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If I intend to earn on the side doing different category of things should I do it as an individual or as a small business?

Personal Finance & Money Asked on October 23, 2020

If I have a few areas of expertise (that can’t fit a classification of services/products) and I’d like to make use of those and provide products or services based on those, should I do it as an individual or should I register a business?

Examples of things I have in mind:

  • Gardening work
  • Teaching Computer Programming in community colleges or private institutes
  • Selling art work of mine and possibly of some friends and family
  • Marketing for other businesses

Examples of concerns:

  • Tax complications
  • Liability (in case someone decides to sue me)
  • Other benefits or issues I may not be thinking about

So instead of providing the above services as a person, could I provide it under LLC/LLP/Inc where I am the sole contributor. There are somewhat similar questions but here I don’t have a fixed business category and it is also a mix of selling things and services.

Another point that I want to focus on is if there is a point beyond which establishing a small business (instead of an individual provider) doesn’t make financial sense – tax (esp when the business may make losses on consecutive years).

2 Answers

If I intend to earn on the side doing different things should I do it as an individual or as a small business?

Yes! When you do business as an individual you have a small business. The bulk of small businesses are just individuals doing work. For tax purposes you don't have to file any paperwork with your state government to have a business, and LLC doesn't really mean anything to the IRS. A single-member LLC can be taxed as a sole-proprietorship, an S-Corp, or a C-Corp. If you don't register an LLC you'd still be taxed as a sole-proprietor.

There are somewhat similar questions but here I don't have a fixed business category and it is also a mix of selling things and services.

Agreed, I think there are enough similar questions that you can find good info on whether or not you need an LLC, and whether or not an S-Corp is worthwhile. My only note on LLC's is that how much exposure you have varies significantly even among the four things you listed (gardening might actually have the greatest liability exposure), so you should research the activities independently and it could be worth looking at liability insurance for gardening. As for S-Corps, I'd say they only tend to be worth the additional hassle if you are generating significant income from the businesses.

As for multiple business activities there are multiple ways to structure them. You could do this without an LLC, establish one LLC/corporation and have multiple DBA's registered underneath that LLC/corporation, or set up multiple LLC's/corporations. Investigate costs associated with an LLC/corporation for your state, they vary significantly. You'll keep separate records for each type of business activity and assuming you don't establish a corporation you'd file multiple Schedule C's with your personal tax return.

Other benefits or issues I may not be thinking about

An important topic is which of your expenses are appropriate to deduct for a business, returns with self-employment income are more likely to be audited, because fraud is common. The IRS has a host of rules, but in general they say that the business expense must be ordinary and necessary. For example as an artist you may have considerable expense for paint, brushes, canvas, and even travel, but deducting a lease on a luxury vehicle would be inappropriate. Luckily there are many good business-activity specific resources you can find to help guide you on this.

One more related item to consider is whether any of your businesses could/should be considered hobbies. Hobby income isn't subjected to self-employment tax, but also can't be offset by expenses to the same extent as business income. This typically only becomes a topic with the IRS if you've had losses in 3 or more of the last 5 years. This is more of a reason to make sure you aren't making questionable deductions, a business can lose money year after year, but if questioned you'll have to prove to the IRS that you are trying to make a profit and deductions that feel more like pleasure than work can hurt your case.

Correct answer by Hart CO on October 23, 2020

I believe registering a business is much better. On the other hand, you could purchase an already established business in an area of interest. You may be thinking about four ideas now but really, the possibilities are limitless. Perhaps you could visit any of the tens of portals where businesses are already up for sale. I believe they offer better guidelines and help on dealing with tax matters as per your jurisdiction and the entire sale process.

You also get an opportunity to select an already established business and all you need is to get it working the way you want. Even better, the process of purchasing one or looking into a registered business up for sale might open up your eyes on more opportunities you may have missed or help you reach a conclusion that you probably don't need to go with an established business but start your own or try something else.

Answered by Benson M on October 23, 2020

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