Do You Need an LLC for Your Side Hustle?

The Guru Problem

Every other YouTube video about starting a side hustle includes this advice: "First, form an LLC." It's usually delivered with the confidence of someone telling you to put on your seatbelt before driving. As if operating without an LLC is some kind of reckless financial behavior that will inevitably end in disaster.

I bought into it. When I started my DoorDash side hustle in 2020, I spent my first weekend researching LLC formation instead of, you know, making money. I was watching videos from people who sell LLC formation courses, which — in hindsight — is like asking a car salesman if you need a new car.

The truth is more boring than the gurus want you to believe. An LLC is a useful legal tool. For some side hustlers, it's necessary. For most people making $500-2,000 a month delivering food or freelancing on Fiverr, it's an expensive formality that provides almost no practical benefit. I wish someone had told me that before I spent $300 on a Texas LLC filing when I was earning $800 a month from DoorDash.

What an LLC Actually Does (and Doesn't Do)

An LLC — Limited Liability Company — does one thing well: it creates a legal separation between your personal assets and your business liabilities. If someone sues your business, they can generally only go after the business's assets, not your personal savings, your car, or your house. That's the "limited liability" part.

That's it. That's the whole product.

An LLC does not reduce your taxes. I'm going to say that again because it's the single most misunderstood thing about LLCs: a single-member LLC does not change your federal tax situation at all. The IRS treats a single-member LLC as a "disregarded entity," which is bureaucratic language for "we're going to pretend this doesn't exist." You file the same Schedule C. You pay the same self-employment tax. You claim the same deductions. The LLC is invisible to the IRS.

The YouTube gurus usually follow up with "but you can elect S-Corp status!" and yes, that's a real thing that can save you money — but S-Corp election is a separate decision from forming an LLC, it comes with its own costs (payroll processing, additional tax filings), and it generally only makes financial sense when your net profit exceeds $50,000 or so annually. That's not where most side hustlers are.

An LLC also doesn't make you look more "professional" in any meaningful way. Your clients don't care. The gig platforms don't care. Your bank might require one for a business account, but many banks — Relay, Mercury, Novo — let sole proprietors open business accounts without an LLC.

When You Genuinely Need an LLC

There are real scenarios where an LLC earns its cost. Not because a YouTube personality said so, but because the liability math actually works out.

You're signing contracts with clients. If you're a freelance web developer building a $15,000 e-commerce site and something goes wrong — the site crashes, the client loses sales, they decide to sue — an LLC means they're suing the business entity, not you personally. Without it, your personal assets are on the table. The bigger the contracts, the more important this becomes.

Your work creates real liability risk. If you're a freelance photographer shooting a wedding and you damage the venue, or a personal trainer whose client gets injured, or a consultant giving advice that a business relies on for major decisions — these are situations where a lawsuit isn't some theoretical scenario. It's a realistic risk that an LLC helps contain.

You have personal assets worth protecting. If you own a home, have significant savings, or have other assets that a creditor could target, the LLC creates a barrier. If you're 23, renting an apartment, and your most valuable possession is a PlayStation, the liability protection is protecting nothing.

You have a business partner. Once there's more than one person involved, an LLC with an operating agreement is almost mandatory. It defines ownership percentages, profit distribution, decision-making authority, and what happens if someone wants to leave. Operating a multi-person business as a general partnership without a written agreement is a recipe for a friendship-ending dispute.

When an LLC Is a Waste of Money

I'm going to be blunt about this because nobody else seems willing to be. If you're driving for DoorDash, Uber, or Instacart, an LLC is almost certainly not worth the cost. The platform carries its own insurance. Your personal auto insurance covers accidents. The chance of a customer suing you personally for a delivery gone wrong is vanishingly small — and even if they did, most gig workers don't have enough assets to make a lawsuit worthwhile for a plaintiff's attorney.

Same goes for low-revenue freelancing. If you're making $300 a month selling Canva templates on Etsy, the $300 LLC filing fee plus the annual maintenance cost (which varies by state — California charges $800 per year just for the privilege of existing as an LLC) doesn't make any sense. You'd need to sell a lot of templates just to cover the cost of the entity that's supposedly protecting you.

And here's the part that the LLC evangelists never mention: an LLC's liability protection can be "pierced" if you don't maintain it properly. That means keeping separate bank accounts, not mixing personal and business funds, filing your annual reports, maintaining proper records. If you treat the LLC like a formality and commingle funds — which most small side hustlers do — a court can ignore the LLC entirely and come after your personal assets anyway. The legal term is "piercing the corporate veil," and it happens more often than people think.

The Real First Steps (Before an LLC)

If you just started a side hustle, what actually matters — in order of importance, not in order of what sounds impressive on Instagram:

Open a separate bank account. This is step one, and you can do it today without an LLC. A separate checking account for business income and expenses makes tax time dramatically easier and creates a paper trail the IRS respects. I use Relay — no minimum balance, no monthly fee, and the sub-accounts let me separate tax savings from operating money. But any free checking account works.

Track every expense from day one. I didn't do this my first year and spent a miserable weekend in January trying to reconstruct 12 months of expenses from bank statements and email receipts. Now I use QuickBooks Self-Employed, which auto-categorizes most transactions. It took about 2 hours to set up and has saved me at least 10 hours at tax time each year since.

Get an EIN. It's free from the IRS, takes 5 minutes online, and lets you use a business tax ID instead of your Social Security number on W-9 forms. You don't need an LLC to get one. This is a privacy and identity protection measure that costs literally nothing. (More on this in our EIN guide.)

Consider insurance before an LLC. A general liability insurance policy for a small side hustle runs $300-600 per year and actually covers you if something goes wrong — which is more than an LLC does. An LLC limits who can be sued. Insurance actually pays the claim. They solve different problems, and for most side hustlers, insurance is the more useful one.

Why I Eventually Formed One Anyway

I formed my LLC in Texas in 2022, about two years after I started side hustling. The filing fee was $300, I did it online in about 20 minutes, and I immediately felt like I was playing business dress-up. For the first few months, literally nothing changed about how I operated except that I had a certificate of formation saved in a Google Drive folder.

But by that point, my situation had shifted. I was no longer just doing DoorDash — I had freelance clients, I was signing contracts, and my annual side hustle income had crossed $40,000. The contracts were the tipping point. When a client asks you to sign an agreement with indemnification clauses and you're signing as yourself personally, the liability exposure starts to feel real.

I also wanted to open a business credit card, and some of the better ones required a registered business entity. And I knew that if I ever wanted to elect S-Corp status down the road — which I was starting to think about as my income grew — having the LLC already in place would make that transition simpler.

Was it worth the $300? At the income level I was at by then, yes. Would it have been worth it in year one when I was making $800 a month from DoorDash? Absolutely not. The timing matters more than the formation itself.

For more on the LLC formation process and ongoing requirements, check out the full LLC guide. And if you're still in the early stages of separating your finances, start with our guide on separating personal and business finances — that's the foundation everything else builds on.

Bruce Samuels

Side Hustle Finance Writer

Bruce spent 12 years in logistics management before going full-time freelance in 2023. He started MoneySavvyHQ after an $1,800 IRS penalty taught him that side hustle taxes don't figure themselves out. He's not a CPA — just a guy who got burned and did a lot of homework.