Over one-third (36 percent) of U.S. adults earn extra money beyond their main source through a side hustle, according to Bankrate’s 2024 Side Hustles Survey. More than a quarter (28 percent) of side hustlers make more than $500 per month in extra income, on average.
When running a side hustle, there may come a time when you need to make a choice: stay small or switch to full-time status. If you’re looking to turn your passion into a full-blown career, you’ll want to follow a few steps before and after making the leap.
What is a side hustle?
A side hustle is any job or business that you work outside of your main form of income. Side hustles usually involve some active work or oversight on your part, hence the hustling or hard work involved outside of normal work hours.
A side hustle can be a great way to supplement your income or explore a new career opportunity. On average, Americans feel they’d need to earn over $186,000 per year to live comfortably or feel financially secure, according to Bankrate’s 2024 Financial Freedom Survey. Starting a side hustle could help you achieve those financial dreams.
Bankrate insight
According to Bankrate’s Side Hustles Survey, 16 percent of U.S. adults agreed they’d like to develop their side hustle into their main source of income.
Side hustle vs. business
As soon as your side hustle starts earning money, you (and the government) can consider it a business, even if it’s not a full-time business.
Since almost half of U.S. businesses don’t make it past five years, side hustles can help you lay the groundwork and gain experience for full-time success. But if your side hustle starts to take off, you may want to consider quitting your day job and focusing all of your energy into a new business venture.
When considering transitioning your side hustle to a full-time business, consider these questions:
- Can business revenue sustain my income along with all business expenses?
- Has there been an upward trajectory of growth within the last year or longer?
- Has my business successfully weathered any seasonality in customer purchases?
- Am I relying heavily on a few large customers that make up the bulk of my business?
- Have I created multiple channels for getting new customers? Do I have a repeatable, reliable method for gaining new customers?
- Will I need employees to help me handle the increased workload when transitioning to full time?
Bankrate insight
According to the IRS, you must file a tax return reporting business income if you make net earnings of $400 or more from a side hustle or gig work.
If you are a sole proprietor (unincorporated business), you will need to pay quarterly estimated taxes throughout the year instead of the normal tax withholdings from your income. To help you estimate these, you can use an accountant, bookkeeping software, like QuickBooks, or fill out the IRS Estimated Tax Worksheet. When setting financial goals for your business or side hustle, you will need to decide what is a comfortable salary as well as consider your business expenses.
6 steps to turn your side hustle into a business
Turning a side hustle into a business requires thoughtful planning and strategy to help your business succeed. Here are six steps to consider:
1. Define your goals
Start thinking through your plans for your business over time, such as where you want it to go, how many people you want to reach or how much money you want to make. Then, set specific, achievable goals and timeframes to help you benchmark your business’s journey to success.
It can be helpful to set short- and long-term goals so that you can cast a vision for your business’s growth over time. For example, you may set a goal to make 100 sales calls in the next three months in hopes of gaining 10 recurring clients. Then, in the next year, set a goal to expand to 20 clients and hire a contractor to cover some of the work.
The benefit of these goals is that you can check your progress as you go, update your metrics for accurate forecasting and identify problem areas such as low customer retention.
2. Create a business plan
Creating a well-thought-out business plan is essential to any business. The good news is that you’ve already done some of the work when you created your business goals and metrics above.
A business plan is a document that details what your business does, your vision and your strategies for reaching your goals. It formulates your business model, unique value proposition, plan for marketing, goals and metrics and revenue forecasting. You’ll also want to include any market research you can find to support the strategies you’ll use, giving you data to show the interest and expected success you’ll have.
You can choose a lean business plan that just outlines the basics or a thorough plan that dives in depth. The latter is best for pitching to investors and lenders since it will show them that you’re a sustainable business worth investing in.
3. Plan to scale
Always moving the needle forward and scaling may be your primary goal as a full-time business. Consider these tips to help your business continue growing even after you make the jump:
- Get a mentor. You grow as a leader and business owner by learning from other people’s successes and failures, particularly successful business owners in your space. You can find a mentor from SCORE, a nonprofit that provides small businesses with local support.
- Educate yourself. Another fast way of gleaning invaluable knowledge from all sorts of business owners is to read books or listen to podcasts.
- Consider a business partner. A business partner can help cover your weaknesses if they have skills and resources you don’t. You’ll want to choose a business partner who you trust and can work with, since you’ll need a strong relationship to weather the ups and downs of business together.
- Diversify your revenue. Expand your business into new products, services and marketing channels to bolster your revenue. This allows you to cater to a broad range of customer needs and strengthens your business’s financial profile.
- Plan to hire out. You won’t be able to accomplish every task on your own, and you can get more valuable work done if you hire people to help you. You could start with service-based products or contractors and then move to employees when the time is right.
4. Establish your business
Next, you’ll want to get your business established in a structure that you can sustain over the long term. This starts with an official business formation: LLC, C-Corporation or S-Corporation.
- LLC: A limited liability company works well as a step up from a sole proprietorship, giving you some legal separation between your personal and business finances.
- S-Corporation: S corporations offer additional tax benefits over an LLC. They are controlled by shareholders who are the owners and require specific documentation such as bylaws. But they allow businesses to pass profit and losses to the owners’ personal taxes.
- C-Corporation: C corporations have the strongest protection for the owners against liability. Yet these entities require detailed tax documentation, and they tax both the corporation and the owners individually, called doubled taxation.
You’ll also want to file for an Employer Identification Number (EIN), which is your business’s unique tax identification number. As a sole proprietor, you may have filed taxes under your Social Security Number. As an officially incorporated business, you’ll need an EIN.
5. Seek financing
One way to propel your business’s growth forward faster is to finance your business expansion. Financing may give you the runway you need to get a new product off the ground or hire an employee.
You can achieve financing by raising funds through investors or crowdfunding, or you can get a small business loan. Even if you don’t need financing now, consider opening a business line of credit or getting a business credit card, which will give you some flexibility in the future if you need it.
On the downside, startup financing can be hard to find, and most side hustles are in the startup phases. According to Bankrate’s Side Hustles Survey, 52 percent of side-hustlers have been making money on the side for two years or less, including 24 percent who have been side-hustling for less than a year.
You’ll need to meet the lender’s requirements for a business loan with any lender you choose. Common minimum requirements include:
- Time in business: 6 months for online lenders; 2 years for banks and credit unions
- Annual revenue: $100,000 for online lenders; $200,000 to $250,000 for banks
- Personal credit score: 600 to 650 for online lenders; 670 for banks
6. Check in and improve
Business ownership is a fluid process that will change over time as your business grows. You’ll see the best progress if you check in with your goals regularly and make sure that those goals are still serving the right purposes or if they need revisions. You’ll also want to update metric and revenue forecasts regularly to ensure that you’re meeting targets.
Numbers aside, you can always find ways to improve customer service and the processes that you have in place. Looking for unique improvements will ensure that customers will want to return to your business time and time again because it’s the only place to get the quality and service that is uniquely yours.
The bottom line
As you begin the exciting journey of turning your side hustle into a business, you can lay a solid foundation for your business through planning, goal-setting and continual education. You’ll also want to address the legal formation and tax side of your business, which are key parts of a successful business.
But you don’t want to stop there. Build a plan to scale your business so it can continue to grow in the coming months and years. While it’s a lot of prep work to get your business off the ground, these steps will help you establish a strong business that can last for years to come.
Frequently asked questions
-
It’s best to have a business checking or savings account to keep your business finances separate from your personal finances. If you’re just starting out, you could open a separate personal savings account with your current bank. But you’ll want to move to another account as soon as you see your side hustle growing, particularly to help you separate money for taxes, wages and expenses.
-
You don’t need to start an LLC with a small side hustle, though an LLC does provide some liability protection if a customer were to take you to court.LLCs have a simple filing process compared to corporations and don’t tend to cost as much.
-
You should officially apply for business formation once you decide to go full-time with your business. You can apply earlier if you want the legal separation from personal liability and the tax benefits.
Read the full article here
The post Turning that side hustle into a business appeared first on Budget Busters Hub.