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  • Writer's pictureDavis Yu

Starting a Side “Hustle”? Here are Some Legal Considerations to Think About

December 1, 2020


Hobbies or passion projects have increasingly turned into potentially lucrative opportunities for many. Recent surveys have found that 54% of Americans planned on starting a side "hustle” due to the COVID-19 pandemic. From creating sourdough tutorials to starting a lifestyle coaching business, the opportunities are endless when it comes to contributing to your cash flow. Online platforms such as Etsy and Fiverr have also made it easier for people to provide their services on their own time. Despite the numerous benefits of starting a side hustle, there are also legal issues to consider.


Employment Contract


When starting a job, you will likely review the terms of and sign an employment contract. The contract generally lays out the specific job duties, working hours, salary and benefits, in addition to terms and conditions limiting what you can engage in outside of the job.


It is important to examine these contracts carefully to make sure you are not violating any contracts and provisions to avoid any potential litigation or penalties/fines.


Non-compete Agreement


A non-compete agreement is a contract in which an employee is prohibited from becoming a competitor of the employer during and for a specific amount of time after the employment ends. The agreement may also restrict geographic location from which the employee cannot work in competition with the employer.

Nondisclosure Agreement


A nondisclosure agreement prevents an employee from disclosing or using proprietary or confidential information of a former employer.

Non-solicitation clauses


This agreement prohibits a former employee from soliciting a former employer’s customers or clients. Oftentimes, these clauses are implemented to protect the company’s trade secrets and additional business interests at risk.

Invention Assignments Agreement


An invention assignments agreement is a crucial component in protecting intellectual property. Generally, the contract would give the employer certain rights to inventions created or conceptualized by the employee during his or her course of employment.

The enforceability of such agreement varies from state to state. In California, an invention assignment agreement is not enforceable as it pertains to inventions created entirely on the employee’s own time, without using any of the employer’s equipment, supplies, or trade secret information. California Labor Code § 2870.

Business Structures

Even in its initial stage, a side hustle that sells a product or service is considered a business. As your side hustle takes off, there may be decisions to consider including expansion and taking on additional partners or transitioning into a full-time business.

Included in this decision-making are the various ways in which your business can be structured. It is important to understand the key differences as each structure has different legal and tax implications. These implications will ultimately affect your business’ infrastructure, ongoing costs, liabilities in addition to rights and obligations.

Some of your business structure options are briefly discussed below. Consult with a licensed attorney in your respective state to determine which structure will work best for your business.

Sole Proprietorship

A sole proprietorship is considered to be more affordable and the simplest to form. By simply doing business in California with one owner, a sole proprietorship is automatically formed.

As the sole owner of the business, you are not only entitled to the profits but are also responsible for business’ losses and liabilities should any business creditors or parties to a lawsuit be looking to recover. Sole proprietors are personally liable for any debts, which means that the owner’s property, personal assets and accounts are accessible to cover these debts. In some cases, a business can acquire liability insurance for more protections.

Limited Liability Company (LLC)

Many favor the formation of an LLC for its operational flexibility and limited liability for its members. To register the LLC, Articles of Organization must be filed with the Secretary of State. The articles of organization will include the name and street address of the LLC in addition to the name and street address of the registered agent that will receive legal and official documents on the business’ behalf.

The articles will also designate whether the LLC is member-managed or manager-managed. With a member-managed structure, all owners will collectively control and take part in the company’s decisions. In contrast, the members designate a manager(s) to make day-to-day decisions in a manager-managed structure. This structure is typically preferred if there are a large number of members that may make decision-making challenging.

For federal income tax purposes, an LLC can be taxed like a sole proprietorship, a partnership, a C corporation, or even an S corporation. Unless the LLC elects to be taxed as a corporation, members will be obligated to report their share of the LLC’s profits on their personal income tax return. An LLC that makes more than $250,000 in total revenue will be subject to a gross receipts tax, which will vary depending on the total revenue.

C Corporation


A C corporation consists of one or more owners, and the corporation is supervised by shareholders, board of directors, and management. The business is a separate entity that pays corporate taxes. This entity type is usually reserved for larger businesses.


S Corporation (tax election)

A small business corporation can elect S corporation status for tax purposes by filing federal Form 2553 (Election by a Small Business Corporation) with the IRS. Up to 100 shareholders are allowed in an S corporation and all shareholders must be US citizens or residents. When a corporation elects federal S corporation status it automatically becomes an S corporation for California. The corporation can elect to remain a California C corporation, by timely filing Form 3560 (S Corporation Election or Termination/ Revocation).


Unlike a C corporation, an S corp is only taxed at the shareholder level. The shareholders report the corporate income and losses on their personal tax returns and are assessed at their individual income tax rates.


For more information on the different types of entities and which entity might be best for you, contact us at (714) 386-7755 or email dyu@dylawcorp.com.




This article is specific to the laws of the State of California and is intended for informational purposes only. The article should not be construed as legal and/or tax advice or a legal opinion based on any specific facts or circumstances. For specific questions related to this article, please contact an attorney.




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