Side Gig or Not: Limit Your Liability.

I have been asked quite a bit lately about when one should create a business entity like an LLC. I get told things like: “It is just a small side gig.” or, “It is a direct sales thing.” And I get it. You don’t know if it is going anywhere, and you don’t want to make it more complex than it needs to be. So, is it “worth the effort” of creating a new entity and all the work that goes with it? I am here to say that it is definitely worth the work, even if you don’t create a new entity.

I am a believer of acting like a business from the get-go. Start out knowing your numbers and keeping separate books. How else do you know if you are making money, or not? And if you aren’t making money, why are you putting all that effort into it? If you are doing all the work already, then let’s keep your liabilities separate, too.

Still not sure? I recommend creating an entity (like an LLC) whenever there are risks that we want to have separated from other assets.  I know that is a bit of a jargon-y answer, but it really comes down to: how much trouble do you think you can get into doing your project?  You should be asking yourself questions like the following:

  • If you do get into trouble, what is the maximum amount of money that you think you would have to pay someone?
  • What is the average amount?
  • How likely is it that trouble will find you?
  • Do you have back-up if there is trouble? (Insurance, indemnification agreements, etc.)
  • How easy is it to get that back-up to cover you when there is trouble?
  • Do you have significant assets outside of that business that you want to be sure to protect even if trouble is unlikely?
  • How much money is flowing through that business?
  • Is your developing project significant enough that you want to be sure to protect it from the other stuff you are doing?

Depending on those answers, you may find that you have more risks than you first thought. That’s definitely when you want to separate the risks and start an entity. I know that whenever I have looked at different side projects, we have often opted for separation and a new LLC.

Yeah, yeah. I know, you are thinking that is easy for me to say. After all, that’s what we do for our business: create business entities. But this really is a case of practicing what I preach. We ask ourselves the same things and go through the same hems and haws. Then we suck it up and realize that we are doing business, not a hobby. And businesses have risks that we don’t want hurting our other businesses. So, what are you running? And what risks are worth it?

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