Side Hustle vs Business: Key Differences Explained

Last updated: 10/03/2024 Written by: Ruby Layram

When you first start looking into making money online, you will come across two different routes: online side hustles and online businesses.

More often than not, the two options are mistakenly mixed up, leaving people confused as to which category their endeavour fits into. Understanding whether an online income stream is a side hustle or a small business can help you to determine which options are most suitable for you. Side hustles and businesses require different levels of commitment and initial investment that are important to be aware of before you get started.

In this article, we will explore the key differences between a side hustle and a business. We will dive into the commitments, scale, and goals associated with each option, helping you make an informed decision about pursuing your entrepreneurial endeavours.

What is a Side Hustle?

A side hustle is a secondary job that individuals take on to supplement their primary source of income. Side hustles can be flexible and allow individuals to earn extra money on their own terms.

It is usually done on a part-time basis and is a way to earn extra money outside of regular working hours. Side hustles can range from freelancing gigs to selling products online or getting paid to take online surveys.

Side hustles are most suitable for people who want to start a second income stream that fits around their 9-5 with little to no investment.

What is a Business?

A business refers to a venture that is established with the intention of replacing a salary and generating consistent profit. Unlike a side hustle, a business is typically a full-time commitment and requires more resources, time, and financial investment. It involves taking on the role of an entrepreneur and building a sustainable operation.

When starting a business, entrepreneurs must have a clear understanding of their target market, competition, and the industry landscape. This knowledge is crucial for making informed decisions and developing effective strategies to establish a strong foothold in the market.

Entrepreneurs must also have a solid business plan that outlines their goals, objectives, and financial projections. This plan serves as a roadmap for the business and helps in securing funding from potential investors or lenders.

The goal of a business is to scale operations so that earnings are not limited by time constraints.

When Does a Side Hustle Become a Small Business?

A lot of small businesses start as side hustles that are developed over time to replace the founder’s full-time income. The main reason for this is that starting a business requires some financial investment which means that founders must continue to earn money from their primary job until the business can replace their salary.

So, when does a side hustle become a small business?

The most objective way to determine the point when a side hustle becomes a small business is when you have to register with HMRC. This will involved registering as a sole trader or limited company and paying business tax on your earnings.

However, some people may choose to refer to their side hustle as a small business before this.

Perhaps you start selling handmade items on Etsy and then decide to turn this into a recognizable brand. You may not be able to replace your full-time income yet however, it might make sense to describe your brand as a business rather than a side hustle.

Another example of when someone might refer to their side gig as a business instead of a side hustle is when they are able to scale.

A person who takes surveys doesn't own the products that they are making money from which means that their earnings are limited by the number of surveys available for them to take at any one time.

On the other hand, a person selling online courses has an unlimited number of products available to sell which means that they can scale their earnings by tapping into different traffic sources.

A business is scalable, a side hustle is not.

Also read: How to turn your side hustle into a business

What is the Difference Between a Side Hustle and a Small Business?

In the following section, we will take a closer look at the differences between side hustles and businesses. Read carefully through the following points to determine whether a side hustle or an online business is the best route for you.

Commitment Level

One of the key factors that distinguish a side hustle from a business is the level of commitment required. Understanding this difference can help individuals make informed decisions about the route that they wish to take.

A side hustle allows individuals to generate additional income without the need to fully commit to running a business on a full-time basis. It provides the flexibility to manage the venture alongside other responsibilities and offers greater freedom in terms of time management. This flexibility is particularly advantageous for those who want to pursue their passions or maintain a healthy work-life balance.

Also read: The best remote side hustles that allow you to work from anywhere in the world

On the other hand, a business demands a higher level of commitment in order to build and grow the venture successfully. The time and effort dedicated to running a business are significantly greater than those required for managing a side hustle. Business owners need to prioritize their involvement in all aspects of the venture, from operations and marketing to finance and strategy.

Ultimately, the commitment level for each option depends on personal goals, aspirations, and resources. While a side hustle allows for more flexibility and freedom, a business requires a higher level of dedication and focus to achieve long-term success.

Scale and Growth Potential

Another key difference between a small business and a side hustle lies in the scale and growth potential. A side hustle is typically smaller in scale and often serves as a means to supplement income or indulge in a hobby. It allows individuals to explore their passions without the primary goal of expansion and scalability. On the other hand, a business has the potential to grow into a larger operation and generate substantial profits over time.

Financial Investment

When considering the difference between starting a side hustle and launching a business, one crucial factor is the level of financial investment required.

Side hustles can often be commenced with minimal initial investment because they don’t always involve creating a product or building an audience.

On the other hand, starting a business usually necessitates significant startup costs and a substantial capital investment to cover expenses such as equipment, inventory, marketing, and operational costs.

Also read: Best free side hustles

Tax Considerations

Another difference between business and side hustles is the tax implications that are involved.

Tax Implications of Side Hustles

Side hustlers are typically considered self-employed for tax purposes. This means that they are responsible for paying self-employment tax, which comes into effect once your annual income is over £12,500. Self-employment tax can be a substantial expense for side hustlers, as it is calculated based on their net earnings from self-employment.

However, side hustlers also have the opportunity to deduct certain business expenses from their taxable income. Common deductions include expenses related to supplies, equipment, marketing, and home office expenses if applicable. These deductions can help reduce the overall tax liability for side hustlers and maximize their take-home income.

Tax Implications of Businesses

Business owners, depending on their business structure and operations, may have additional tax obligations and deductions. The tax implications for businesses are more complex compared to side hustles.

For example, if the business is registered as a limited liability company (LLC) or a partnership, the owners may need to file a separate business tax return and pay taxes on the business's profits. Alternatively, if the business is structured as a sole proprietorship or a single-member LLC, the income and expenses of the business are reported on the owner's personal tax return.

In addition to self-employment taxes, businesses may also have other tax obligations such as payroll taxes if they have employees, sales taxes if applicable, and corporate income taxes for certain business structures.

Business owners also have various deductions available to them. These deductions can include expenses such as employee wages, rent, utilities, business insurance, and other business-related costs. Deduction

It's important for individuals and business owners to understand their tax obligations and consult with a tax professional or accountant to ensure compliance and take advantage of all available deductions.

Risk level

Another important difference that should not be overlooked when choosing between a side hustle and a small business is the level of risk involved.

A side hustle is often viewed as a low-risk endeavor. It can be started and operated without significant financial commitments, allowing you to try your hand at making money online without jeopardizing your primary source of income. This flexibility provides an opportunity to test the market and explore new ideas at a manageable level of risk.

On the other hand, starting and running a business carries more risk and uncertainty. It requires a more substantial investment of resources, time, and money. The success or failure of the venture can have a significant impact on your financial security and stability. A business venture inherently comes with a higher level of risk, as market conditions, competition, and other external factors can affect its profitability and long-term viability.

While a side hustle offers individuals a sense of security by not fully relying on it as their sole source of income, a business comes with the potential for greater financial rewards. However, it also entails a higher level of risk, demanding careful planning, adaptability, and resilience to navigate fluctuations in the market.

Financial Rewards

While both side hustles and businesses have the potential to generate income, the financial rewards can vary significantly. Side hustles often provide a supplemental income, allowing individuals to earn extra money alongside their primary job. On the other hand, businesses have the potential for higher profitability and can serve as a primary source of income. Business owners can also build up passive income streams so that they are able to continue earning without any physical effort.

Also read: 10 side hustles that pay well

In comparing the income potential of side hustles and businesses, it is important to consider the scalability and growth opportunities that businesses offer. While side hustles can provide a steady additional income, businesses have the potential to expand, attract more customers, and generate greater profits over time.

Additionally, owning a business allows individuals to take advantage of various tax benefits and deductions that contribute to their financial rewards. Business owners can deduct business expenses, such as rent, salaries, marketing costs, and other operational expenses, reducing their taxable income and maximizing profitability.

Recognition and Branding

Another key difference between starting a side hustle and starting an online business is the level of marketing that is needed to see results.

Most side hustles come with a ready-established audience such as businesses that are actively looking for freelancers on marketplaces or brands that have pre-funded their accounts to pay for you to take online surveys. Therefore, it is possible to start a successful side hustle with zero marketing efforts.

On the other hand, starting a business involves using marketing to attract customers who are not already aware of your brand. This means building up a recognizable image on social media and connecting with your audience.

The need to build a recognizable brand is one of the reasons that starting a business comes with larger time commitments.

Flexibility vs Long-Term Vision

When considering the differences between side hustles and businesses, one of the key factors to consider is the balance between flexibility and long-term vision. Side hustles offer individuals the flexibility to manage their time and pursue other passions or commitments while earning extra income. On the other hand, businesses require a long-term vision and goals, involving strategic planning and a commitment to sustainable growth.

Flexibility: Side hustles provide individuals with the freedom to choose how much time they dedicate to their venture. They can be seen as a short-term solution for earning additional income on top of their primary job. This flexibility allows individuals to explore their entrepreneurial interests without completely reshaping their lifestyle or career.

For example, an individual working a full-time job may choose to start a side hustle as a freelance graphic designer. They can take on projects in their spare time, working with clients on their own terms. This flexibility enables them to maintain their current job while pursuing their passion and earning extra income.

Long-Term Vision: In contrast, businesses require a long-term vision and goals. The focus is on building a sustainable operation that can stand the test of time. This involves strategic planning, goal setting, and a commitment to long-term growth and profitability.

For instance, an entrepreneur starting a small bakery will have a long-term vision of establishing multiple branches, expanding their product range, and building a loyal customer base. They will set goals such as increasing sales, enhancing brand reputation, and fostering customer loyalty. This long-term vision keeps them motivated and guides their decision-making process.

While side hustles offer flexibility, they may lack the long-term vision and strategic planning associated with businesses. Businesses require a greater level of commitment, investment, and goal setting to achieve sustainable growth and success.

Conclusion

In conclusion, when choosing between a side hustle and a business, it is essential to consider your individual goals, commitments, and resources. Side hustles offer the flexibility to earn additional income while managing other responsibilities, making them ideal for those seeking a part-time venture. On the other hand, businesses present opportunities for scalability and growth, requiring a greater level of commitment and financial investment.

Understanding the key differences between side hustles and businesses can help you to make informed decisions that align with your long term goals. Whether you opt for a side hustle or embark on a full-fledged business venture, both paths have the potential to bring personal and financial fulfillment.

Ultimately, the choice between a side hustle and a business depends on your specific circumstances and long-term vision. Whichever path you choose, embracing the spirit of entrepreneurship can lead to exciting opportunities and growth. So, whether you choose to pursue a side hustle for additional income or dive into the world of business, remember to follow your passion and keep yourself accountable.

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