Many entrepreneurs today get started by working on the side or creating hobby businesses. But what happens when it’s time to take that side hustle to the next level? If you’re looking to grow and make your passion project into a real, official business, there are some legal steps you need to take.
Turn a Side Business Into a Real Business
Here’s an outline of what may be required.
Create a Plan
All of the legal and official steps that go into starting a business can seem overwhelming to someone who is used to running a hobby business or side hustle. So it helps to map out a timeline beforehand so you can break it down into manageable pieces.
Paul Kassabian, Legal Product Counsel at LegalZoom said in an email to Small Business Trends, “Turning a side hustle into a company may seem daunting, but it doesn’t have to be. By taking a step back and carefully evaluating legal steps and business structure options, entrepreneurs can start their dream off on the right foot.”
Develop a Business Model
In addition to planning the actual start of your business, you should have a business model in place that outlines how you plan to make money and grow throughout each stage of your business. This plan can evolve over time, but it’s essential that you create one as soon as you start to get serious about your venture.
Check Name Availability
When you take any official steps to register your business, you’ll need to have a company name. There are tons of different ways to choose a proper name, but it’s always essential to choose something that is not already in use by another company.
Kassabian explains, “Trying to use an existing company name will cause delays and possibly result in legal trouble. If the business name will be used as a brand, it’s wise to search the federal trademark database as well.”
File a DBA
If you’re running your business on your own, it is possible to get started just as a sole proprietor, though you may want to change that down the line. However, you should still file a DBA, which stands for Doing Business As, to reserve your brand name.
Kassabian says, “For entrepreneurs trying to fast track getting their business up and running, sole proprietorship with a DBA is an option, as it’s the quickest and most affordable way to operate a business. That said, a sole proprietorship is not a separate legal entity, so it doesn’t separate personal and business assets and liabilities—which can be risky.”
Formally Register
If you do want to form a company that is a separate entity, then you can do that right away or once you get more serious.
Kassabian explains, “Formally registering a business helps to keep personal and business affairs separate, since the entity is viewed as a separate “person” in the eyes of the law. The business maintains its own legal identity, and, depending upon the entity, can protect the owner’s personal assets from business liabilities.”
Choose a Structure
However, there are multiple options to choose from when it comes to business structures.
Kassabian details, “To help limit personal liability, many small business owners choose to form an LLC (Limited Liability Company). In addition to limiting personal liability, LLCs require less record keeping than a corporation, avoid double taxation, and allow for owner flexibility in managing the business.
“If an entrepreneur expects to seek outside investors at some point, or if a state doesn’t allow the company to do business as an LLC, a corporation might be the better choice. Corporations are also recognized internationally and have the ability to provide preferred shares of stock, giving special rights to specific investors.”
Check State and Local Licenses
In addition to federal regulations and licenses, your state and local governments may have legal requirements for new businesses. Check with your city and county government offices and browse your state website to find any additional licenses or regulations that you may need to comply with.
Check Industry Licenses
Additionally, there are some legal and licensing requirements for businesses in your particular industry. You can check with industry associations or a legal professional to learn about requirements for your specific business model.
Kassabian adds, “A food truck vendor, for example, may need a food handler’s and seller’s permit on top of a vehicle license.”
Create Legal Documents
You need a variety of documents in order to stay compliant, from LLC paperwork to legal contracts.
Kassabian adds, “Many of the documents and filings required to stay legally compliant can be created online. LegalZoom helps small business owners by offering online resources for a range of legal services, including forming an LLC, applying for trademarks, obtaining a seller’s permit, and filing an annual report.”
Consult with a Professional
For more personalized advice, you may also want to speak with a business attorney in your area.
Kassabian says, “If an entrepreneur feels unsure about the necessary legal steps to take, it may be helpful to consult an attorney on the best business structure and other issues facing their new business. Looking to local city or state websites can also be useful, as these sources will have specific information business owners need to stay in the clear in their local communities.”
Photo via Shutterstock
This is great! Many people don’t think about all the “behind the scenes” work that goes into a starting a business. The legal and tax implications can be HUGE if you don’t set it up properly. Things like a DBA and creating a legal entity are often overlooked until it’s too late.
NMV
Sometimes it’s easy in practice, but it’s theoretically hard stuff. This is one of them 🙂