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 you just want to start a side business to earn some extra money.
Therefore, it's 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
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 don't 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.
Employer conflicts
Probably the most important thing to consider when starting a small business on the side is the wording of your employment contract, if you don’t have an employment contract, your employer’s policy concerning intellectual property and noncompetition.
Intellectual property
For example, many employment agreements or contracts have provisions about ownership of inventions or innovations created or developed by you, either as part of your job or during company time. If this is the case, you may face legal issues if any new side business involves the use of such a new invention.
Noncompetition
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 noncompete 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.
While noncompete clauses are controversial and may not be enforceable, it's not worth the legal hassle of defending yourself against legal action.
Informing your employer
You are generally not required to inform your employer about your life outside of work, but this situation isn't so black and white.
On the one hand, if your employer knows of your new business venture, he or she may start worrying about your commitment to them; 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. It could also help your employer understand you better or even open up new job opportunities within your organization.
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.
Tax implications
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.
Balancing your work
Ready to start your LLC? Here are a few tips to help you run a successful side business while remaining employed:
- Be aware of the time commitment a side business requires. While you’ll probably have to work part-time hours on your new business venture at first, 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. Watch for burnout and, if you rely on the income from your primary job, don't let your performance suffer or you may lose it.
- 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 primary job’s hours from your new business’ 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.
- Don't mix resources. 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 such conduct is unethical and may be a violation of your employment contract.
Starting a business takes courage. LegalZoom makes sure the legal details don’t stand in your way, from the day you register until the day you retire.
LLC formation FAQs
Can I legally form an LLC while working a full-time job?
Yes, you can legally form an LLC while working full time—no state in the U.S. has laws that prevent you from starting an LLC just because you have a job. When you apply to form an LLC, states only care about basic compliance requirements like choosing a name, picking a registered agent, and filing the right paperwork. They don't ask about your employment status or require you to tell them where you work.
What should I check in my employment contract before starting an LLC?
First, look for noncompete agreements that stop you from starting businesses in the same industry as your employer. Second, check for intellectual property clauses that say your employer owns anything you create, even during your free time. Third, look for conflict of interest policies that require you to tell your boss about side businesses or that ban activities that might interfere with your job performance. Some contracts also have rules about using company equipment or working on personal projects during company time.
How will having an LLC affect my taxes if I'm already employed?
Having an LLC while employed means you'll pay taxes on both your job income and your business income. Your LLC income gets added to your regular tax return, so you'll pay income tax on everything together. The tricky part is that LLC income also requires you to pay self-employment taxes. The good news is that your LLC can deduct business expenses like equipment, marketing costs, or a home office, which can lower your overall tax bill. Just make sure to keep detailed records and separate your personal and business expenses.
What happens if my LLC business competes with my employer?
Starting an LLC that competes with your employer can get you fired and possibly sued. Most employment contracts have noncompete agreements that specifically forbid this kind of activity. Your employer could terminate you immediately and take legal action to shut down your business or demand damages. Even if your contract doesn't explicitly mention competition, your employer might argue that you're using inside knowledge, client relationships, or company resources unfairly. The safest approach is to choose a completely different type of business that doesn't overlap with your employer's industry or customers.
How do I manage time between my job and LLC without getting in trouble?
You must keep your LLC work completely separate from your job time and resources. Never work on your business during company hours, use company equipment, or handle business calls at work. This could very reasonably lead to repercussions with your employer. Plan to work on your LLC only during evenings, weekends, holidays, and lunch breaks away from the office. Use your own computer, phone, and internet connection for all business activities. Even checking your business email on a company computer could violate your employment agreement.
What are the main benefits of forming an LLC while keeping my job?
The biggest benefit is liability protection. Your LLC shields your personal assets, like your house and savings account, from business debts or lawsuits. If someone sues your business, they generally can't go after your personal property. Having an LLC also makes your side business look more professional and credible to customers and potential investors. Finally, keeping your day job provides financial security while you build your business. You have steady income and benefits while testing your business idea, which reduces the pressure and lets you make better long-term decisions.
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