Can I Start an LLC While Employed?

If you’re tired of your nine-to-five grind and want to strike out on your own, you’ve probably asked this question: can I start an LLC while employed by someone else?

Ultimately, it depends on your employment circumstances, but there’s a good chance you can. In this guide, we’ll walk you through the considerations you should make, from ethical choices to your employment agreement and everything in between.

Can I start a company while working for another?

Generally speaking, you can start your own company while working for another. It’s actually pretty common for someone to have a standard nine-to-five job and a side hustle that’s a limited liability company (LLC). In fact, when you file formation paperwork for a limited liability company, the state doesn’t even inquire about your employment status.

That said, there are some legal and ethical considerations to check into. For example, you’ll want to check the terms of your employment agreement, protect your intellectual property, and more. As long as you do the right homework, it’s relatively unlikely that you’ll encounter issues. 

Check your employment agreement

If you’re thinking of starting a side hustle on top of your day job, your very first step should be to check your current employment agreement. That document will dictate how (and if) you can proceed.

As long as the LLC you’re starting doesn’t conflict with the terms in your employment agreement, you’re probably good to create your side business. If it does, you might have to leave your employer or start a different business.

What is an employment agreement?

An employment agreement is kind of like a “terms and conditions” section of your contract. The agreement dictates your obligations to your company. Typically, an employment agreement will include non-compete provisions and conflict of interest policies.

Non-Compete Provisions

Non-compete provisions are terms where you, as an employee, agree not to compete directly with your employer’s company. This means you can’t create and sell a product that would harm your employer’s sales. Sometimes these provisions are perpetual or for a set period of time. Non-compete agreements are especially common in industries with competitive innovation. They often go hand-in-hand with a non-disclosure agreement.

If your employment agreement has a non-compete clause, you must ensure that your new business doesn’t infringe on it.

Conflicts of Interest

Many employers include a conflict of interest policy in their employment agreement. A conflict of interest occurs when one or more aspects of an employee’s life outside of work make them unreliable or biased at work. A conflict of interest can be caused by a lot of different factors, even “good” things like volunteering or starting a side business. Your employer could argue there’s a conflict of interest if your small business distracts you from your job during work hours — even if the LLC is in an entirely different industry.

Depending on your conflict of interest policy, you might (or might not) be able to quit your job and start a competing business. The terms vary from business to business. If your employer has a conflict of interest policy in place, be sure you abide by it. Be 100% mentally and emotionally present when you’re at work, and you’ll probably avoid conflict of interest issues.

Intellectual Property

If you’re an employee at ABC Inc. and you create an innovative new product for a business you’re starting, is the idea yours? Or is it your employer’s property? Intellectual property is an important aspect to consider when you’re starting a business, and it’s not always black and white.

According to the U.S. Chamber of Commerce, your ideas (and products created from those ideas) are generally your intellectual property. That said, the lines blur if your creation is something you probably would have created as part of your job, anyway. For example, if you work for an athletic shoe company and you design an innovative ankle support for a basketball shoe, the intellectual property probably belongs to your employer. But if you work for a bakery (or you quit your job) and design the next great basketball shoe, the intellectual property is likely yours to sell or create as you please.

Intellectual property laws can be tricky. If in doubt, check with a lawyer to be sure.

Ethical Issues

Even if you keep the terms of your employment agreement and respect any intellectual property rights, you still might encounter ethical issues by starting your own business. For example, you might be tempted to answer a quick business phone call while you’re on the clock at work or send an email to a potential client on company time. Or maybe you’re off the clock but you use company resources like your work computer’s expensive software to handle some tasks for your LLC.

Maybe you can overcome these ethical issues, but you’ll want to be mindful of them if you start an LLC while employed by someone else. This is a crucial component of starting a business while working full-time.

Tax Implications of Starting a Business While Still Employed

Becoming a business owner always impacts your taxes, especially when you already work for someone else. You’ll still receive a W-2 from your employer and report that income on your personal tax returns. But how you’ll report your business income will depend on how your business is taxed for federal income tax purposes.

LLCs are taxed as pass-through entities by default, meaning the LLC’s owner reports the business income on Schedule C of their personal tax return. So, you’ll likely fill in an extra section on your return for your business. You’ll also pay self-employment taxes on your LLC income, which includes Social Security and Medicare taxes.

That said, if you elect to be taxed like a C corporation, you’ll file a corporate tax return for your business and a personal tax return for the profit you receive from it. Tax filing requirements can be complicated, and we highly recommend consulting with a licensed accountant or attorney for help.

Risks and Benefits of Notifying Your Employer

Do you tell your employer that you’ve started a business on the side? Ultimately, the answer to that question boils down to a judgment call. How do you think your boss would respond? Some employers might worry about your loyalties or how your business activities would affect your work; others might be incredibly supportive. In contrast, your business might offer a product or service that could help your current employer, and you might be able to establish a mutually beneficial relationship.

You know your employment circumstances best, so only you can truly decide if it’s best to tell your boss. If in doubt, transparency with your employer is probably a good call.

We can help!

Whether you’re ready to quit your day job completely or want to start a side hustle, you don’t have to go it alone. Here at ZenBusiness, we’ll handle the red tape side of business filings so you can focus on making your business succeed. Whether you need help starting your first LLC, managing your business finances, or staying compliant year after year, we’ve got your back.