When you’re starting a small business, it’s important to choose the right business structure. One popular option you might consider is a Limited Liability Company (LLC). But is an LLC right for your craft business?
What is an LLC?
An LLC, or Limited Liability Company, is a separate legal entity that is created by state statute and offers its owners personal liability protection while providing them with the flexibility to choose how their company is taxed.
LLCs are relatively easy to set up and maintain, and they can be a good choice for small businesses and entrepreneurs who want the benefits of both a corporation with the ease of administration of a sole proprietorship or partnership.
Benefits of forming an LLC
There are a few things to keep in mind when deciding whether to form an LLC for your craft business.
First, an LLC can help protect your personal assets in the event that your business is sued. That’s because, with an LLC, your personal assets are not at risk if the business is liable for damages. If your craft business sells higher-risk handmade items such as children’s clothes, or candles, an LLC, along with product liability insurance needs to be considered.
Second, an LLC can give you flexibility when it comes to taxes. With an LLC, you can choose how you want to be taxed: as a sole proprietor, partnership, or corporation. This can be beneficial if you think the corporate tax rate will be higher than the individual tax rate.
Finally, an LLC can make it easier to raise capital by allowing you to sell ownership interests in your business.
Overall, there are many benefits of forming an LLC for a small business. However, it’s important to weigh the pros and cons before making a decision.
Also see: How to start a craft business
Downsides to forming an LLC
There are also a few downsides to consider before forming an LLC.
First, LLCs can be more expensive to set up and maintain than other business structures such as the sole proprietorship or general partnership. This is because you’ll need to file paperwork with the state to form the LLC and each year to maintain your LLC status.
Second, LLCs can also be more complex to operate than other business structures. This is because LLCs have more rules and regulations that they must follow.
Other Possible Business Entities for Craft Businesses
If you’re not sure whether an LLC is right for your craft business, there are a few other business structures to consider.
The sole proprietorship is the most common type of business structure and is a great choice for small businesses. This is because sole proprietorships are easy to set up and maintain, and they offer the owner complete control over the business. Set up is easy because there is no business entity to register, but if you plan to operate the business under a DBA (also referred to as a Doing Business As, Fictitious Business Name, Trade Name, or Assumed Business Name), you will probably have to register with the county where your business is located.
Also see: My list of creative names for a craft business
A general partnership is another option to consider. Partnerships are similar to sole proprietorships in that they offer the small business owners complete control over the business. However, with a partnership, there are two or more owners who share in the profits and losses of the business.
If you’re looking for personal liability protection but don’t want an LLC, a corporation might be a good choice. Corporations offer their owners limited liability protection, but they can be more complex to set up and maintain than other business structures.
Steps to forming an LLC
If you’ve decided that an LLC is the best choice for your craft business, there are a few steps you’ll need to take to get started. Every state is different, but here are the steps that you would generally take.
1. Choose a business name: When choosing a name for your LLC, you’ll want to make sure that it’s available in your state and that it meets your state’s requirements. Each state requires a unique LLC name so doing a business name search.
2. File Articles of Organization: This is the paperwork that you’ll need to file with your state to officially form your LLC.
3. Draft an Operating Agreement: This is a document that outlines the ownership and operating procedures of your LLC. It’s not required in all states, but it’s a good idea to have one anyway.
4. Obtain an Employer Identification Number (EIN): This is a federal tax identification number that is assigned by the Internal Revenue Service (IRS) that you’ll need if you want to open a business bank account or hire employees. If the LLC will be only owned by one person and there will be no employees, the owner’s social security number is used instead.
5. Comply with state requirements: Once you’ve formed your LLC, you’ll need to comply with your state’s requirements for LLCs. This may include filing annual reports and paying annual fees.
6. Register your business: You may also need to register your LLC with the city or county in which you’re doing business. In some areas, a home occupation permit will be needed to legally operate a business from a personal residence.
7. Obtain licenses and permits: Depending on the type of craft business you’re operating, you may need to obtain certain licenses and permits from your state or local government.
Also see: What licenses do crafters need to sell at craft show?
Most commonly, a business license and sales tax permit (or seller’s permit) is all a craft business will need to register for, but be sure to check with requirements in your local area. Additionally, by registering for the sales tax permit, you will be able to start making purchases of your supplies that are used for resale without having to pay sales tax!
8. Open a business bank account: Once you’ve obtained your EIN, you can open a business bank account in the name of your LLC. This will help you keep your personal and business finances separate.
9. Start crafting! Once you’ve taken care of all the legalities, you can start crafting and selling to your heart’s content.
The Bottom Line
There’s no one-size-fits-all answer to the question of whether you should form an LLC for your craft business. The best choice for you will depend on a number of factors, including the size and scope of your business, your personal liability protection needs, and your tax situation.
If you’re still not sure which business structure is right for you, it’s a good idea to speak with an accountant or attorney who can help you weigh the pros and cons of each option.