The gig economy is booming and for good reason. Side hustles offer workers the chance to earn additional income, satisfy a passion, and gain additional experience. The surge in remote work has also made launching a side business more achievable. Hybrid entrepreneurs enjoy unprecedented flexibility to balance employment with the pursuit of a new venture.
Operating a side business also mitigates the risks typically associated with starting an LLC, since you have your full-time job as a safety net. Nevertheless, it is essential to evaluate how managing a side gig might affect your current position.
Here are a few things to consider before starting an LLC while working full-time.
Employment contract
Before starting an LLC, review your employment contract. Employers can’t ban you from working on the side, but they may restrict the type of work you can perform and the type of clients you work with.
Intellectual property is another issue. Some employers add a clause to their employment contracts that allows them to claim ownership of any innovations or inventions you create while an employee.
There may be other restrictions and policies within your employment contract (see below), so be sure to check them first.
Non-compete agreement
A non-compete agreement prohibits an employee from soliciting work or working for a competing business for a period after leaving a position. A non-compete clause may be part of the employment contract or a standalone agreement. Either way, it’s something you typically agree to as a condition of employment.
Note: The Federal Trade Commission (FTC) has proposed a ban on non-compete language in employee contracts stating they are unfair, suppress wages, hamper innovation, and block entrepreneurs from starting new businesses. A final ruling is expected in 2024.
Non-disclosure agreements
A non-disclosure agreement (NDA) acknowledges a confidential relationship between two or more parties and prevents them from disclosing information to outsiders. Employers often require employees sign NDAs to protect their confidential business information.
Breaking an NDA can result in financial penalties and expose you to a civil lawsuit. Even if you didn’t sign an NDA, your employer can still pursue legal action.
Intellectual property, proprietary information, and company resources
Don’t use company resources to pursue your side gig. This includes computers, software, office supplies, and so on.
In addition, there may be legal consequences if you use or share your employer’s intellectual property – including patents and trade secrets – to start or operate your business. Employers can and have sought substantial damages from employees who steal intellectual property.
Whether you consult, provide a service, or sell a product, be careful not to use your employer’s resources or information. If in doubt, consult an attorney.
Tax implications
If you're a W-2 employee, your employer handles tax withholding, and your involvement typically revolves around filing an annual tax return. However, when you operate an LLC, you shoulder specific tax responsibilities.
For instance, if you sell a product or service, you might be subject to sales tax and other state taxes.
You are also required to pay self-employment tax. That’s because LLC members who work for the business are considered owners not employees and Social Security and Medicare contributions are not withheld from their paychecks. These must be paid separately for any income received from the LLC, whether it’s as a salary or share of profits.
Fortunately, you can deduct legitimate business expenses from your business income. This will lower any profits you report to the IRS and reduce your taxable income.
To realize maximum tax savings, keep detailed records of any income and expenses associated with your LLC. Proper recordkeeping can also reduce the risk of an IRS audit.
State LLC formation laws
Every state has its own regulations governing the formation of an LLC. However, regardless of your state of residence, employment status is not a factor that states consider when processing your LLC application. For more information, see What is an LLC & how to form an LLC.
Other LLC requirements
Forming and maintaining an LLC also brings non-tax requirements, such as obtaining a registered agent and getting an EIN.
You will also need to file a beneficial ownership information (BOI) report with FinCEN (U.S. Department of Treasury’s Financial Crimes Enforcement Network), unless your business qualifies for an exemption. A BOI report contains information on the company, its owners, and the individuals involved in the filing of the formation document for the LLC. For more information, visit: Beneficial Ownership Information Report.
In addition, be sure to separate your business and personal assets. Open a separate business bank account, apply for a business credit card, and only use these for your LLC. Doing so will help you maintain the limited liability protections of an LLC and avoid “piercing the corporate veil.” For more information, see How to avoid piercing the corporate veil.
Should you tell your employer about your LLC side business?
If you’re in the planning stages, it may be a good idea not to share your LLC plans with your boss yet. But once your business is up and running, be transparent. You don’t want your employer to find out about your side gig on the grapevine or via social media.
Review your employment contract, NDA, and non-compete agreement to fully understand your employer’s policy around side gigs and your rights as an employee (i.e. any protections you have against being fired without apparent cause). If your company doesn’t have a policy or you have questions, consult an employment lawyer.
Bottom line: disclose only what you need to and assure your employer that your side business is within the bounds of company policy. And, most importantly, don’t let your LLC work impact your current job. Demonstrate that you remain committed to your full-time job by meeting deadlines and maintaining a high level of performance.
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