Side Hustle vs. Small Business: 4 Practical Differences You Need to Know

January 13, 2023 / Nacondra Moran / 1 Comment

Side Hustle vs. Small Business: 4 Practical Differences You Need to Know

If you’re an entrepreneur, you probably started with a little side hustle – something that you worked on after the kids were in bed, before logging in to your 9-5, or even just on weekends. Maybe it was something you did for fun that started bringing in some income, or a project or two you did on the side.

As you started getting more clients, maybe you also started wondering: Are you actually running a small business, or is this just a side hustle? At what point does a side hustle become a business?

This is a valid question that everyone who’s participating in the ever-growing gig economy should ask themselves. Figuring out where the line is between a side hustle and a small business can be confusing, which is why I’m outlining the four practical differences you need to know.

1. Side Hustle or Small Business: How Much Are You Investing?

There’s a joke that goes “I didn’t want to work 9 to 5, so I started my own business… Now I work 24/7.”

Jokes aside, the biggest and most obvious practical difference between a side hustle and a small business is how much you are investing in it. This investment can be time, money, resources, and even your mental or physical energy.

In my experience, most entrepreneurs start out as solopreneurs. You may be doing some freelance work or offering services as an independent contractor. You may be juggling this alongside your full-time job and trying to see if this can be a feasible, sustainable way to make a steady income.

However, as you start to get more clients and your business begins to grow, you are faced with a big decision. Do you intend to grow your business or are you happy to stay in the solopreneur stage?

Now, if you plan to maintain your business as a solopreneur or keep it as a side hustle because of your preferences and/or circumstances, that’s perfectly fine. However, if you decide that you want to grow your business, that’s when you’re going to see a difference in the amount of investment required.

As a small business owner, you are likely going to have to make investments in your business and yourself. You may need to pay for accounting software to keep your books up to date, CRM platforms to manage your client information and leads, and legal fees to draft contracts. You may have to hire someone to help you with certain business tasks or outsource them. You may need to invest in courses, workshops, and training to build your skills.

These are just some of the investments you will need to make as a small business owner vs. when you were simply running a side hustle for a bit of extra income.

Ask yourself:

How much money am I investing in this venture?
How much money am I willing to invest in it?
How much time am I dedicating to making this a success?
How much of my resources am I channeling to this endeavor and how much more do I want to direct to it?
How much of my (physical and mental) energy can I devote to this?

Evaluating your answers to these questions can give you a sense of whether your business is a side hustle or if you are ready to make the leap to small business ownership.

2. Hobby, Side Hustle, or Business? Your Business Structure Matters!

Regardless of whether you have a hobby that started generating a profit or you specifically started your side hustle to earn extra income on the side, having the right business structure in place matters.

If you are a freelancer or independent contractor who has not set up any kind of legal entity for your business, the default status for your business is a sole proprietorship. This is the simplest option for anyone who is running their business as a side hustle.

As your business grows, it may be a wise move for you to change your business structure and start an LLC or an S Corporation. These business structures offer better protection for your assets, provide more tax and legal benefits, and also create more avenues to expand your business.

If you are wondering if you should start an LLC for your side hustle, consult with a financial or legal professional before making a decision. They will be able to advise you on the best structure for your business depending on your intentions and plans.

3. Managing Your Finances in Your Side Hustle vs Small Business

One of the biggest differentiators between a small business and a side hustle is the finances. On the surface, the back end a.k.a the financial aspect may seem similar but there are some critical differences you need to know.

As a side hustle, you may have been able to get by using an Excel spreadsheet to track your income and expenses but as your business grows, this quickly becomes infeasible. With more clients, you may start using a variety of payment platforms, outsourcing tasks in your business, and racking up expenses to enable you to do your work more efficiently or better.

All these add a new level of complexity to your finances and it may be hard to keep track of them in a spreadsheet. You may need dedicated bookkeeping and accounting software to manage the finances of your business. At this stage, you may consider working with financial professionals like bookkeepers, accountants, and financial planners who would be best able to advise you on tax planning, investments, and the profitability of your business.

Another important difference between a side hustle and a small business in terms of finances is having a solid foundation. Where a side hustle lacks any real structure, a small business is built on a firm financial foundation that is designed intentionally to foster growth and longevity.

To make the transition from side hustle to small business, you will need to uplevel your financial foundation by setting up the necessary structures and processes.

4. Side Hustle vs Small Business: Stepping into Your CEO Mindset

Maybe you’ve heard the expression “mindset is everything”. When it comes to being an entrepreneur, there is nothing that holds more truth.

All other factors aside, whether you are running a side hustle or a small business comes down to your mindset.

Ask yourself these questions:

Do you believe that your activities will one day turn into a million-dollar business?
Do you make decisions thinking about long-term growth?
Do you plan for the future with the vision that this venture will still be providing you with an income five years down the road?

If you answered YES to those questions, you have the mindset to be the CEO of your small business.

Stepping into your role as the CEO of your business is your key to wealth, freedom, and getting your time back. With the mindset that you are the CEO of your business, you can start planning for the future and taking decisions that may pay dividends in the long run rather than seeking short-term wins.

You’re in it for the long haul.

Wherever you started out, you have the power to turn your side hustle into a successful small business. You simply need to be ready to take that step.

If you are ready to turn your side hustle into a small business, check out the From Side Hustle to CEO free mini-course! In this course, you’ll learn about: