How to transition a side project into a startup

If you’ve got a side project, you might be a fledgling entrepreneur — but just don’t realize it yet.

In 2017, Bankrate released a survey that revealed 44 million Americans claim to have side hustles.

A side hustle (sometimes referred to as a side gig or side project) is essentially a second job. Those working a side project typically seek it out on their own. Side projects also generate a second income, whether the role is becoming a rideshare driver or freelancing as a writer.

This allows gig workers to bring in a little extra money each month that they may use to pay off any debts or add to personal savings.

A side project is more than extra income

However, money isn’t the sole reason many choose to become members of the gig economy.

Side projects often closely align with a person’s interests and passions.

An aspiring chef may have a cooking blog where they share original recipes for meals. A writer may be actively freelancing at several websites and print publications. A skilled yoga instructor may teach classes on the side at yoga studios.

The more these workers keep refining and focusing on their side hustles, the more it becomes possible that their side project can expand to become a full-time business.

The aspiring chef’s cooking blog may be sponsored by food companies that want to advertise on the site. The writer freelancing with several media outlets will continue establishing bylines and growing their online portfolio. The yoga instructor may be considering opening up a studio of their own.

Turning your passion into a business

Greek philosopher Aristotle has been famously quoted for saying, “We are what we repeatedly do. Excellence, then, is not an act, but a habit.”

Individuals who continue to spend more time with their side projects focus on fine tuning their skill sets and growing their social media footprints. This better prepares them to take the next step forward — turning the side project into a full-time business.

3 signs a side project is ready to be its own business

How do you know your side project is ready to become a business? Let’s take a look at common signs a side project is ready to level up into its own business.

Your net earnings exceed $400 yearly.
You’re growing more invested in the side project.
You’re actively preparing to quit your full-time job for your side project.

After we determine if you’re side project is poised for startup status, we’ll explore what entrepreneurs need to do next once they’re ready to pivot the hustle into its own business.

1. Your net earnings exceed $400 yearly

According to Form 1040 from the IRS, individuals with net earnings of at least $400 from self-employment are required to file a tax return. The only exception to this filing rule are self-employment net earnings that are less than $400 for the tax year.

Entrepreneurs might believe that they need to earn significantly more for their side project to actually become a business.

The IRS, however, recognizes side projects earning more than $400 yearly to be the threshold toward self-employment.

Earning $400 a year may not yet prepare your side project to become its own business, but the income earned must be reported in tax returns. Otherwise, you could be facing potential tax penalties before your side project has a chance to transition into its own company.

2. You’re growing more invested in the side project

This sign tends to happen in gradual increments. You might find yourself at your full-time job considering the following aspects of your side project.

Return on investment (ROI) and continual growth

How do plan to grow your side project and its customer base as time progresses? Will you be investing in marketing and advertising? What expenditures are your dollars currently going towards? Has the ROI from these expenditures been positive or negative?

Hiring

Is your side project growing to the point where you need help from a professional? Are you starting to think about outsourcing some of your workload to others with complementary skill sets?

Bringing the side project to work

Do you respond to emails from customers throughout the day or complete freelance work during a down period? Chances are you might be bringing your side project to work — and gradually doing a bit more each day than focusing on your day job’s workload.

Once a side project becomes profitable — and stays profitable for at least three out of five years — it is no longer considered to be a hobby.

It’s perfectly fine to be invested in your side project, but it’s important to be mindful that you do not drop the ball or start to slip on your full-time workload either.

3. You’re actively preparing to quit your full-time job for your side project

As your side project grows and becomes more successful, you might feel like it’s time to retire from your full-time job. This is an exciting feeling, but actually going through with quitting requires a great deal of practicality.

It’s recommended that you do not put in your two weeks before you thoroughly answer these questions.

Are you financially prepared?

If you’re currently paying off a loan or have debt, it’s advised that you stay where you have financial security. Pay off any existing debt as quickly as possible. Then, begin setting aside money for an emergency nest egg and money for the startup.

Create spreadsheets of your existing monthly expenses to track how much you’ll need to earn each month to keep the business thriving as well as yourself.

This approach might mean you’ll be in limbo for a bit before making the leap into entrepreneurship. However, it also ensures that your leap forward comes with a safety net, stronger credit scores, and less worries you may run out of money and wind up dissolving the business.

How will you stay insured?

Many full-time jobs offer benefits including health insurance, 401(k) plans, and disability insurance. Once you leave your job, you’ll be in charge of determining how to stay covered with necessary insurance plans afterwards.

Can you handle entrepreneurship?

Meet with a mentor, or someone you know that has had a similar career path to the one you plan to pursue. They will likely be frank about the realities of entrepreneurship, including the number of hours you’ll actually have to work (hint: it’s more than 40 a week) and the amount of time and energy that must be invested in the role.

Not everyone can handle entrepreneurship — and that’s OK!

If you know you can do this, go for it. Otherwise, consider keeping your side project as a side project until you feel a bit more comfortable you can run it as a business.

How to transition side projects into startups

If all three signs are pointing towards yes, it’s time to begin transitioning your side project to become its own small business.

Entrepreneurship may be a risky field, but you can minimize the legal risks involved by checking these legal items off your to-do list.

1. Draft a business plan

Side Project Business Plan Doodle
This document is going to act as a blueprint for your business. Remember that drafting one does not ensure your business will be instantly successful.

What a business plan does is allow entrepreneurs to establish a common vision for the startup and objectively evaluate its feasibility.

Entrepreneurs may write a business plan in a traditional or lean format. Let’s briefly sum up what should be included in either version.

Traditional business plan

A traditional business plan is fairly detailed and is around 30 to 40 pages in length. These plans include:

An executive summary that explains who you and your business are
What the startup does
The industry
The location
How it makes money
Why consumers will want to invest in your offerings

This section is followed up by a business description (with more specific details about your services and products), an industry analysis of your competition, a market analysis of your audience, and who makes up the startup’s management team. There are also sections dedicated to the startup’s cash flow and financing requests from potential investors.

Lean startup plan

Lean startup plans are much more straightforward. They also tend to be shorter, sometimes no longer than a page.

Inside a lean startup plan, you can find the startup’s value proposition, and information about the side project’s key partnerships, resources and activities.

There are also details about the customer segments and relationships and the revenue streams for the side project.

2. Incorporate or form an LLC

The benefits that come with incorporating or forming an LLC early on for your side project turned small business are endless.

Incorporating provides liability protection (found with most entities), significant tax savings, and the ability to establish credibility with consumers.

After all, who wouldn’t feel confident about doing business with a company that has “Inc.” or “LLC” in their business name?

Not sure which entity is the “best” one for you? Consider these popular legal structure options below.

Sole proprietorships

This entity allows entrepreneurs to exercise complete control over their side project-turned-business. They’re the ones calling the shots! Sole proprietorships are fairly affordable to form and require little filing paperwork.

However, sole proprietorships are one of the few entities that do not provide liability protection. In the event an unforeseen circumstance impacts the startup, the owner will be held fully responsible and may have their personal assets impacted as well.

Limited liability company (LLC)

Unlike a sole proprietorship, an LLC provides the business with liability protection. This separates professional and personal assets.

Liability protection aside, LLCs offer a lot of flexibility. You even get to choose the entity, S Corporation or C Corporation, that you would like to be taxed as an LLC!

Corporation

Your side project might be capable of going global, or public, one day. If that’s the plan, you’ll be glad you incorporated as a corporation. Much like an LLC, a corporation also provides liability protection.

However, the entity is much less flexible than an LLC. This entity has a formal structure that makes it possible to accept money from interested investors.

Partnership

Side Project Partners Shaking Hands
Two or more individuals may start a business together if they incorporate as a partnership. Remember that if you choose a partnership as your entity, make sure you’re going into business with a partner you know can make decisions with and work together for the greater good of the startup.

Editor’s note: Make sure your brand is ready to go bigger by securing a strong domain name and attaching it to a professional website and email address.

3. Register the side project’s trademarks

Does your side project have a unique name, design, tagline or logo associated with it? This is your side project’s trademark.

It’s a valuable piece of intellectual property for your budding business.

The mark helps differentiate your company from competing businesses on the market and allows you to begin building brand recognition.

If you have a unique mark, it’s important that you file a trademark application as soon as possible.

The general rule of thumb is to register a trademark after incorporating or forming an LLC for your side project. Once your trademark has been registered, no other business can take or copycat the mark from you and pass it off as their own creation.

Ready to register a trademark?

Conduct a name search first through the USPTO trademark database to see if the mark is available. If there are no pending or registered applications for the mark, you are free to file a trademark application.

Remember to pay the associated fee required with your application. You are also welcome to consult an attorney with any other questions you may have about trademarks or the filing process.

While you’re waiting for your trademark’s registration, you can monitor your application through the USPTO’s Trademark Status and Document Retrieval (TSDR) system. Here, you can conduct a “trademark watch” to ensure other pending applications with similar marks are not registered.

Busy entrepreneurs with a lot on their side hustle’s plate may also work alongside a third party. Online filing service companies provide trademark watch services. They work to keep an eye on the status of your trademark. This gives entrepreneurs peace of mind and allows them to focus on what they do best: turning their side project into a booming standalone business of its own.

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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