Welcome to our #AskACPA feature where we answer financial, accounting and business questions.
Question: What business structure is best for my side hustle and/or small business?
Answer: The answer is: “It depends!” There are a number of factors that go into deciding the right structure for your business, including tax, liability, funding and personal considerations. As a small business owner, you must choose a business structure before registering your business with the state. Let’s start by taking a look at some of the most common structures for businesses…
Sole Proprietorships
A sole proprietorship is one of the most straightforward business structures, as it’s easy to form and gives its owner complete control over the business. If you perform business activities yet have not registered as any other kind of business, you’re automatically considered to be a sole proprietorship. You are also able to get a trade name.
However, this also means your business assets and liabilities are not separate from your personal liabilities and assets. In other words, you may be held personally liable for any obligation of the business. In addition, raising money may be challenging as banks may be more reluctant to lend to sole proprietorships, and your structure doesn’t allow you to issue and sell stocks.
Who is this for? A sole proprietorship may be a good choice for anyone wanting to test the waters for their business idea first, and in general, for any low-risk business.
Partnerships
Are you and one or many partners planning to own a business together? Then a partnership may be the right business structure for you. Keep in mind there are two main types of partnership structures, including Limited Partnerships (LP) and Limited Liability Partnerships (LLP).
In Limited Partnerships, only one general partner has unlimited liability and must pay self-employment taxes, while the other partners have limited liability and limited control over the company. Any profit is passed through to the partners’ personal tax returns, hence the reason why partnerships are also known as “pass-through” entities.
As for Limited Liability partnerships, they afford their owners limited liability, thus protecting them from debts against the partnership.
Who is this for?
Similar to sole proprietorships, partnerships may be good for groups of owners wanting to test their ideas before building a more formal structure. In general, partnerships are well suited to professional groups such as accountants or lawyers.
Limited Liability Company (LLC)
Are you looking to have both the advantages of partnerships and corporations?
Do you have a medium to high-risk business?
In this case, you may elect to form an LLC. While an LLC protects you from personal liability in case the business faces a lawsuit or bankruptcy, it also can allow for profits and losses to pass through to your personal income and avoid corporate taxes. LLC members, however, are treated as self-employed and have to pay the self-employment tax.
Who is this for?
LLCs are well suited to members who own sizable personal assets they need to protect, as well as owners who aspire to a lower tax rate than the corporate tax, and medium or higher risk businesses.
Corporations
There are many corporations, including:
C corporations
C Corporations are legal entities separate from their owners, and protect the latter from legal liability. As a matter of fact, they can be taxed, make a profit, and be liable legally. In many instances, C corporations can be taxed
A great advantage of corporations consists in their ability to raise capital through the sale of stock. However, they are more costly to form than other structures, and demand more complex processes, reporting and record-keeping.
Who is this for?
C corps are a good choice for medium to higher-risk businesses in need of capital.
S Corporations
S Corporations help you avoid the double taxation that C corps are subject to. Profits and losses are passed through to the owners’ income without being taxed at corporate rates. S corporations may be taxed differently depending on the state they’re in.
Who is this for?
S corporations are good options for businesses that would be structured as a C corporation, but do qualify to be an S corporation.
B Corporations
Benefit corporations, called B corporations, are for-profit corporations taxed like C corporations. However, they are required by shareholders to generate a public benefit, in addition to financial profits.
Who is this for?
B corporations are a good choice for business owners interested in producing a public benefit along with financial profits.
Close corporations
Similar to B corporations, close corporations are less traditionally structured. They are usually not traded publicly. Usually, they can be run by small groups of shareholders. However, they don’t have a board of directors.
Who is this for?
Close corporations are well suited for business owners who do not want a traditional corporate structure.
Nonprofit corporation
Nonprofit corporations, often called 501(c)(3), are usually dedicated to dong charity, religious, educational, scientific or literary work to benefit the public. As such, they can receive tax-exempt status allowing them not to pay state or federal income taxes on their profits. However, they follow an organizational structure similar to a C Corporation.
Who is this for?
Nonprofit corporations are a good choice for business owners who want to do work to benefit the public.
Cooperative
Cooperatives are businesses or organizations benefiting those using its services, also known as user-owners. They are run by an elected board of directors and officers. Members can join the cooperative through the purchase of shares, and distributed profits among themselves.
Who is this for?
Cooperatives are for owners interested in using the services and sharing the profits of the business among themselves.
After reading about these different structures, which one(s) do you think appeal most to you?
One thing that is sure about the pandemic, is that it has definitely radically altered the way we think about work, especially as working women and moms. As we went through the pandemic and watched the lines between work, life and parenting being blurred, throwing working moms and women into an abyss of unending and exhausting responsibilities and struggles. As a result, many, if not most working women and moms, have been re-thinking their careers and what they truly want out of work.
According to a recent research by McKinsey, one in four working women in North America revealed they were considering a career downshift or dropping out of the workforce entirely. This shift in career attitudes and expectations clearly shows women and moms are stepping away from traditional views on work, and redefining its meaning in their lives. However, for many, this also equates to stepping onto unfamiliar territory. After all, most of what we known as far as work and careers go, comes from traditional perspectives passed on from previous generations. For the longest time, work has been confined to something we do to earn a living, separate from who we are and the personal parts of our lives. Today, and especially after the pandemic, the lines between the personal and professional have been incredibly, and probably irretrievably, blurred. We work from the same homes we raise our kids in, often on the same kitchen tables we eat our family meals on, in the same environment we live, breathe and evolve in every single day. Sometimes, work even involves sharing some of our most private moments on screen and social media, when our positions require it or when our careers err on the side of unconventionality. In any case, work is definitely not what it used to be, which is only one more reason to revisit our careers and what we truly want out of it…
Yet, where do we even begin in this monumental quest to re-define what we want out of work, when the last thing we need is yet another monumental task on our to-do list. This is the question so many working women and moms are asking themselves at this very moment, as some are forced to exit the workforce for lack of adequate childcare and others are seeking a relief from chronic burnout. The reality is, revisiting the very meaning and purpose of our careers is not a one-time thing. The reality is, it’s a process that requires regular attention and dedication. While it may vary from individual to individual, depending on personal preferences, circumstances and choices, it’s anchored in three major principles, including:
Shifting Your Mindset
Rethinking the meaning, place and purpose of work in our lives is no easy feat. Considering the amount and sheer number of pressures faced by the average person, from financial to economic and personal pressures, stepping outside of the traditional norms of work in order to create one’s own definition of professional success can be a daring act in and of itself. Yet, it’s very much a necessary one…
How would you envision your ideal career if money and the other pressures of life were non-existent? What would professional fulfillment and purpose look like to you? How would you rethink your career ambitions to fit your life, personality and priorities?
Organizing your Priorities
Speaking of priorities, a big part of rethinking our careers as working women and moms is also a matter of organizing, and re-organizing our priorities. One thing the pandemic exposed for many, if not most of us, is the lack of boundaries existing between the different areas of our lives. Let’s remember for working women and moms, work is all around, from the professional work we do in and out of the office, to the work we do at home folding laundry, cooking meals and homeschooling kids…
While much of this lack of boundaries was a result of extreme circumstances imposed to us by a global health crisis, a significant part of it was inherited from a latent inequity in social roles and responsibilities at the expense of working women and moms’ balance, health and sanity. This is where understanding, acknowledging and organizing our priorities comes into play…
What truly matters to you? What can you delegate or get more help and assistance on? What are non-negotiables in your work and life? What constitutes a sacred space for you? These are all questions that touch to the core of who we are as working women and moms, that have been neglected for far too long in favor of the proverbial hustle to get it all done. Maybe this is the time to put them back on the table…
Learning to Set Boundaries
Where lines between work and every other area of our lives have been blurred during the pandemic, most of us have realized the urgent need for boundaries in the way we work and live. As we re-imagine our careers in the wake of this crisis, we’re also slowly learning to stop teetering on the edge of personal and professional burnout and exhaustion. This requires getting re-acquainted with the concept of boundaries.
What boundaries do you feel are lacking in your work and life? How did this impact you during the pandemic? What kind of boundaries would you set in your ideal career?
As so many working women and moms are reframing their vision of their careers after the pandemic, many questions are coming to the forefront. While these are challenging our traditional views on work, they’re also helping create the new working world for women and moms.
Are you rethinking what you want out of your career after the pandemic?
Welcome to this week’s News Roundup, where we chat about what happened in the news around working women and moms’ careers, businesses, parenting and lifestyles. Read up…
Black Enterprise reveals groundbreaking ophtalmologist Dr. Patricia E. Bath is set to become one of the first Black women inducted in the National Hall of Fame;
Need to audit and re-design your life? Forbes defines how the Intentional Pause project can help you do just that;
Changing careers? Recruiterblogs suggests you consider a few additional options;
Are you into backpacks? Fast Company lists the most fashionable backpacks for adults;
Feeling rushed all the time? Zen Habits suggests ways to feel more spaciousness in your day;
Want to sound more confident? Lifehacker tells you to drop a few phrases from your vocabulary;
With the end of Daylight Saving time, Mother.ly has a few tips on how to “fall back” with kids.
If you’ve ever wondered about how to deal with change in your career and life, you owe it to yourself to read this book. “Who moved my cheese?” by Dr. Spencer Johnson was recommended during a professional training, igniting my curiosity. I literally devoured it in one evening…
This short story featuring two mice and two little humans faced with a shortage of cheese at their usual cheese station reminds us the only constant is change. When both the little mice and little humans show up one day to no longer cheese at their usual cheese station, they’re surprised and unprepared to deal with this seemingly new turn of events. While the “simpler” little mice accept their new circumstances without much questioning and embark on a search for new cheese, the little humans go through a more laborious process, questioning the change at hand and hesitating to adapt to their new reality. Through their thought process, behaviors and lessons learned, they reveal to us the intricacies of our own nature when faced with the “new” and the lessons learned along the way.
It’s quite easy to identify with the characters, especially the little humans who are more hesitant to recognize and adapt to change. In a few short words and a powerful anecdote, Dr. Spencer Johnson expertly manages to place a mirror in front of us as readers, confronting us with the reality of our core instincts of self-preservation, comfort and predictability. He presents the dilemma of change so many of us face with a simple tale of humanity that can be applied to any area of work or life.
“Who Moved My Cheese?”, in its simplicity and truth, is a game-changer when it comes to dealing with change at work and in life. It not only prompts us to look within at our own beliefs and attitudes about personal and professional transitions, but also to realize and confirm the necessity of change in life. More importantly, it teaches us all to anticipate change, adapt to it, and enjoy the process.
Welcome to our #AskACPA feature, where we answer accounting, financial and business questions. Send us your questions at corporate@thecorporatesister.com.
Question: Should I report my side hustle income in my taxes?
The answer is yes! Any money you make through your side hustle is income, and should be added as such as part of your income taxes. Whether you babysit on the weekends, walk dogs every now and then, or freelance as a writer, in addition to your main job, the income you generate on the side should be reported.
If you hustle on the side by working for a company, and earn more than $600 in the course of the year, most likely you will get a taxable income form (1099-K or 1099-MISC) from the company outlining the amount of money you earned.
Your side hustle income affects your total taxable income, which is why it’s so important to track it. You can do this by opening a dedicated business checking or savings account, and setting money aside out of your revenue for taxes.
Got more accounting, financial or business-related questions. Email us at corporate@thecorporatesister.com
