The modern gig economy is more than just Uber, Lyft, and food delivery services like DoorDash. Gig workers are dog walkers, web designers, resume writers, hairdressers, bloggers, social media influencers, and other independent contractors from all walks of life. People are even renting their vehicles or houses through apps like Touro and Airbnb.
According to Forbes, over 36% of US workers earn some income from a side hustle. That’s almost 57 million people. Thanks to the ubiquity of smart phones, it’s never been easier to work or earn money from gig-work. Make jewelry at home? Sell it on Etsy. Write resumes on the weekends or build websites in your spare time? Sign up with Fiverr. Own your home and want to rent out your guestroom? Airbnb is just a click away. In 2018 US gig workers accounted for almost $1.3 trillion in total economic output. Those are huge numbers, and they are slated to increase, with Morgan Stanley stating that by 2027 “freelance workers may represent more than 50% of the US working population.”
But what happens if you’re driving for Uber and you get into a car accident? Is your car insurance enough? What if your Airbnb guest slips and injures themselves in the shower? Will your homeowners insurance be enough to protect your assets? A simple google search shows that dog walkers, ride-share drivers, freelance web designers, even craft jewelry makers are being sued by customers. You can bet that these multi-billion dollar companies have deep pockets and lawyers on speed dial. But who is looking out for the gig worker?
How Forming an LLC Can Help Your Contract Hustle
Because companies like Uber and DoorDash don’t have to pay for benefits or the training costs of a full-time, new employee, freelance workers often have a lower cost than other workers. When you sign up to be a driver for Uber or walk dogs for Rover, you immediately become a contract worker operating the business under your name. In short, you and the business are the same legal entity in the eyes of the law. If you sell crafts online for Etsy, help write resumes for Fiverr, or drive for a ride-sharing platform, you are by default operating as a sole proprietor. There are no additional costs to being a sole proprietor, other than taxes, accountant fees, and business expenses, but you also don’t get the liability protection of an LLC. Luckily the gig worker has options to insulate themselves from possible financial ruin.
Why Start an LLC?
Forming an LLC is a relatively easy and inexpensive way (in most states anyway) to structure your sole proprietorship. In short, if you are a gig worker, forming your own LLC will offer you similar legal protections of a corporation, but with far fewer moving parts. For example, if you make vintage necklaces and sell them on Etsy, your LLC will own all the materials that go into making those necklaces. Think of the LLC as a way to separate your private holdings from your business holdings. If a customer (this actually happened) sues you because the necklace somehow injured them, they will be suing your LLC, thus insulating all of your other assets from the lawsuit. Since most gig workers and freelancers are working for themselves without business partners or employees, the LLC makes the most sense for basic liability protection. In many states, you can register an LLC for $100 or less. One drawback is that some states like Massachusetts, California, Nevada, and Delaware have a pretty expensive barrier to entry, with either expensive filing fees, high cost annual reports, or both.
While the LLC is probably a gig worker’s most simple option, the possibility exists where you can establish your side gig as an LLC, but then make the election to have it treated as an S-Corp by the IRS. As a gig worker, you may be paying up to an extra 15.3% in Social Security and Medicare taxes. Traditionally your LLC will be subject to three taxes; personal income, Social Security, and Medicare. If you form an S-corporation, you can divide your profits into wages and dividends. Wages are subject to all three taxes, while dividends are subject to income tax but not Social Security or Medicare taxes. Consequently, if you want to turn your side hustle into the next big public company, forming a C-Corp is the way to go. Like an S-Corp, a C-Corp is more formal than an LLC, and is required to have officers, an annual meeting, and fulfill additional filing requirements. But let’s be honest, most gig workers are simply working to make money without the constraints of the usual work-a-day world, and both S-Corps and C-Corps are overkill unless your gig is pulling down tons and tons of money and either needs to take on partners, or switch up it’s tax status.
Thinking about forming an LLC for your side hustle? Check out Northwest’s How to Start an LLC guide.
As a small business owner, you’ll need to protect your assets. With Northwest’s asset protection guide, you’ll have a leg up on the competition.