Is my Side Hustle an LLC or An S-Corp?

You started a home business, but now its outgrowing your dining room. You’re wondering, “Do I need to incorporate?”

For entrepreneurs thinking about taking their side hustle fulltime, the considerations around choosing the proper business entity usually coalesce around three main considerations: limited liability, income taxes and ownership structure.

For instance, both an LLC and an S Corp. protect owners from being personally on the hook for business liabilities or debts, whereas a sole proprietorship doesn't. But you may be able to achieve the same protections as a sole proprietor with an umbrella insurance policy.

With both the LLC and the S Corp. you can have “pass-through tax treatment” meaning that the business entity is not taxed, but its owners are taxed as if items of income, loss, deduction and credit were earned or incurred directly by them. The benefit of this is that the income of the business is taxed only once.

Regarding your ownership structure, how many people are going to be involved and what will be their roles? With an LLC, you’ll have more flexibility in how you manage and run your business; a board of directors not required, as opposed to an S Corp. where you must have a board of directors and there are stricter rules about holding meetings and keeping records. Also, all shareholders must be U.S. citizens or residents.

Before deciding upon a business structure, you should consult with not just an attorney, but also with an accountant and a commercial insurance broker.