In addition to being a great source of extra income, a side hustle makes an excellent stepping stone to running your own full-time gig. Still, even though this freelance gig or contract work may just be a part-time job, you can protect yourself from some costly legal mistakes by first ensuring your enterprise is compliant. So, what does “compliance” mean for a side-hustle? States and municipalities require that all small businesses — no matter their size — abide by specific laws and regulations. Yes, even a side hustle selling homemade soaps or jewelry needs to abide by laws. Failure to follow local rules and regulations can lead to fines or loss of privileges. Why Business Compliance Is Vital for Your Side Hustle Business compliance allows state and federal governments to maintain a sense of order. It’s intended to protect you, your business, and your customers. Most compliance involves filing and retaining paperwork, although there are some exceptions. To simplify the compliance process, you can break compliance down into 2 categories: external requirements and internal requirements. External requirements include everything from filing and paying federal and state taxes to completing necessary paperwork. This is the category of requirements that most business owners are likely to remember because the consequences are more direct and familiar — think late filing fees or penalties. Internal requirements can be a bit trickier. These include documents and records that you may be required to keep on file at your place of business, like copies of information sent to the federal and state government. You’ll need this information on hand if you ever decide to sell your business or apply for funding or loans. Incidentally, good recordkeeping — of both internal and external requirements — will keep you safe with the government and safeguard you in case anyone decides to take legal action against your business. Compliance documents do one more thing, too: they show you’re acting according to federal and state laws and following industry standards, which adds legitimacy to any organization. Tips for Keeping Your Side Hustle Compliant Keeping your side hustle compliant gives you the peace of mind of knowing you’ve satisfied all requirements so you can run your enterprise with confidence. While compliance requirements vary from state to state and business structure, there are some universal requirements you can expect. Employer Identification Number (EIN) Are you operating your side hustle as an LLC or corporation? Then you must have an EIN, which you can obtain from the IRS. If you went down a different road and chose to operate as a sole proprietorship, you can choose between using an EIN or your social security number. Business License No matter where you run your side hustle, most municipalities require that you have a license to practice business, whether in your city, county, or state. This holds true for sole proprietors, too. Business licenses generally need to be renewed yearly or semi-annually. Franchise Taxes If you run an LLC, corporation, or, in some cases, a sole proprietorship, you may need to pay a franchise fee or franchise taxes — even if your business isn’t actually a franchise (the term “franchise” has multiple connotations and/or meanings). This varies by state and is generally only required when you sell physical items. Federal Taxes As the saying goes, the only things certain in life are death and taxes. All businesses are required to pay federal taxes, including income and employer taxes. If you’re just starting your business, you may want to discuss your operating plans with a small business tax advisor or CPA. Annual Report or Biennial Statement If you operate as an LLC or corporation, most states require that you check in once a year or every two years. Luckily, the state should let you know when your annual or biennial reporting is due. Check the date carefully: the due date of your report/statement could be the anniversary of when you formed your business or it could be another date entirely. When you file for the first time, you need to submit an initial report after you’ve incorporated as an LLC or corporation. There will generally be a deadline date for filing this first report, too. Report or Statement Filing Fees Biennial statements and annual reports also usually require paying mandatory filing fees. Articles of Amendment Making changes to your company, such as changing its name, adding officers, or updating its address? You’ll need to report these changes in your company’s articles of amendment and abide by any state requirements for notification, voting, and filing. Certificate of Good Standing Once you ensure that your side hustle possesses all of the required documents to run a business, consider obtaining what is known as a Certificate of Good Standing. This document verifies that your company is in full compliance with local and state laws and regulations. The certificate may be required when you open banking accounts, apply for financing and licenses, and executive contracts. You’ll also need a Certificate of Good Standing if you decide to sell your business. Certificates of Good Standing contain your company’s official name, including any DBA. The document confirms that you are authorized to conduct business in your area by verifying that your company is current on fees and taxes and that you have filed all necessary reports. LLC and Corporations — Special Requirements Running a corporation means tracking additional compliance requirements including shareholder and director meetings and maintaining written meeting minutes. In general, corporations require complex management practices that might not be ideal for entrepreneurs taking their first steps with a side hustle. Deadlines for Filing Certifications, Permits, and Licenses It’s essential to keep current on any certifications, permits, and licenses that apply to your business. It’s advisable to check with your local government for applicable deadlines and add them to your calendar so you don’t miss a deadline. When you do, it usually means more work and possible fines. What If Your Business Isn’t in Good Standing? If your side hustle isn’t in good standing, you’re looking at several negative consequences. You could be responsible for fines, late fees, and other penalties. Worst yet, you could find it difficult, if not impossible, to open bank accounts, apply for licenses, secure financing, and execute contracts. If that wasn’t enough, lenders are unlikely to finance companies not in good standing. Taking Your Side Hustle Full Time At some point, you might find it’s time to make your side hustle a full-time gig. If you’ve been working your side hustle as a sole proprietor and want to make it your full-time job, now may be the time to apply for an LLC. It is also an excellent time to open a business banking account if you’ve been using your personal account, which will help separate your business and personal finances, too. If you take this step, don’t risk administrative dissolution by being noncompliant. Dissolution will leave you personally exposed to company liabilities. The best way to prevent this is to address compliance issues ASAP. Plus, this will ensure your company is in good standing and lets you focus on running your incredible business. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.