The stand is a real business now. Time to act like one.
The story so far Your tune-up stand made $8,400 of profit this year: $5,400 from regular months plus $3,000 from the bike club. You never filled out a single form, so in the eyes of the law you're a sole proprietor: you and the business are the same person. Now you want to rent a small shop on a 1-year lease at $800 a month. If the business fails, can the landlord take your $3,600 emergency fund? And how much tax do you owe on that $8,400? This lesson is about the choices that turn a side hustle into a company.
A business structure is the legal form a business takes. It decides who's on the hook for its debts and how its profit gets taxed.
The wrong setup can cost you your personal savings if things go bad, or thousands in extra tax if things go well.
Pick a structure, register it with your state, get a tax ID, open a business bank account, and pay tax four times a year.
Small-business accountants and CPAs help owners pick a structure and file taxes. Business lawyers write the paperwork. At big companies, tax analysts handle the same questions with far bigger numbers.
What you're looking at: the business on the left and you on the right. With an LLC, a legal wall stands between them: if the shop can't pay its lease, the landlord can go after what the business owns, but not your personal savings.
Who's on the hook, and who pays the tax.
Every business structure answers two questions. If the business owes money, can they come after your stuff? And when the business makes a profit, how many times does it get taxed?
Sole proprietorship
If you start selling on your own and file nothing, you're a sole proprietorship. It's free and automatic. But you and the business are legally the same, so you have unlimited liability: the business's debts are your debts.
- The lease
- 12 months × $800 = $9,600 you promise to pay.
- If the shop closes after 3 months
- 9 × $800 = $7,200 still owed. As a sole proprietor, the landlord can go after your $3,600 emergency fund.
Partnership
Two or more people who go into business together without filing anything form a general partnership. Same deal as a sole proprietor, times two: each partner can be on the hook for the whole debt, even one the other partner signed.
- If a friend joins
- You split the profit, but the landlord could still collect the full $7,200 from either of you.
LLC
A limited liability company (LLC) is a business you register with your state, usually for $50 to $500, plus a yearly fee in many states. It gives you limited liability: you can lose what's in the business, but usually not your personal savings. Two catches: if you sign a personal guarantee, you're on the hook anyway, and the wall doesn't cover harm you cause yourself, which is what liability insurance is for.
- The same $7,200
- The landlord can take what the LLC owns, like its tools and bank account. Your $3,600 stays yours, as long as you didn't personally guarantee the lease.
Pass-through taxes
Sole proprietorships, partnerships and most small LLCs are pass-through businesses. The business itself pays no income tax. The profit lands on your personal tax return, and you pay income tax plus the 15.3% self-employment tax from Lesson 2.3.
- Self-employment tax
- $8,400 × 0.9235 = $7,757.40. × 0.153 = $1,186.88, on top of any income tax.
Corporations and double taxation
A C corporation is its own taxpayer: it pays a 21% federal tax on its profit. When it pays what's left to its owners as dividends, the owners pay tax again, usually 15%. That's double taxation. Why bother? Corporations can sell shares to many investors, and profit kept in the business isn't taxed a second time. Most startups raising money and every company on the stock market are corporations. (An LLC can also choose to be taxed as an S corporation, a pass-through that can cut self-employment tax once profit grows; that's a question for a CPA.)
- If the business made $100,000
- Corporate tax: $100,000 × 0.21 = $21,000. Left: $79,000.
- Paid out as dividends
- $79,000 × 0.15 = $11,850. You keep $67,150. Total tax: $32,850.
What you're looking at: $100,000 of profit, taxed two ways. The top bar is a pass-through LLC: taxed once, at the owner's rate. The bottom bar is a C corporation: 21%, then a dividend tax on whatever it pays out (0% for owners in the 12% bracket, 15% otherwise). Orange is tax; green is what the owner and the business keep. Simplified: it skips state taxes, self-employment tax and deductions.
The paperwork
Making it official takes a short checklist. Register the LLC with your state. Get an EIN, a free tax ID for the business from the IRS. Get any license your city or county requires. Open a separate business bank account, so business and personal money never mix; mixing them can weaken your LLC's wall. And since nobody withholds tax from business profit, pay estimated taxes every quarter if you expect to owe $1,000 or more.
- Quarterly payments
- Self-employment tax alone is $1,186.88, over $1,000, so pay quarterly: $1,186.884 = about $297 each quarter.
Two minutes. Just listen.
Tap any line to jump to it.
Pick the paperwork.
Eight questions about setting up a business. Each one gives you the facts. One try each.
What you're looking at: made-up business owners. Each lists the facts, then asks one question.
The logic, step by step.
When a side hustle starts to look like a business, run these three steps.
Step 1: What could you lose?
- The shop lease
- $9,600 of promises. Without an LLC, your $3,600 savings is exposed.
Step 2: How will the profit be taxed?
- The tune-up shop
- $8,400 of profit, one owner, no investors: a pass-through LLC.
Step 3: Do the paperwork
- Taxes
- About $297 every quarter for self-employment tax.
Worked example: is the LLC worth it?
- The cost. Say your state charges $100 to file and $50 a year after that.
- The risk. If the shop closes after 3 months, $7,200 of lease is still owed.
- Without an LLC. Your whole $3,600 emergency fund could go toward it.
- With an LLC. The landlord collects from the business, not from you, unless you signed a personal guarantee.
- The answer. $100 to protect $3,600 is a good deal, and your taxes don't change: a one-owner LLC is still pass-through.
The lizard drops its tail.
When a predator grabs a skink by the tail, the tail breaks off at a weak spot built for exactly that. The tail keeps wiggling, the predator gets distracted, and the skink runs off. It grows a new tail later. The skink loses a part, not its life.
What you're looking at: an illustration, not data. On the left, a bird holding the skink's dropped tail. On the right, the skink getting away.
Why this sticks. An LLC is a built-in breaking point. If the business fails, creditors can take what's in the business, but you walk away with your personal savings and can start again.
The page you'd copy down.
- Sole proprietorship: automatic, free, unlimited liability. General partnership: same, with 2+ owners.
- LLC: registered with the state ($50 to $500). Limited liability: lose what's in the business, not your savings (unless you personally guarantee).
- Pass-through: profit taxed once, on the owner's return, plus 15.3% self-employment tax. $8,400 → $1,186.88.
- C corporation: 21% corporate tax, then ~15% on dividends. $100,000 → $21,000 + $11,850; owner keeps $67,150.
- Paperwork: register, EIN, license, business bank account, insurance.
- Estimated taxes: pay quarterly if you'll owe $1,000+. $1,186.884 ≈ $297.
Fill in the blanks
Grab a friend or a study group.
Look it up
Find your state's LLC filing fee and yearly fee on its Secretary of State website. Whose state is cheapest?
Name that structure
Each person names a business they know, from a taco truck to Apple. Guess its structure and why it chose it.
Slider challenge
Using the chart above, find a setting where the C corporation leaves more money than the LLC. What do those settings have in common?
Just you and your money.
These stay on this device. Nobody else sees them.
Exam-style questions.
Written the way a college exam would ask them. Each right answer on the first try is worth 10 xp.
On the job: you're a small-business accountant
Jordan runs a dog-walking business and asks you for help. Here's the situation:
- Structure: none filed, so a sole proprietorship.
- Profit this year: $40,000.
- Taxes paid so far: $0. Nobody withholds anything.
- Personal savings: $15,000.
- Next step: Jordan wants to sign a $30,000 loan for a van for the business.
Your task: about how much self-employment tax does Jordan owe? Should Jordan be paying quarterly? What setup would you recommend before the van loan?
See a model answer
Self-employment tax: $40,000 × 0.9235 = $36,940. × 0.153 = $5,651.82, plus income tax.
Quarterly? Yes. That's well over $1,000, so Jordan should pay estimated taxes every quarter: $5,651.824 = about $1,413 each, just for self-employment tax.
Setup: form an LLC so a business debt can't reach the $15,000 of savings. Taxes stay the same, because a one-owner LLC is pass-through. Get an EIN, open a business bank account, and buy liability insurance in case a dog gets hurt. Warn Jordan that the lender may ask for a personal guarantee on the van, which would put the savings back on the hook for that loan.
From side hustle to company.
What you're looking at: a map of where this lesson fits in the course. Read it left to right: the lessons it builds on, this lesson in the middle, and the lesson that comes next.
- Back · Unit 11Profitable and still broke
- Back · Unit 2File your first tax return
- Back · Unit 6Insurance: health, car and renters
- You are hereMaking it official
- Next · Unit 12Did the business make money?