Top 5 Things You Need to Know About LLC or S Corp for Your Hobby or Side Gig

In today’s gig economy, transforming a hobby into a side gig—or even a full-fledged business—has never been more accessible. Whether you’re selling handmade crafts online, offering freelance services, or managing a small consultancy, understanding how to structure your business is crucial. Many entrepreneurs grapple with deciding whether to form an LLC (Limited Liability Company) or elect to be taxed as an S Corporation (S Corp). Making the right choice can significantly impact your taxes, liability, and long-term growth potential.

InVision Capital Advisor, a fee-only financial planning firm based in the San Francisco Bay Area, specializes in providing personalized advice to entrepreneurs and small businesses. Their expertise in wealth management, estate planning, and business advisory can guide you through the complexities of business structuring.

Here are the top five things you need to know about LLCs and S Corps to help you make informed decisions for your hobby or side gig.

1. Understanding the Basics: LLC vs S Corp

Before deciding which structure suits your side gig, it’s essential to understand what LLCs and S Corps are and how they differ.

LLC (Limited Liability Company)

An LLC is a flexible business structure that combines the simplicity of a sole proprietorship with liability protection similar to a corporation. Key features include:

• Limited personal liability: Your personal assets, like your home or savings, are generally protected from business debts or lawsuits.
  
• Flexible management: LLCs can be managed by the owner(s) or designated managers.
  
• Pass-through taxation: Business profits are passed directly to your personal tax return, avoiding double taxation.

S Corporation (S Corp)

An S Corp is not a type of business entity itself—it’s a tax designation available for LLCs or corporations that meet specific IRS requirements. Key features include:

• Pass-through taxation: Like an LLC, profits and losses pass through to personal taxes, avoiding corporate tax.
  
• Potential tax savings: Owners may save on self-employment taxes by taking a reasonable salary and receiving remaining profits as distributions.
  
• Ownership restrictions: S Corps have limits, such as a maximum of 100 shareholders, and all must be U.S. citizens or residents.

For hobbyists or side hustlers, forming an LLC is often the easiest entry point. Electing S Corp status later may provide tax benefits once your income reaches a certain level.

2. Liability Protection Matters

One of the primary reasons to formalize your hobby or side gig as an LLC or S Corp is personal liability protection. Without a formal business structure, your personal assets are at risk if your business faces legal issues or debts.

Example scenarios where liability protection matters:

• A client sues you over a service or product issue.
  
• You borrow money to invest in equipment, and the business cannot repay it.
  
• A customer gets injured using your product.

An LLC shields your personal finances from most business-related liabilities. While S Corp status is a tax designation, forming an LLC first gives you that legal protection while you benefit from potential tax advantages later.

InVision Capital Advisor emphasizes the importance of protecting personal assets when transitioning from a hobby to a business. Their personalized financial planning services can help you navigate this transition smoothly.

3. Tax Implications: Keeping More of Your Money

Taxes are often the most confusing part of deciding between an LLC and an S Corp. Here’s a simplified breakdown:

LLC Taxes

• By default, single-member LLCs are taxed like sole proprietorships, while multi-member LLCs are taxed like partnerships.
  
• You report business income on your personal tax return, which avoids double taxation.
  
• All profits are subject to self-employment taxes (Social Security and Medicare).

S Corp Taxes

• Profits can be split into a reasonable salary and distributions. Only the salary is subject to self-employment taxes.
  
• Distributions can potentially reduce your overall tax burden.
  
• The IRS requires that salaries be “reasonable” based on your role and industry standards.

For side gig owners, S Corp status may be beneficial once profits are significant enough to justify paying yourself a reasonable salary and taking the rest as distributions. Before making this election, it’s wise to consult a tax professional to avoid IRS scrutiny.

InVision Capital Advisor provides personalized tax strategies to help entrepreneurs minimize their tax liabilities. Their expertise can guide you in making informed decisions about your business structure and tax planning.

4. Administration and Compliance Requirements

While LLCs and S Corps both offer benefits, they come with different administrative responsibilities. Understanding these requirements helps you avoid penalties and maintain compliance.

LLC Administration

• File articles of organization with your state.
  
• Create an operating agreement (even if not required, it clarifies ownership and management).
  
• Maintain separate business bank accounts and records.
  
• File annual reports in certain states.
  

S Corp Compliance

• File Form 2553 with the IRS to elect S Corp status.
  
• Keep meticulous payroll records for owner salaries.
  
• Hold regular meetings and keep corporate minutes (even for single-owner S Corps).
  
• Maintain compliance with federal and state tax filings.
  

For a hobbyist turning a side gig into a small business, starting with an LLC is generally simpler. S Corp election can be considered once the business grows and profits justify the extra administrative work.

InVision Capital Advisor assists clients in navigating the complexities of business administration and compliance. Their services can help ensure that your business remains compliant with all regulations.

5. Long-Term Growth and Flexibility

Choosing the right structure is not just about taxes or liability today—it’s about future growth and flexibility.

• LLCs offer flexibility for ownership changes. You can add partners or members easily, and profit distribution can be customized.
  
• S Corps provide opportunities for tax optimization and can enhance credibility with clients, lenders, and investors.
  
• Scalability: If you plan to expand your side gig into a larger business or eventually sell it, having an established LLC or S Corp provides a solid foundation.

It’s important to align your business structure with your long-term goals. If you intend to keep your side gig small and simple, an LLC may suffice. But if you anticipate scaling, hiring employees, or seeking investors, S Corp election can be a strategic step.

InVision Capital Advisor offers personalized financial planning to help entrepreneurs plan for long-term growth and success. Their expertise can guide you in structuring your business to align with your future goals.

Practical Tips for Hobbyists and Side Gig Owners

Here are actionable steps to help you decide and implement your LLC or S Corp:

1. Start with an LLC: It’s easier to form, provides liability protection, and allows you to focus on growing your side gig.
   
2. Track income and expenses: Keep clear records from day one to simplify taxes and potential S Corp election later.
   
3. Consult a professional: Small business attorneys and accountants can guide you through state-specific regulations and IRS requirements.
   
4. Separate business and personal finances: Open a dedicated bank account and credit card for your side gig.
   
5. Consider timing for S Corp election: Typically, once net profits reach $40,000–$50,000 annually, consulting with a tax advisor about S Corp status can yield meaningful tax savings.

By taking these steps, hobbyists and side gig owners can protect themselves, optimize taxes, and position their business for future success.

How Professional Guidance Can Help

While many entrepreneurs try to navigate LLC and S Corp formation on their own, working with professional advisors can save time, reduce stress, and prevent costly mistakes.

For example, InVision Capital Advisor provides personalized financial planning services tailored to entrepreneurs and small businesses. Their expertise in business structuring, tax strategies, and long-term planning can help you make informed decisions and avoid common pitfalls.

Their team can assist you in choosing the right business structure, understanding tax implications, and planning for future growth. With their guidance, you can focus on growing your side gig with confidence.

Conclusion

Turning a hobby into a side gig or small business is an exciting journey, but it comes with important decisions—chief among them, whether to form an LLC or elect S Corp status.

Here’s a quick recap of the top five things you need to know:

1. LLC vs S Corp basics – LLCs offer liability protection; S Corp status may provide tax benefits.
   
2. Liability protection – Keep personal assets safe from business debts or legal issues.
   
3. Taxes – Understand self-employment taxes, salary, and distribution rules.
   
4. Compliance – Know the filing requirements and administrative responsibilities for your chosen structure.
   
5. Long-term growth – Align your business structure with your future goals and scalability.

Starting with an LLC is often the most practical choice for hobbyists or side gig entrepreneurs. As your business grows, S Corp election can provide additional benefits.

Professional guidance ensures you make the right choices from the start, protecting both your personal assets and your business ambitions. With proper planning, your hobby or side gig can not only generate income but also grow into a sustainable, thriving venture.