Tax Refund

Chanel Ashford, one of the small business owners spotlighted in our “Hobby Meets Hustle” series, isn’t just the creator and founder of Juice By Chanel. She’s also a special education teacher — which means she has a lot of passion (and a lot of work!) to juggle. “As a small business owner and a teacher, I love my job — but one of my biggest goals is to find a balance between the two,” says Chanel.

Of course, that’s not all Chanel is balancing. She also has a travel agency and a book publishing company, which are under the same LLC (limited liability company) as Juice By Chanel.

What does all of this mean for her business plan? How can she continue offering the best service to her clients while pursuing her passions? What can entrepreneurs like you learn from Chanel’s experiences?

Here are a few small business ideas to help you succeed where hobby meets hustle.

Understanding Your Small Business Profitability

For most companies, profit is the name of the game — but for many small business owners, passion is an equally important factor. The key, as Chanel learns in her “Hobby Meets Hustle” spotlight, is to find the perfect balance. 

“What, outside of teaching, makes you the most money?” asks Ashley Covarrubias, Side Hustle Consultant. Chanel says her juice company is her most profitable undertaking.

But how did she come to that conclusion — and how can entrepreneurs like you do the same? Here are four steps to make it more manageable:

1. Tracking Entity Activities

If you have a single small business, you might have a reasonably easy time tracking profits and costs. Add a few more brands or businesses to the mix, however, and you can quickly lose track of what’s actually profitable. That’s why it’s smart to break everything up and do your math separately. This is true whether you have similar businesses (like digital marketing, graphic design and freelance writing) or totally different ones (like running a coffee shop, acting as a virtual assistant and being a personal trainer).

Split Business and Personal Finances

Keeping all your finances together might seem like a successful business idea, but the truth is that it can lead to confusion, especially when tax time rolls around. That’s because the Internal Revenue Service (IRS) doesn’t allow you to mix personal expenses and your company’s taxable income — which means that, if you paid for business needs with your own money, you might have trouble claiming all the deductions you want.

There are also legal concerns to be aware of. Business and personal finances have different liabilities, so it’s often smarter — and safer — to keep things separate. 

On top of that, it’s just plain difficult to untangle finances when you’re juggling so many numbers. You’ll likely have more trouble keeping up with expenses vs. profits, especially if you have another source of income (like Chanel’s teaching job). 

Split Data From Different Companies

Once you’ve separated personal and business finances, it’s time to look at individual businesses.

Many entrepreneurs run multiple companies. To save time and keep things simple, you may have thought it was a good idea to combine the financial data for a complete view of all your undertakings.  Unfortunately, this can get messy. When you don’t separate financial information by business, you aren’t able to keep track of which company is generating the most profit, where your expenses are coming from and how you can improve your overall business plan.

Of course, there’s always tax time to think about. When all your business data is crammed together, you have limited insight into deductions, employee expenses, actual profits and more. That’s why it often makes sense to keep all your business information separate and tidy.

2. Clarifying Business Expenses

Although Chanel had plenty of brands to juggle, she knew right away which one was most profitable. To do the same for your own companies (or even just one), you need to clarify your expenses.

First, let’s review the different kinds of profit and how costs play into each one:

  • Gross profit: Sales minus the cost of buying or manufacturing goods.
  • Operating profit: Sales minus goods plus operating expenses, accounting costs, etc. — also called “earnings before interest and taxes.”
  • Net profit: Sales minus goods, operating expenses, accounting costs, and interest and taxes — also called your bottom line.

That means you can organize your business expenses into a few helpful categories:

  • Buying/manufacturing goods.
  • Operating expenses.
  • Accounting costs.
  • Interest.
  • Taxes.

Once you have this information for your small business or businesses, you can get a better idea of what your profitability actually looks like. For example, maybe one company had a low startup cost, but now the overall business opportunity has dried up; meanwhile, another could have required a significant upfront investment (like a vending machine) but is now generating passive income. All of this gives you a more accurate view of your business plan and where it’s taking you.

You can also see opportunities for potential improvements. For example, maybe you’re spending too much on marketing (considered an operating expense) and you could cut costs by condensing your social media presence to one or two key platforms.

3. Choosing Your Biggest Money-Maker 

With all this data at your fingertips, it’s time to choose your biggest money-maker. For Chanel, that was her juice company. For you, it might be one of many businesses, or it might be one part of a multi-faceted company. Whatever your most profitable business is, protecting and empowering it should be your priority. Brittney Castro, our “Hobby Meets Hustle” Financial Expert, explains the same thing to Chanel: “It’s great that you have so many businesses, but I think it’s really smart to focus on the one that’s making you the most revenue.”

4. Keeping Your Side Hustles on the Side

Choosing one business over another may feel difficult, but there’s no reason to give up on the rest of your passions. “You can still nurture your other revenue streams,” Brittney tells Chanel, “but focusing on that money-maker one will help you take it to the next level.” The secret is to keep those side hustles where they belong: on the side. Don’t let them take up too much of your time and energy, and make sure their costs aren’t eating into your main business’ profitability. You can also use your skill with a side hustle to support your main revenue stream — for example, using your experience as a social media manager, graphic designer or content writing expert to wow potential clients on Facebook and Instagram.

Keeping Your Small Businesses Under One LLC

Although Chanel is a travel agent, publisher and juice maker, she hoped to keep things simple by housing her various businesses under one LLC.

What Is an LLC?

A limited liability company is just one business structure you can choose for your professional undertakings. Others include:

  • Sole proprietorship: A sole proprietorship is not a separate business entity, but an unincorporated business with only one owner. You’re a sole proprietorship if you do business but haven’t registered as another business structure. As a sole proprietor you are responsible for all business debts and pay personal income tax on your earned profits .
  • Partnership: Partnerships are for two or more owners sharing a single business. Generally, an LLC with more than one owner is treated as a partnership for federal tax purposes unless the LLC elects to be treated as a corporation. The partnership itself doesn’t pay income tax but rather each partner receives a Schedule K-1 for their share (percentage) of the partnership income, expenses and other items according to their partnership agreement to report on their personal income tax returns. Different structures provide different levels of liability to each partner.
  • Corporation: Corporations offer high levels of protection and generally include a legal entity treated as separate from the persons who formed it or shareholders who own it.  But corporations tend to come with higher costs. As a corporation, you pay income tax on your profits — and that tax can shift depending on whether you’re an S corp or C corp.

An LLC provides many of the same benefits and protections as a corporation, but may be simpler to run because they don’t legally require shareholder meetings and other administrative necessities. They help protect your personal assets from business drama, including debts, lawsuits and other challenges. 

How Do You Start an LLC?

Depending on the type of small businesses you run and the state you’re in, the process for registering an LLC can change. However, according to the Small Business Administration, you generally need to:

  • Choose a registered agent service in your state.
  • Register your business name with state and local governments.
  • Get a federal tax ID.
  • Trademark your business, brand or product name (optional).
  • Stay up-to-date with registration requirements.

Why Keep Multiple Businesses Under One LLC?

Once you’ve completed these steps, you’ll have an LLC you can use as an umbrella for all your small companies. That’s a great business idea — not just because it saves you from having to register each brand individually, but because it simplifies your responsibilities during tax time.

LLC Taxes

If you’re the only owner, your LLC is automatically taxed as a sole proprietorship. Generally, if you split the responsibilities with other entrepreneurs, you’ll be taxed as a partnership. In either case, anyone legally considered an LLC owner will report income and costs on their personal tax return, which means all profit will be taxed accordingly.

But the real beauty of an LLC is that you may be able to “level up” and elect to be treated as an S corporation status to get even more tax benefits.

Leveling Up to an S Corp To Save on Self-Employment Taxes

When all your companies live under one LLC, you pay all their individual taxes. However, because you’re technically self-employed, you’ll also pay self-employment tax — just like freelance creators, contractors, gig workers and others. These taxes go toward Social Security and Medicare, and while they’re automatically deducted from a traditional employee’s salary, entrepreneurs have to pay these taxes themselves.

If you think that just sounds like paying more taxes, you’re not alone. That’s why many small business owners choose to make their LLCs into S corporations.

Remember, corporations of any kind have different legal protections and requirements — for example, paying income tax on all profits. However, when you’re the owner of a corporation, you’ll get savings on self-employment taxes.

Here’s what the tax landscape looks like depending on which type of corporation you are:

  • S corp: In an S corporation, owners pay income tax on their share of the company’s overall profits.
  • C corp: In a C corporation, the business pays corporate taxes, while owners pay tax on any distributions they receive.

Electing to be treated as an S corp might make sense as you get more clients, increase demand, improve your marketing or boost your inventory. Corporate structures are often better for companies with more income and variables; some businesses don’t even meet IRS requirements for S-corp status. Those requirements are:

  • Be a domestic corporation.
  • Have only allowable shareholders.
    • May be individuals, certain trusts and estates.
    • May not be partnerships, corporations or non-resident alien shareholders.
  • Have no more than 100 shareholders.
  • Have only one class of stock.
  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies and domestic international sales corporations).

For this reason, it’s important to do your homework before thinking about changing your legal business status.

Managing Your Small Business Activities

There’s only one way to turn a good business idea into a great business idea — and that’s to have a solid financial plan to back up your expertise. This is particularly important when it comes to managing financial activities for one or more small businesses — especially if you have multiple owners.

Here are a few ideas to help balance your passion with the high demand of clients, marketing, inventory and everything else that comes along with making money:

Use Business Banking Accounts

Business banking accounts are versatile, visible and, perhaps most importantly, separate from your personal finances. You can open a business account for each company under your LLC or corporation — that way, you’ll have bank statements clearly identifying how much money goes in and how much comes out.

(Hint: Many banks offer some kind of online course or other resources to help take advantage of their services. It’s a good idea to look into these resources, especially if they can help you make extra income with a more successful business.)

Choose Mobile Accounting Programs

While business banking accounts are a great place to start, they can’t do all the work for you. To track all your different types of profits and costs, you should consider a customizable accounting program. Ideally, this program should be accessible from multiple devices so you can access and update information from anywhere, so make sure there’s a mobile app available.  That way, there’s no limit to where your small business ideas can take you.

Keep Both Eyes on Your Taxes

Taxes can be tricky, especially as you transition to different legal structures. It’s not enough to know what taxes you’re responsible for and how to pay them; you also need to understand how those costs will impact your bottom line, which deductions you qualify for, and how to protect your company as tax rates shift. 

Naturally, that’s when many entrepreneurs turn to TurboTax.

Keep Your Small Business Covered With TurboTax

From potential clients and social media marketing to inventory and demand, you have plenty on your plate. If you want to build a profitable business and keep it that way, you need to balance all these things and have a keen mind for finances.

Luckily, as Chanel discovers in her “Hobby Meets Hustle” spotlight, you don’t have to do everything alone — especially, she says, “when there’s a line of people who can help.”

Don’t worry about knowing tax laws. You can come to TurboTax and fully hand over your taxes to a TurboTax Live tax expert and get your taxes done from start to finish in one meeting. TurboTax Live tax experts are available year-round in English and Spanish, and can review, sign and file your tax return — all from the comfort of your home.

If you’re ready to keep your small business covered this tax season and beyond, start by checking out our financial and tax resources for entrepreneurs just like you.

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