Andre Spicer, a business professor, was delighted when his 5-year-old daughter expressed interest in an entrepreneurial endeavor. He couldn’t have foreseen the outcome, though: a firsthand lesson in side hustle mistakes and a nearly $200 fine, according to a July article in the Telegraph.
Spicer and his daughter decided on a lemonade stand and set up shop on a busy sidewalk near their London home. They quickly attracted customers and sold out.
Unfortunately, the father-daughter duo also attracted the attention of local law enforcement.
An officer approached and “read a lengthy legal statement—the gist of which was that because my daughter didn’t have a trading permit, she would be fined £150,” Spicer wrote, an amount equal to about $200. His daughter burst into tears and repeatedly asked, “Have I done a bad thing?”
This experience is a cautionary tale for side hustlers and other small-business owners, proving that it’s all too easy to run afoul of the law when you try to launch a side business.
6 Common Legal Mistakes Side Hustlers Should Sidestep
Ignorance of local business laws and legal requirements could result in hefty fines and fees. These needless costs can set you back or permanently damage your side business.
You probably can’t afford to make such mistakes with a fledgling side hustle. Here’s a look at common ways your side hustle could break the law—and how to make sure it doesn’t.
1. Failing to Get Proper Business Licenses and Permits
Let’s start with the example of Spicer and his daughter. They were fined for operating a business without proper permits. Business laws in the US differ from those in the UK, but ignoring them could land you in similar trouble.
Here are just a few of the permits and licenses you might need to offer services or products.
- Local business licenses: Most cities or counties require business licenses and will levy fees or force you to suspend operations if they discover an unlicensed business. Your local Small Business Administration (SBA) office should be able to help you sort through the local rules and figure out how to get a business license.
- Occupation-specific licenses: There may be regulations for the specific kind of business you own. For example, you’ll likely need a specific license for a side business preparing or selling food or providing home-based child care.
- Federal business licenses and permits: The SBA provides a list of federal business licenses and permits you might need, such as liquor licenses.
- Doing business as: If the customer-facing name you use for a business differs from its legal name, you’ll have to file the former as your doing business as (DBA) name. You can do so by filing a DBA application with your local government office, which usually includes a fee.
Though some requirements are obvious, side hustlers often won’t find out about lesser-known permit requirements unless they check local commercial regulations regularly and thoroughly.
2. Violating Local Zoning Laws or Your Lease
Many side hustles and startups are homegrown. But when you start a commercial enterprise in your home, you can run into legal red tape.
Taking the time to ensure your business is properly zoned will prevent costly fees or a shutdown of your new business. Check the following documents for rules and restrictions on doing business out of your home.
- Local ordinances and zoning laws: Your city or county might restrict businesses from operating in certain residential areas, and some local laws might allow only certain kinds of home businesses. You can find and review those rules at your city or county clerk’s office, on municipal government websites, or at your local library.
- Your lease agreement: If you have a landlord, be sure that your business operates within the terms of your contract. Many leases have clauses that forbid subletting or short-term renting, for example, which could kill an Airbnb side hustle.
- Your homeowners association (HOA): If your home or condo is in a neighborhood governed by an HOA, check out its rulebook (often called a Declaration of Covenants, Conditions, and Restrictions) for any rules concerning home businesses.
The above regulations might also limit how or when you can operate your business. For instance, an on-the-side carpenter who works in the evening might violate quiet hours or noise ordinances. A sign advertising an in-home hair salon could be considered an eyesore by an HOA.
You don’t automatically have to accept a “no” you get from the city, your landlord, or your HOA, though. Check for a way to appeal the rule and to ask for a variance or exception.
3. Infringing on Your Employment Agreements
You probably don’t want your side business to get you fired from your day job, right? Avoid this outcome with a full review of your employer’s rules and the hiring documents you signed, including the company’s employee handbook and policies, your employment contract, and any nondisclosure or noncompete agreements. Watch for language that clarifies whether your business would violate any of your contract clauses. If these documents don’t offer clear answers, ask a human resources manager.
Even if your company allows side businesses, you should proceed with caution. Avoid conflict between your employment and side hustle with these tips.
- Work on your own time and on your own property: Don’t work on your side hustle on company time. And don’t use company property to work on your side hustle, either, whether it’s a company-owned laptop, email address, or software service account login.
- Don’t use your employer’s intellectual property: Never use employer-owned proprietary knowledge, trade secrets, contact lists, or other materials for your side business.
- Differentiate your side business from your employer: You shouldn’t be competing with your employer. If your business is similar, try to serve a separate target market, and make sure your products or services are sufficiently unique.
Better yet, build a business that’s completely different from your day job. You’ll avoid these legal issues and prevent side hustle burnout.
4. Skipping Business Liability Insurance
Protecting your business from legal issues includes insuring yourself against lawsuits and other legal actions people might take against you. Business liability insurance covers judgments as well as the costs of defending lawsuits.
Take the example of Student Loan Hero writer Kat Tretina, who built her own pet-sitting business on the side. She’d heard horror stories about sitters being held responsible for a pet damaging furniture or for a burglary after losing a key, so she knew getting her own policy was a must.
Many sharing economy–based companies such as Rover, Uber, and Airbnb include insurance as part of their services. Owners starting up on their own, however, will need to find and purchase their own business liability insurance.
5. Mishandling Business Taxes
When you start a new business, it’s crucial to set out with the end in mind—specifically, the end of the fiscal year, when you’ll have to file taxes for your side business.
Complicated business tax codes make it easy to file an erroneous return or fail to claim an important deduction. Either mistake can cost your business money or draw the scrutiny of the IRS.
Forestall unexpected tax bills or penalties and fees from missed tax payments by following some business tax best practices.
- Set aside money for taxes or pay taxes quarterly: By setting aside money and paying on time, you’ll avoid late fees, penalties, and sky-high tax bills that you can’t afford come April.
- Keep all receipts for business purchases: This will make it easy to calculate and write off your side hustle costs—and cover your bases in case of an audit.
- Separate business funds and purchases from your personal finances: Keeping separate accounts for your business will help ensure you don’t mix up any expenses.
- Create a specific place and time to work on your business: Having a set number of hours per week and square footage you dedicate to your business will make it easier to track and deduct business costs when you file taxes.
- Pay others appropriately: Say you have a friend who runs your books for you. Is she your employee or a contractor? You’ll need to know the difference to calculate taxes you owe and file appropriate income tax forms.
- Choose the right business structure: Do you run a sole proprietorship, general partnership, or limited liability company? You need to know, because how you set up your side business will affect how you pay and file taxes.
6. Trying to DIY When You Need Professional Help
The above tips offer some great guidelines to get a side business up and running without too many legal hang-ups. But at the end of the day, they can’t replace professional legal and tax advice.
Local business laws and regulations can vary widely, as can your personal business plans, structures, and management systems. You can and should read up on commercial regulations and tax codes, but the best way to know for sure that your side hustle complies with all legal and tax concerns is to hire a professional.
An hour with a lawyer or accountant is a worthwhile investment to shore up your business practices and ensure your operation is on the right side of the law. When in doubt, hire a professional to clarify any fuzzy areas. Your growing business—even if it’s just a lemonade stand—could depend on it.
Starting a side hustle takes some planning, but it can really pay off if it’s done right. For help finding loans and getting your business off the ground, take a look at Credit.com’s Small Business Loan marketplace.