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6 Steps to Turn Your Side Hustle into a Small Business

Most side hustles start out as informal arrangements–cash only–but a hustle is a business. It’s a more informal way of earning money. But before you bring in any significant amount of income, you’ll want to know the basic rules governing small businesses.

If you disregard the law and run afoul of disgruntled neighbors, unrelenting city zoning boards, or Uncle Sam’s insatiable financial enforcer – the IRS – your new gig could cost you a small fortune in fines. Plus, if you ever want to grow your hustle into a substantial source of income, you’ll thank yourself for taking the time to lay the foundations right.

Here’s what you need to consider to run your hustle legally and turn into a small business.

Business structure

Your side hustle is just an informal small business. Believe it or not, the IRS regards any income you make outside of your regular job as additional taxable income. Even if you’re a cash only operation, legally, you’re required to register as a business for tax reporting purposes. 

It’s not as scary as it might seem. There are numerous ways to register a business. Almost everyone will start out with either a sole proprietorship or a Limited Liability Corporation (LLC).

The main difference is this: tax reporting for sole proprietorships is simpler. But, if someone sues you for your business activities, they can take everything you own; Tax reporting for LLCs is more complicated, but there are protections. If someone sues you for your business activities, they can only take your business assets.

The IRS explains the difference between these structures here.


The most basic form of business insurance is general liability insurance, which covers you for accidents, thefts, and lawsuits. You may be required by law to have general liability insurance for your specific activity.

Even if you aren’t required to have insurance, it’s probably a good idea. If money is really tight, you can get by without it, but accidents do happen.

Read all about different kinds of business insurance, and look up whether your state requires it, here.

Filing taxes

Taxes are the single most frustrating part of running a legal hustle or small business. It’s not because we have to pay them. Taxes can be confusing enough to figure out how to pay, what to pay to whom, and when to do so.

I nearly tore my hair out figuring out federal and state LLC taxes in New Jersey for my landscaping hustle. You would think this side hustle is as simple a gig as it gets. Because of the complexity of taxes alone, I highly recommend you start with a sole proprietorship business registration. As long as your hustle is relatively low risk, you’re starting off right.

Sole proprietors simply track their earnings and expenses. At the end of the year, you simply fill out one additional tax form called a “Schedule C” form. LLC tax reporting requirements vary widely by state and by the type of business you’re running.

The IRS explains the different taxes you may be liable for as a business owner here. And you can learn more about some potential tax advantages for your home-based business here.

However, if you’re like me and most other people, and you don’t speak government legalese, I highly recommend you find an experienced advisor. They can help you understand business taxes and how they apply to your specific situation. 

You can hire a Certified Public Accountant, an Enrolled Agent, or a tax attorney. Here’s a great article on what those people do and how to find them. I also recommend you can ask a friend with a business in your state how to get started. You can also sign up for a free business advisory group like SCORE.


Licenses are different from business registrations. Business registrations put your operation on the government’s radar; licenses allow you to perform certain small business activities, like selling liquor, applying chemicals, or operating a kitchen.

Google usually comes up with an answer pretty quick. I find checking an online databases like Nav’s to find out about state licensing requirements.

However, I’m a fan of going straight to your city or town hall with questions. These public workers often know the questions I need to ask better than I do myself.

Be nice to those people, too. Local bureaucrats and public servants can be a business owner’s best friends or his worst enemies.

Zoning laws and regulations, inspections, permits etc

You may have obtained a federal and state business registration for Smiles ‘n’ Fun Daycare, LLC; a state child care license; and even liability insurance. But wait, there’s more!

Digital or information-based side hustles have less of a problem with this, but your town or city may have small business zoning codes. It may require you to obtain written permission, variances, or permits for specific activities, especially if you perform them in your own home.

For example, you may need a variance to have a child care business in your home on a residentially zoned block; or you may need to install special safety equipment in order to get a commercial cooking license so you can sell food out of your home; and believe it or not, most cities would officially require that cute kid down the street to have a street vendor license for her lemonade stand.

Before you invest any money in specialized equipment of any kind (that anybody is going to notice, anyway), check with your local zoning board and city hall to see if it’s ok. 

If your hustle is going to create a noticeable change in activity on your block, check in with your neighbors too. Explain your business idea and try to raise and overcome any objections. Understand they may have concerns about noise, increased traffic from your customers, equipment in the yard, etc.

If someone is especially cranky about your idea, bake them a cake, mow their lawn, buy them ice cream. Do whatever you have to do so everyone’s happy. Disgruntled neighbors can and often do drag small business owners to court over disputes. Mitigage the potential risks with a little communication and goodwill beforehand.

Get an advisor!

There’s a lot to consider here, and everyone’s situation is different. My best advice: Ask for help from someone who’s walked the road before. Chances are they’ll be happy to share their experience, and you’ll save yourself countless frustrations.

I can’t say enough good things about the free business advisory group SCORE; universities and community colleges often have local small business incubators; and business networking groups on sites like are full of people looking to help each other and exchange resources. Or just take your businessman buddy out for a beer.

A wise man once said, “Once you know how to make money . . . you never forget.” It’s true. Survive the setup phase and each side hustle can be pure small business fun. Good luck!

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