discussed or considered in the excitement of a new side hustle. Last time we talked about oral contracts. Today, I want to talk about your personal liability, why you might want to limit it, and a few pointers on how to limit liability.
Whenever you enter into an agreement with someone else, you are expected to follow through with your part of the bargain. But sometimes, life happens. You may not be able to create content as quickly as you thought, or you might not be available to rent a room out in your house like you expected. Sometimes accidents happen or people get hurt and can’t work. When these things happen, you are open to being sued. That could mean a small claims suit for a few hundred dollars, or it could mean a huge lawsuit for tens or hundreds of thousands of dollars. Whatever the amount, if you have not taken any steps to prepare, your personal assets might be at risk. That could mean your bank accounts, your car – potentially even your house could be seized.
They say that an ounce of prevention is worth a pound of cure. You can save yourself a lot of time and money by thinking ahead to limit your personal liability. One of the best ways to do that is to create one or more entities to act through as you do business. For example, you create an LLC (Limited Liability Company) or something similar, and have the LLC do the business of your side hustle. LLCs are often simple to set up, and an attorney in your community can walk you through the best way to do that for your state and your situation.
Maintaining an LLC is as important as creating one. This includes having separate bank accounts and accounting for the LLC. It could mean holding meetings if there are other owners of your LLC. It could mean having and following an operating agreement. And it certainly includes acting on behalf of the LLC rather than yourself when you are doing business. For example, you would sign your name “for” the LLC. Many states, including Texas, require yearly reports and taxes to be filed for LLCs and other corporate entities.
The main benefit of an LLC is that, if it is properly set up and maintained, it is almost impossible for a lawsuit against the LLC to go after your personal property. The property owned by the LLC may be seized, but your personal assets are, in general, protected.
An LLC is just one way that you can protect yourself from liability. I will explore some of the other options in another post.