Choosing a business structure for your handmade (creative) biz is one of the first things you should do. Keep in mind that the legal structure you choose impacts everything – and I do mean EVERYTHING!
You will need to research the different types of business structures that there are (I’ll give you a head start in this post), so that you will know how the legal structure you choose will impact:
- your day-to-day tasks
- your personal liability
- paperwork you need to file
Choose a business structure BEFORE you:
- register your business with the state
- get a Federal Tax ID number
- apply for licenses and permit
For the purpose of this article, I’ll discuss the 4 business (legal) structures that I feel are most appropriate for handmade or creative businesses.
There are other business types that you can choose from and I would definitely recommend that you speak with your tax professional or schedule an appointment with your local Small Business Administration.
Here is a brief overview of four business structures that are frequently chosen:
- Sole proprietorship – easy to form and you have complete control – BUT – you are personally liable for ALL of the debt that the business incurs. The owner pays taxes on income from the business as part of personal income tax and self-employment tax when the business makes a profit.
- Limited Partnership (LP) – owned by multiple people – one general partner is chosen and has unlimited liability and the remainder have limited liability. This means that one partner is responsible for ALL of the debt that the business incurs. The other partners are liable only up to their actual share value in the business. Profits are passed through to personal tax returns for all partners, but ONLY the general partner must also pay self-employment taxes.
- Limited liability company (LLP) – similar to Limited partnerships BUT gives limited liability to each partner.
- Limited Liability Company (LLC) – protects your personal assets (your house, vehicle, savings) in the event your LLC faces bankruptcy or lawsuits. Profits (or losses) can be passed though to your personal income tax return and you must pay self-employment taxes.
There you have it, the brief business structure overview.
As I mentioned before – I would definitely recommend that you speak with your tax professional or schedule an appointment with your local Small Business Administration. Information and other legalities could very well change by state.