Do You Need an LLC for Your Handmade Business? Probably Not Yet

Of the 35.7 million businesses the Census Bureau counted in the United States, 29.8 million have no employees at all — sole operators, side hustles, one person and a workbench, generating $1.7 trillion in receipts between them (U.S. Census Bureau, May 8, 2025 (opens in new tab)). That is better than four out of five American businesses. The Bureau's own description of that group: "the majority of nonemployers are self-employed individuals operating unincorporated businesses (known as sole proprietorships)" (Census Bureau, About Nonemployer Statistics (opens in new tab)). Unincorporated. No entity. Just a person and a Schedule C.

Which is worth holding onto, because the first piece of advice any maker gets after their third sale is form an LLC. It arrives in Facebook groups, in Reddit replies, in the comments under a video about pricing. It is delivered with total confidence and almost no follow-up questions, and it is usually wrong — not because an LLC is a bad thing, but because the three benefits people attribute to it are, in order: not automatic, not real, and not free.

The short version: An LLC is a liability container, not a tax strategy. By default it changes nothing about how you are taxed. It does not protect you from claims arising out of your own work — which is most of what a maker gets sued over. Its cost to carry ranges from $15 a year to $800 a year to a six-week newspaper campaign depending on which state you are standing in. And four specific things, none of which is "I sold some candles," are what should actually trigger a filing.

What the liability shield actually covers

The statute, in plain English

Start with the statute, because the statute is unusually clear and almost nobody reads it. Delaware's LLC Act — the model half the country borrowed from — says the debts and liabilities of an LLC "shall be solely the debts, obligations and liabilities of the limited liability company, and no member or manager of a limited liability company shall be obligated personally for any such debt, obligation or liability of the limited liability company solely by reason of being a member or acting as a manager" (6 Del. C. § 18-303(a) (opens in new tab), emphasis added).

Read that last clause twice, because everything hinges on it. The shield stops liability that attaches to you because you own the thing. It does not stop liability that attaches to you because you did the thing.

Louisiana's version of the same provision says the quiet part out loud. After granting the standard protection, it adds that nothing in the chapter derogates "any rights which any person may by law have against a member, manager, employee, or agent of a limited liability company because of any fraud practiced upon him, because of any breach of professional duty or other negligent or wrongful act by such person" (La. R.S. 12:1320(D) (opens in new tab)).

The scorched countertop

Now picture a candlemaker — call her Dana, a composite of a very common situation. Dana pours 200 vessels a month in her garage, sells them at two markets and on her own site, and formed an LLC last spring because someone in a group chat told her to. A customer's candle burns through its vessel and scorches a countertop. The customer sues.

The claim is that the candle was defective. Dana made the candle. She chose the wick, she chose the vessel, she ran the burn test, or she didn't. The LLC is not standing between her and that allegation in the way she thinks it is, because the allegation is not "Dana owns a company that did something" — it is "Dana did something."

What does respond to that claim is an insurance policy, which is a different purchase entirely and one most makers put off longer than the LLC. If that sentence made your stomach drop slightly, there is a whole post here on what product liability coverage actually costs and excludes — worth reading before you file anything.

The Small Business Administration's own language on LLCs is more careful than the internet's: they "protect you from personal liability in most instances," so personal assets "won't be at risk in case your LLC faces bankruptcy or lawsuits" (SBA, Choose a business structure (opens in new tab)). In most instances is doing an enormous amount of work in that sentence, and the instances it quietly excludes are the ones a solo maker is most likely to encounter.

Where the shield does hold

Here is where the shield genuinely does its job: the business signs a two-year lease on a studio and then folds. The business takes on $18,000 of supplier credit and cannot pay it. The business hires someone and gets sued over an employment issue. In every one of those, the liability is the company's, and the wall holds. Notice what they have in common — they are all obligations the business entered into as an entity, not products you personally made.

Four beliefs that don't survive contact with a craft business

"It'll lower my taxes"

This one is the most stubborn, and it is simply not how the default works.

The IRS treats a one-owner LLC as "an entity disregarded as separate from its owner" for income tax purposes unless it files Form 8832 and affirmatively elects corporate treatment (IRS, Single Member Limited Liability Companies (opens in new tab)). Disregarded means exactly what it sounds like. You report the business on the same Schedule C, "Profit or Loss from Business (Sole Proprietorship)" — the form's parenthetical is not a typo — and the same IRS page confirms that the owner "is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship."

Self-employment tax is 15.3%: 12.4% for Social Security and 2.9% for Medicare, owed once net earnings reach $400 (IRS, Self-Employment Tax (opens in new tab)). That number is identical before and after you file Articles of Organization. Nothing about the entity changes it. The SBA says the same thing from the other direction: "Members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security" (SBA, Choose a business structure (opens in new tab)).

The savings people are actually describing come from an S corporation election — a tax classification, not an entity type, which you can layer onto an LLC later. Under it, you pay yourself a salary subject to payroll tax and take remaining profit as a distribution that is not subject to self-employment tax. It is a real strategy. It is also one the IRS watches closely: distributions to a shareholder-officer "must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation" (IRS, S Corporation Compensation and Medical Insurance Issues (opens in new tab)), and the agency can reclassify a too-small salary after the fact.

The practical point: the election adds payroll filings, a separate corporate return, and usually an accountant on retainer. Those costs are roughly fixed. The savings scale with profit. Below some profit level — the level depends on your state, your salary, and what your accountant charges, so ask them rather than a blog — the arithmetic runs backward. Note what the accountant needs from you before they can run it at all: an actual net profit figure. That is a harder thing to produce than most makers expect, and tracking materials and batch costs properly is the unglamorous prerequisite to ever answering the question. And note the deadline mechanics: an entity classification election "cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed" (IRS, Limited Liability Company (opens in new tab)). You are not locked out by waiting.

"I need one to open a business bank account"

You don't. Banks open business checking accounts for sole proprietors as a matter of routine, generally on the strength of an EIN — which the IRS issues free to sole proprietors — or a Social Security number, plus a fictitious-name registration if you trade under something other than your legal name.

The underlying instinct is right and the conclusion is wrong. Separating business money from personal money is one of the highest-value things a small maker can do, and it costs nothing but a trip to a bank. Doing it inside an LLC is not what makes it work. In fact, the causation runs the other direction: if you form an LLC and then keep running everything through your personal checking account, you have created a paper entity with none of the separation the shield depends on. The commingling is the problem, and the LLC did not fix it.

"It's cheap, like fifty bucks"

It is fifty bucks in some states and it is emphatically not in others. Three real examples, all from the primary sources:

Fees are from each state's own schedule: Kentucky Secretary of State (opens in new tab), California Secretary of State (opens in new tab), and the New York Department of State pages for Articles of Organization (opens in new tab), the biennial statement (opens in new tab), and the Certificate of Publication (opens in new tab).

California's number is statutory, not a fee schedule someone can waive for you: an LLC doing business in the state owes an annual tax "for the privilege of doing business," due the 15th day of the fourth month of the taxable year (Cal. Rev. & Tax. Code § 17941 (opens in new tab)), and the amount it points to is $800 (§ 23153(d)(1) (opens in new tab)). A California maker clearing $6,000 of profit a year is handing over more than 13% of it for the privilege of having filed a form.

New York's requirement is stranger and catches people badly. Within 120 days of formation, the LLC must publish a notice "once in each week for six successive weeks, in two newspapers of the county" where its office sits — papers designated by the county clerk, not chosen by you — and then file proof with the Department of State. Miss it and "the authority of such limited liability company to carry on, conduct or transact any business in this state shall be suspended" (NY LLC Law § 206 (opens in new tab)). The newspaper charges are set by the papers rather than the state, so the total is whatever your designated county papers quote — and in the downstate counties they are not small.

Kentucky, meanwhile, is $40 to open the door and $15 a year to keep it open. Same entity, same shield, wildly different arithmetic. "Should I form an LLC" is not a national question and answering it nationally is how people end up surprised in April.

One cost on this ledger recently disappeared entirely: the federal beneficial ownership reporting requirement that dominated small-business advice in 2024 no longer applies to U.S.-formed companies. FinCEN's interim final rule, published March 26, 2025, removed the requirement for entities created in the United States and for U.S. persons, leaving it on foreign-formed entities registered to do business here (Federal Register, 90 FR 13688 (opens in new tab)). That rule has moved more than once — check FinCEN's current guidance rather than trusting any post, including this one, on the date you read it.

"It protects my business name"

Only a little, and only in one state. Forming an LLC generally stops another entity in that same state from registering an identical name with that state's filing office — and that is the whole of it. It does not stop a shop one state over from using your name, it does not stop anyone from opening an Etsy store under it, and it is not a trademark. Name rights come from use in commerce and, if you want them enforceable across state lines, from federal registration — which is a separate process with its own clearance search and its own costs.

If your goal is to trade under a name that isn't your own, the cheap tool is a fictitious-name or DBA registration at the county or state level, usually for a filing fee in the tens of dollars.

The four structures, honestly

Sole proprietorship

Pros:

• Costs nothing and requires no filing. You are one by default the moment you start selling.
• One tax return, one Schedule C, no separate entity filings or annual reports.
• No state franchise tax, no annual report deadline to miss, no registered agent to pay.
• Can hold an EIN, a business bank account, a sales tax permit and a cottage food license like anyone else.

Cons:

• The SBA puts it plainly: "You can be held personally liable for the debts and obligations of the business" (SBA, Choose a business structure (opens in new tab)).
• No shield if the business itself takes on obligations it can't meet — a lease, a supplier line, a judgment against the business.
• Some counterparties (a minority, but a real one) will not contract with an unincorporated seller.

Best for: almost every maker in their first two or three years, and the SBA agrees — it calls sole proprietorship "a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business" (SBA, Choose a business structure (opens in new tab)).

Sole proprietorship + DBA

Pros:

• Everything above, plus you can bank, invoice and brand under a business name instead of your legal name.
• Usually a county-level or state-level filing in the tens of dollars, renewed every few years.
• Satisfies the "business name" requirement most banks and market organizers actually ask about.

Cons:

• Zero liability change. A DBA is a name registration, not an entity.
• Name protection is thin — it typically prevents duplicate registrations in the same county, nothing more.

Best for: the maker whose real problem was "I don't want checks made out to my legal name," which is a surprising share of the people being told to form an LLC.

Single-member LLC

Pros:

• A genuine shield against liabilities the business incurs as an entity — leases, business debt, contracts signed in the company's name.
• Signals formality to wholesale buyers, licensors and commercial landlords who ask.
• Costs nothing extra in federal tax complexity by default: still Schedule C, still one return.
• Keeps the S corporation election available for later, without redoing anything.

Cons:

• Annual cost that ranges from trivial to $800 depending on the state, owed whether you profit or not.
• Requires real separation — separate bank account, separate records, contracts signed in the company's name — or the shield is decorative.
• Does not touch liability for your own work, which is the exposure most makers actually face.
• Some states have annual reports and registered-agent obligations with real consequences for missing them.

Best for: makers who have hit one of a few specific situations — a lease, a partner, a counterparty demanding it, or tax math that finally clears — rather than makers who have merely crossed a revenue milestone. Each of the four gets its own breakdown below, under "Four things that should actually trigger a filing."

LLC with an S corporation election

Pros:

• The only one of the four that can genuinely reduce self-employment tax, by splitting profit into salary and distribution.
• Preserves the liability posture of the LLC underneath it.

Cons:

• Payroll: real wages, real withholding, real quarterly filings, usually a payroll service.
• A separate business return on top of your personal one, which most people are paying a professional to prepare.
• The IRS can reclassify an unreasonably low salary as wages after the fact.
• Below a meaningful profit level the added cost exceeds the tax saved.

Best for: the maker whose net profit has grown to the point where an accountant can show the crossover on paper — and it should be your numbers on that paper, not a rule of thumb from a video.

Four things that should actually trigger a filing

1. You are about to sign something that outlives a single order. A commercial studio lease, an equipment loan, a supplier credit line. These are entity-level obligations, and this is precisely the exposure the shield was built for. Caveat: lenders often insist on a personal guarantee anyway. SBA's own business-loan regulation is blunt about it: "Holders of at least a 20 percent ownership interest generally must guarantee the loan" (13 CFR § 120.160(a) (opens in new tab)) — which collapses the shield for that specific debt. Read what you sign.
2. Someone is joining you. Two owners means a partnership by default whether you papered it or not, and the default rules are almost certainly not what either of you wants. Here the operating agreement is the reason to form, and the liability shield is a bonus.
3. A counterparty requires it in writing. Some wholesale accounts, licensors, commercial insurers and landlords do ask. When one does, the question has been answered for you.
4. The tax math finally clears. Not "I made money this year" — specifically, an accountant running your actual profit against your actual state's costs and showing that an S election nets out ahead. Until someone has done that arithmetic with your numbers in it, the answer is no.

Notice what is not on that list: hitting $10,000 in sales, getting your first wholesale inquiry, or feeling like a real business. Those are milestones. They are not liabilities.

What to do instead, this month

If you came here ready to spend a few hundred dollars on becoming legitimate, there are things that will do more with the same money.

Buy the insurance. A product liability or general liability policy is the instrument that actually responds when a customer claims your product hurt them. It is the single largest gap between what makers think an LLC does and what it does.

Open the separate account. Free at most banks, takes an afternoon, and it is the foundation of every other good habit — clean records, defensible deductions, a real answer to "how much did the business make."

Write down what things cost. Not revenue: cost. The reason so many makers cannot tell whether an S election would pay is that they cannot state their net profit within a thousand dollars. If your material costs live in your head and your batch history lives in a notebook, that number does not exist yet. This is the part Ardent Seller is built for — recipes and batches that carry real material costs, so cost of goods sold on your Schedule C is a figure you can defend rather than a figure you estimated in March.

Get your contracts in order. A commission agreement, a wholesale terms sheet, a clear returns policy. Sole proprietors can and should have all of them, and they prevent more disputes than any entity filing.

Then, when one of the four triggers fires, file. It will still be there. Filing is not a one-way door, and there is no bonus for having done it early.

The uncomfortable truth underneath all of this is that "form an LLC" is popular advice partly because it is easy to give. It takes four words, it sounds prudent, and nobody has to look at your numbers to say it. The four things above take longer to explain and are considerably more likely to save you. Most of those 29.8 million nonemployer businesses are, by the Census Bureau's own account, unincorporated — and the overwhelming majority of them are fine. Not because they got lucky, but because the risks they actually face were never the ones an LLC was designed to catch.

Ready to know your real numbers before you spend money on structure? Start a free Ardent Seller account and get your material costs, batches and margins in one place — so when the LLC question comes back around, you can answer it with arithmetic instead of vibes.

Related reading

• Product Liability Insurance for Handmade Sellers — the coverage that actually responds when a customer says your product hurt them, what the cheap policies exclude, and which counterparties demand proof.
• Hobby vs. Business: Taxes and Record-Keeping — before "which structure," the prior question is whether the IRS considers this a business at all, and what records make that case.
• How to Trademark a Handmade Business Name — the process that actually protects a name across state lines, which an LLC filing does not.
• Should I Quit My Day Job? — the runway math for the decision that usually sits behind the entity question.

Free resources

Free companion downloads if you want to put any of this into practice:

• Legal Documents Every Maker Should Have — the contracts and policies that prevent disputes regardless of which structure you choose, which is most of what people are hoping an LLC will do for them.
• Craft Seller Startup Checklist — the permits, registrations and accounts that actually gate selling, sorted from "required before your first sale" to "later."
• Hobby vs Business: IRS 9-Factor Test — walk the nine factors the IRS weighs, since business status is the question that has to be settled before entity choice means anything.

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This article is provided for educational purposes only and does not constitute legal, tax, or accounting advice. Entity formation rules, state filing fees and franchise taxes, liability doctrines, and federal tax elections vary by jurisdiction and change frequently. Consult a qualified CPA, tax preparer, or attorney before choosing or changing your business structure.