Starting a business on the side while still holding down your day job is an ideal way to dip your toes into entrepreneurial waters. It’s also a good way to earn some much-needed supplementary income. But in most cases, you want to hang onto your regular job, whether it’s because the regular paycheck will help your new start-up business stay afloat until it becomes financially viable or whether you’re just wanting to start a side business to earn some extra money.
It’s, therefore, a good idea to make sure your idea to start an LLC won’t lead to unwanted consequences when it comes to your job.
State LLC formation rules and regulations
You may think you are barred from starting an LLC while employed at another job because of state regulations for forming an LLC.
State laws regulating LLC formation do vary from state to state, but while there are different procedures to follow depending on the state in which you live, states do not look into your employment status when you’re submitting an application to form an LLC. When it comes to complying with the legal rules required to start an LLC, whether or not you’re employed at the time you start a business is irrelevant to your state’s LLC registration regulations.
Your employment contract
Probably the most important thing you will need to consider when starting a small business on the side is the wording of your employment or job contract or, if you don’t have an employment contract, your employer’s policy concerning employees running side businesses.
For example, is there a provision about ownership of inventions or innovations created or developed by you as either part of your job, or during company time?
Often, any innovations an employee has developed while on the job or while using company resources will belong to the employer, so this is an important thing to keep in mind if your new side business involves the use of such a new invention.
But what if your new business doesn’t involve a new invention or innovation? In that case, will your side business compete with your employer’s business? Or is there some other conflict of interest with your employer that might arise as a result of you starting a business while you’re still employed?
Many employment contracts have non-compete provisions prohibiting employees from starting businesses that puts them in competition with their employer; job contracts may also contain clauses prohibiting employees from engaging in work outside of their job that gives rise to a conflict of interest with their employment.
Should you tell your employer?
There’s quite a bit of debate as to whether you should tell your employer you’re operating a side business. On the one hand, if your employer knows of your new business venture, he or she may start worrying about your commitment to your day job; there may also be some worry you’ll use company resources and company time to work on your own business. On the other hand, your new business might provide a good or service that’s ideal for your employer, who could become one of your business’s first customers. While it’s often best to be as upfront as possible with your employer, only you know your employment circumstances well enough to decide whether you should tell your employer about your new business.
Dealing with tax issues
Unless you choose to have your LLC taxed as a corporation—in which case your company will be paying LLC taxes as a separate corporate entity and filing its own corporate tax return—you’ll be reporting your LLC income on your own personal tax return by filling out Schedule C to Income Tax Form 1040
Making it work
So you’ve checked your employment contract, and there’s nothing stopping you from starting your new business while you’re still employed at your day job. Here are a few tips to help smooth the road to running a successful side business while remaining employed:
- Be aware of the time commitment a side business requires. While you’ll be working part-time hours on your new business venture, these hours will take place on top of your regular work hours. This means you’ll have a lot less free time for your personal life.
- Be conscientious about not working on your business while you’re at your day job. It might take only a few seconds to answer a customer’s email, but those few seconds should not be done on your employer’s time. Clearly separate your job’s hours from your new business’s hours; giving in to the temptation to work on your own business while on the job is unethical and could also end up placing you in hot water with your employer.
Just as you shouldn’t work on your business while on company time, you also shouldn’t use company resources and equipment for tasks you’re doing for your own business. It might be tempting to make a few copies after work hours on your employer’s photocopier, but again such conduct is unethical and could also lead to unwanted consequences.