Turning a passion project or hobby into a full-blown side hustle can be empowering, exciting and, hopefully, lucrative. However, experts say that a side hustle can come with big risks you may not even realize are there. 

Whether you're dogsitting your neighbor's mini goldendoodle, selling handmade purses on Etsy or posting sponsored get-ready-with-me videos on Instagram, one unexpected lawsuit could wipe out not only your side hustle gains, but also your personal savings.

Small businesses carry liability risk — that is, the possibility that someone could sue you if they get injured or experience property damage as a result of your side hustle activities. One of the best ways you can shield yourself from losing everything in a lawsuit is by getting umbrella insurance, says Ed Slott, a certified public accountant and founder of IRAHelp.com.

This is particularly important for side hustlers who work in clients' homes, Slott says. "If you're a craftsman, you're a contractor or a doctor … it's always good to have insurance," Slott says.

Even if you run a side hustle you don't think is vulnerable, the coverage's reasonable price means you're likely better off safe than sorry.

"Umbrella insurance is key for anybody," Slott says. "It's so cheap — you can get millions of dollars in coverage for literally hundreds of dollars [per year]. It's probably the most efficient form of insurance you can have."

Umbrella insurance can be a game-changer for your side hustle

Umbrella insurance provides coverage above and beyond the scope of traditional policies, such as home and auto insurance, which typically cover bodily injury and property damage. However, these policies have coverage limits. If a claim exceeds those limits, you could be on the hook for paying the difference out of pocket.

So if something goes wrong while running your side hustle — for example, you say the wrong thing on a TikTok video and a celebrity sues you for defamation, or you drop a tool on your client's foot — umbrella insurance can step in where your existing insurance policies fall short. 

"What if you have a $1 million car accident and your coverage is only $300,000?" Brock Jolly, a certified financial planner and managing partner at Veritas Financial in Tysons, Virginia, said in a 2016 interview with CNBC. Umbrella insurance coverage can step in for typical "red flag" issues, such as defamation or accidentally damaging someone else's property, that typically tie people up in lawsuits, he said.

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There are two types of umbrella insurance: personal umbrella insurance and commercial umbrella insurance. The former will not cover your side hustle or small business, so make sure to ask for the latter.

The price of umbrella insurance depends on your specific needs. Approximately $383 a year will buy you $1 million in coverage, according to WalletHub.

Speaking with a financial advisor or insurance agent can help you find the best policy for your side hustle, as the price of your policy is dependent on multiple factors.

Consider establishing your business as a separate entity to protect your personal finances

Another step you can take to protect yourself and your side hustle is to establish a separate entity for it, Slott says.

You can establish a Limited Liability Corporation (LLC) or an S corporation for your side hustle, no matter its size, he says. This way, liability is limited to your business and someone cannot go after your personal finances if something goes wrong. This separation can add an extra layer of protection for you, Slott says.

For example, if you drive for Uber as an individual and get into an accident, all of your personal assets (money and property) could be at risk in a lawsuit. However, if you drive for Uber and do so while operating under an LLC, only your business assets would be at risk in a lawsuit.

Filing an LLC typically costs between $50 and $500, depending on the state. You won't need a lawyer to file an LLC, but consulting one can help make sure everything is set up correctly.

At the end of the day, securing the right coverage isn't just about financial protection — it's about peace of mind, Slott says. "If you don't have the right coverage, you could be risking your financial future," he says. 

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