Running a handmade shop, from hobby to business

What this site covers, and the answer most sites skip

Most people selling what they make do not need an LLC on day one, and this site says so plainly, then tells you which events change that answer.

The usual advice runs the other way. Search for how to start a handmade shop and nearly every result opens with forming an entity. That skips the part where the IRS already treats you as a sole proprietor the moment you sell with a profit motive, and where a state like California bills an LLC a flat annual tax whether or not the shop sold anything.

Start with whether you need an LLC yet if that is the question that brought you here. If you are not sure your selling counts as a business at all, read the hobby-or-business test first.

The tax pages, in the order the questions arrive

Tax questions show up in a predictable sequence: a form arrives, a bill follows, and then the quarterly payments start.

The first thing most sellers notice is a Form 1099-K, so the 1099-K page explains the current reporting threshold and what the form does and does not mean. Profit from the shop then carries self-employment tax on top of income tax, which is why the quarterly estimated tax guide walks through the payments step by step.

Sales tax is a separate system run by the states. The marketplace facilitator page covers when the marketplace collects it for you and when a craft fair or your own website puts the job back on you.

Getting registered and set up

Setup is a short list for a sole proprietor and a longer one for an LLC, and both lists have an order.

The registration guide covers the seller's permit, the fictitious business name and the local business license, using California as the worked example. The business setup guide is the long version: every step from the first sale to the point where an entity starts to make sense.

When you do reach that point, the entity comparison sets sole proprietorship, the LLC and the S corporation election side by side. The formation-services comparison lists what each service publishes about its own prices, next to the file-it-yourself route.

What it costs, and what can go wrong with the product

The real costs of a small shop are mostly recurring, and the recurring ones are where an early LLC hurts.

The cost breakdown separates one-time fees from annual ones. The California LLC tax page covers the annual tax, the fee tiers above it and the statement of information.

The product itself carries its own rules. The insurance page covers what an LLC does not protect you from. Children's products and cosmetics covers the testing and labeling rules that catch toy makers and soap makers off guard.

Do you need an LLC yet?

• Do handmade sellers need an LLC yet? — Most small handmade shops can run as sole proprietors for now. What an LLC protects, what it costs in California, and the events that change the answer.
• Is your craft selling a hobby or a business? — How the IRS separates a hobby from a business, what each means for reporting craft income and deducting costs, and why the label matters more than an LLC.
• Sole proprietor, LLC or S corp for a handmade shop — The three structures a handmade seller actually chooses between, compared on liability, federal tax, state cost and paperwork, with IRS and SBA sources.

Getting set up

• Setting up a handmade selling business, step by step — The setup order for a handmade shop: start as a sole proprietor, register what your sales need, plan tax, and form an LLC only when a trigger arrives.
• Registering a handmade shop in California, in order — The registrations a California handmade seller may need, in the order to do them: shop name, fictitious business name, seller's permit and local license.
• LLC formation services for handmade sellers compared — What formation services publish about their own prices and renewals, set against filing a California LLC yourself for the state's $70 fee.

Money and tax

• Form 1099-K for handmade sellers, explained — The 1099-K threshold is back to $20,000 and 200 transactions. What that means for handmade sellers, and why income below it is still taxable.
• Estimated tax and self-employment tax for makers — How self-employment tax applies to handmade shop profit, when quarterly estimated payments are required, and the four IRS due dates to calendar.
• Sales tax for handmade sellers and marketplaces — When a marketplace collects sales tax for you, when craft fairs or your own site put it back on you, and what California's seller's permit rules require.
• California LLC annual tax and filings for makers — What a California LLC owes every year: the $800 annual tax, the income-based LLC fee, and the statement of information, from the state's own statutes.

Costs and product risk

• What a handmade shop costs to set up and run — One-time and yearly government costs for a handmade shop, sole proprietor versus LLC, using California's published fees and the federal tax rates.
• Product liability insurance for handmade sellers — Why insurance, not an LLC, is what protects a maker from claims about their products, and which policy types a small handmade shop should know about.
• Handmade toys, soap and cosmetics rules — The federal rules that apply to handmade children's products, soap and cosmetics: CPSC testing and small batch relief, and FDA's soap and labeling rules.

Questions