Craft Business Expenses: How to Keep the Tax Man Happy
There are many tax expenses involved in running your own professional craft handmade business - we guide you though some of the most common ones.
We discuss the different structures available for US businesses, and show you the advantages and disadvantages of each one.
Once you have decided that you are running a fully fledged business (rather than just a hobby) then you’ll want to be clear on exactly what sort of company you are actually running. In this article, we’ll discuss the various business structures that are available to you as a small manufacturer (aka handmade seller).
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Firstly, it’s important to know that it is completely possible in the US to start a business without officially signing any forms or documents. It’s your activity that defines if you are running a business.
So if you open an Etsy shop today and make your first sale - congratulations, you are now running a business! This type of business structure is called a Sole Proprietorship. This essentially means that you are the singular owner of the business.
In this structure, as the sole owner, you are entitled to all profits. It also means that you are also solely responsible for all your business’s debts, losses and liabilities (this is called Unlimited Liability).
There are no specific business taxes paid by the sole prop company - the owner pays taxes on income from the business as part of his or her personal income tax payments. This is done via filing Schedule C of your Form 1040.
Although there is no official paperwork to begin your business, you’ll still want to ensure that you are fully complying with any licensing, regulations and zoning requirements in your home state.
Tip: If you have created a fictitious name for your business (otherwise known as a DBA - Doing Business As) then you’ll want to ensure you are filing all applicable forms under this name.
Let’s say that instead of running your business alone, you instead want to form a business with your friend and split the profits. This structure is called a Partnership. There are two common kinds of partnerships - Limited Partnerships (LP) and Limited Liability Partnerships (LLP).
Limited Partnerships have a nominated general partner with unlimited liability, and all other partners have limited liability. This means that it is only one partner that accepts the responsibility of paying off of the remainder of company debts personally if at any time the company can’t make its payments. All other partners accept liability only to the proportion of their actual share value in the business (which is typically only a very small nominal amount). In an LP, all partner profits are passed through to personal tax returns, however the general partner is also required to file self-employment taxes.
Limited Liability Partnerships differ by the fact that all partners have limited liability.
Unlike the Sole Proprietorship structure above, to form a limited partnership the partners must register in the applicable state (typically through the office of the local Secretary of State). In addition to this, it is important to research and obtain all relevant business permits and licenses - these will vary based on locality, state or industry.
Another option is a Limited Liability Company. A LLC is basically a combination of both the corporation and partnership business structures. LLC Profits and losses can get passed through to your personal income without facing corporate taxes. You can be quite flexible in the way that you structure the members of the business and their involvement. Members of an LLC are still considered self-employed.
Please note that tax laws change frequently. This information is for educational and informational purposes only should not be construed as tax or legal advice. Please consult a licensed financial expert in your area with specific questions or concerns.
Nicole Pascoe
Nicole is the co-founder of Craftybase, inventory and manufacturing software designed for small manufacturers. She has been working with, and writing articles for, small manufacturing businesses for the last 12 years. Her passion is to help makers to become more successful with their online endeavors by empowering them with the knowledge they need to take their business to the next level.
There are many tax expenses involved in running your own professional craft handmade business - we guide you though some of the most common ones.
We discuss how cash based accounting may not be the best option for your handmade business.
We discuss the considerations around how to select the best bookkeeping software if you are a handmade business.
Confused about your tax obligations as a handmade seller? Read on to find out how to stay on the right side of the tax man.
Wondering if your handmade business is considered a hobby or a business? This article will explain the finer details from a tax perspective.
If you are just starting your craft business and need some advice, or need some guidance on what to do next in order to grow your handmade business further then definitely consider arranging a mentor meeting with SCORE.