Small Business

Your side hustle may be at risk — here are steps you can take to protect it

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A side hustle can be a good way to make some extra cash, stretch your entrepreneurial wings and perhaps eventually become a full-time business owner.

It can be anything from blogging to being an Uber driver or a handyman. A side hustle is usually in addition to another “main” job.

Yet just as important as running your side business is making sure it — and you — are protected in case something goes wrong, experts advise.

For some, that could mean insurance outside of their personal coverage. It also means having the right structure for your business.

“There is a lot of opportunity in terms of earning an income, but there are other issues — such as a record keeping, tax reporting, expenses and business risks — that a lot of times get overlooked,” said certified financial planner Brian Ellenbecker, a senior financial planner with Baird in Milwaukee.

If you are thinking about starting a business, or already have one, you aren’t alone.

If you have a home, assets built up, things like that — those could all be subject to a negligence lawsuit if you did something wrong in the business

Jason Pappas

insurance broker

More than one-third (38%) of millennials are pursuing an entrepreneurial side business, compared with 26% of Generation X members and 11% of baby boomers, according to a 2018 survey by Liberty Mutual Insurance.

Yet, 54% of millennials with a side hustle don’t have insurance other than their homeowners or renter’s policy, the poll found.

The reason: lack of knowledge. Of those surveyed, 40% of millennials said additional coverage never occurred to them.

“Small-business owners, especially those that are embarking on a new business for the first time or a side hustle, there are so many things to manage … so many balls in the air, insurance is not always top of mind,” said Tyler Asher, president of independent agent distribution at Liberty Mutual Insurance.

Choose your structure

The first thing you should do when starting a business is decide how to structure it.

If you are the only owner, then establishing a sole proprietorship is the simplest route to take because, apart from obtaining any necessary permits or licenses, there isn’t much more you need to do.

“The drawback is [that] there is no separation between the business and the owner,” Ellenbecker said.

The owner receives all the income but “they are also responsible for any expenses or liabilities that arise from the business.”

The other option is a limited liability corporation, or LLC, which separates your personal and business assets and generally protects you from personal liability if something happens with your business.

If forming an LLC, keep in mind that each state has its own rules on how to create one, so do your research.

Do you need additional insurance?

Whether you need business insurance is dependent on the type of side business you run and your level of risk tolerance, according to insurance broker Jason Pappas.

You may be a contractor working on someone’s house or you could be a writer who works from home and therefore don’t have much at stake.

“A lot of entrepreneurs have a pretty high risk tolerance,” said Pappas, founder of Queen City Risk Management, based in Buffalo, New York.

“It is more a question of at what point in your business are you OK with something going wrong and you losing everything that you built in the business.”

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A business owner’s policy includes general liability coverage. That may cover things such as tenant liability if you are renting space or products coverage in the event that one of your creations hurts someone.

There is also usually property coverage, which protects your stuff — e.g., computers or tools — as well as coverage if you own a building. Some companies may even include errors and omissions, which protects you if you give someone incorrect information.

If you are a driver for a ride-hailing company, such as Uber or Lyft, be sure to read the fine print in their provided insurance — it has different tiers for when a passenger is in the car and when the driver is alone.

That’s important because most personal auto policies won’t cover you if you get into an accident while working for one of these companies, Pappas said. In fact, he said, he knows of instances where insurers have canceled a personal policy after discovering the person worked as a driver, even though the accident may have happened on personal time.

His suggestion: Take 15 or 20 minutes to look into what it would cost you to insure your business. It may be $500 a year, or lower.

If you encounter problems, without insurance, you could wind up with your company bankrupt. If you are a sole proprietor, it could be worse.

“If you have a home, assets built up, things like that — those could all be subject to a negligence lawsuit if you did something wrong in the business,” Pappas said.

Don’t forget about taxes

Another thing people often forget about is keeping a detailed enough record to substantiate their business tax deductions, Baird’s Ellenbecker said.

“One of the biggest tax benefits of a business is the ability to deduct certain expenses,” he said.

They have to be ordinary and necessary to carry out the business, but you have to keep good records. That could be as simple as receipts.

However, if you use your car for business, you’ll have to do things like keep a separate log that tracks the dates, distances and what you were doing for your business, Ellenbecker said.

CHECK OUT: Suze Orman: ‘Do not let these markets scare you — you want these markets to go down’ via Grow with Acorns+CNBC.

Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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