Starting Your Maker Business: Licenses, Legal Structure, and Finances
It could seem overwhelming to transform your woodworking or crafting hobby into a full, legal maker business. Between the paperwork, legal terms, and government acronyms, starting a business is not exactly your average weekend project. But it is critical. Operating your maker business is not only about committing to consistently high-quality products and engaging marketing. You will need to invest your time into all the work that keeps your business operable in the first place: the accounting, the taxes, the licenses, etc. Without that administrative infrastructure, you cannot reach your goals of a growing, financially sound business. And frankly, without the right registrations, your business may not even be legal.
So let’s make sure it’s done right!
To help achieve any dream of making real money from your craft, transitioning your hobby to a business is vital. But it doesn’t have to be hard. Your licenses and registrations can most likely be done in 1 or 2 days. And if you stay organized, your accounting can be done in a few hours each month.
This post will provide you the information you need to get started on taking your craft from a garage hobby to legitimate business. You will need to:
- Choose a business name
- Choose an entity name
- Choose a legal structure
- Obtain the right permits and business licenses
- Set up a system to pay sales tax
- Set up a system for bookkeeping
It may seem like a lot of hoops to jump through, but we’ll break it down for you.
START BY CHOOSING A BUSINESS NAME
Your official business name can be some version of your current maker name. It's of course how your customers know you, how your fans find you, and possibly already on your packaging and marketing materials.
But before making the final decision on a business name, you may want to ensure an appropriate website domain name and (possibly) appropriate social media handles are available. Even if you don’t think you will use Instagram to advertise your work, your customers may be searching for your store on a search engine, and it would be unfortunate if another maker is already using your store’s name as their account username.
Consider a name that is easy to remember and preferably easy to spell. Maybe it rhymes, like Stump Chump, or you use alliteration, like Cameron’s Crafts. Draw inspiration from your locale, like using the name of your town, region, neighborhood, or local geographic features. Muddy River Artisans sounds pretty neat, right?
Your business name could be personally meaningful to you, as well. If you can share the story of your business name well, people will remember it. Just consider George Supply Co.!
CHOOSE AN ENTITY NAME
Firstly, we need to explain what we mean by “entity”. The legal operation you are creating is your business entity. The product lines, brand, marketing, slogan, etc. (you know, your ‘business’) is operated by your business entity.
Depending on your state, your entity name may or may not be the same as your business name. You've possibly seen names in the past that look like JOHNSON WOODWORKING LLC dba ALL STAR WOODWORKS. Johnson Woodworking is the entity name, dba means "doing business as", and All Star Woodworks is the business name.
In other words, the business entity Johnson Woodworking, LLC owns and operates a business called All Star Woodworks.
This setup allows you to have one entity that owns several businesses, or allows you to change your business name sometime in the future, with minimal paperwork. Johnson Woodworking, LLC, for instance, could open a second business just for online digital blueprints without going through the entire process of creating a new business entity from scratch. Keep in mind, each state will allow multiple ALL STAR WOODWORKS, but only one JOHNSON WOODWORKING LLC dba ALL STAR WOODWORKS.
Your entity name is also how the state identifies you. Ensure your entity name is available to use legally by checking your state’s Secretary of State online database of business entities. Your exact entity name will also depend on your legal structure, as you will see below. Your entity may not be an LLC, as the example has used.
Each state requires you to register your entity name (sometimes called a fictitious name) and connect it to your business name (dba). SBA instructions by state are here.
Once you have your business name, you can also start thinking about your logo. Here are a few tips for making an outstanding logo.
CHOOSE A LEGAL STRUCTURE
Now would be the time to set up your legal structure to protect yourself and your family’s assets legally. There are 2 important steps, choosing the legal structure and choosing how you will be taxed.
1: Choose the Legal Structure
There are 5 common legal structures:
- LLC or Limited Liability Company
- Sole Proprietorship
- S Corp
- C Corp
The US Small Business Administration (SBA) describes each business structure on their website in more depth. But we have the basics below.
Step 2: Choose how you will pay taxes
- An LLC, Limited Liability Company, is a hybrid structure that allows owners, partners, or shareholders to limit their personal liabilities while enjoying partnership’s tax benefits. The LLC structure can choose to be taxed as a partnership, so profits are divided among the partners and taxed on their personal tax returns, or be taxed as a corporation, so taxes are paid by the business. (This, however, can result in double taxation, so work with a tax professional.)
- Under a Sole Proprietorship, the company profits are reported on your personal tax return. The profits are also subject to Self Employment Tax (essentially Medicare and Social Security).
- Under a Partnership, the company profits are divided by the number of partners. Profits are allocated to each partner, and that income is reported on the partner's personal income tax, as well as subject to Self Employment Tax.
- An S Corp (short for special corporation) is a more complex partnership, but involves paying fewer taxes. An operating agreement delineates the amount of ownership for each shareholder, thereby determining their portion of the profits or losses. Each partner must take at least one paycheck of a reasonable amount, where they pay their Social Security and Medicare taxes. While the remaining profits are not subject to Self Employment Tax, they are taxed when they are reported as income on the partner's personal income tax.
- A C Corp (short for corporation) is typically for large corporations planning to raise capital, possibly go public in the future, or offer various classes of stocks. Consult an accountant for more information on this type or any type of business entity.
A legal entity like an LLC will serve to protect your personal assets separate from your business assets
GET THE PROPER PERMITS AND LICENSES TO DO BUSINESS LEGALLY
Once you have your entity and business names and legal structure established, you will need a few business licenses, depending on your locality. Here are links to complete each one.
- Federal Tax ID Number from the IRS (also known as an EIN): You need this to pay federal taxes and hire employees.
- State sales tax number (your state may call it a State Sales Tax ID, State Sales Tax License, Retail License, Vendor License, or Wholesale Permit): You need this to remit sales tax payments.
- Local business license: You may need this to operate a business in your local area.
SET UP A SYSTEM TO PAY SALES TAX
Establishing a system for collecting and paying sales tax can save many future headaches. You may consider having a separate bank account exclusively for sales tax, that you either deposit into regularly or receive an automatic transfer regularly.
When you apply for your state sales tax number, it should also include your sales tax percentage to charge and instructions on how and when to remit payment of your sales tax liability. Make sure you have set up your sales tax percentage in whatever e-commerce platform you are using and know how to charge it manually for in-person retail purchases.
Sales tax for online sales can be very confusing, as rules differ from state to state. Using a reputable e-commerce platform like Shopify or Etsy, which automates the process, is recommended to reduce any future unexpected tax liability.
Quickbooks is a common DIY bookkeeping system that will automatically update from your bank account, and offer options such as printing invoices and tracking inventory.
ESTABLISH A BOOKKEEPING SYSTEM
The least glamorous part of turning your hobby into a business is bookkeeping. If done correctly and with purpose, however, it will not only show whether you are profitable or not, but can also be a tool for identifying opportunities for improving profits, projecting future sales and profits, and making decisions regarding investments into the business.
Options for executing your bookkeeping responsibilities are to do it yourself with a solution like Quickbooks or to find an independent bookkeeper. Either way, here are some steps to follow:
- Open a business bank account
- This may be required in your state or local area
- Decide how you will pay yourself. (This is also called a draw.)
- Most likely you will cut a check when only assets allow.
- Draws are not taxed until they appear on your annual income tax, so you may consider setting some funds aside to pay the additional income tax due.
- Decide how you will keep track of your bookkeeping. Common options are:
- Do it yourself using a technology solution like Quickbooks.
- Use an online or local bookkeeping service.
- Either way, keep in mind how you will organize your purchase receipts and income receipts so they can be accounted for correctly and efficiently.
Whatever you use for your year-end taxes or your monthly bookkeeping service will guide you toward your requirements for tracking and valuing your inventory for tax purposes. These requirements may vary on your type of business, your annual sales volume, and your location.
Spending a few hours getting your legal requirements completed is not only required to comply with state and federal law, but is an important step psychologically in moving from part-time hobby, to the part-time or full-time business you want.
Initially, you'll need to spend some time making important decisions like a business name, business structure, and how you will pay your taxes. Then the focus turns to maintaining your records so they become a tool for making future business decisions.
Ultimately, establishing a strong foundation now will allow you more time in the future to do the making you love.
Have other questions about building your maker brand and business? Subscribe to the Business for Makers Blog and Business for Makers Podcast for insights and tips. Tune to Sawdust Talk on IGTV Live on Wednesdays at 10 pm CST to hear from makers about their projects and business and meet some great members of the maker community.
By the way, once you get your business name, you’ll need T-shirts to show it off! Check out georgesupplyco.com to get your maker business’s name and logo on a shirt, hoodie, or hat.
ABOUT THE AUTHORS
Scott Chervitz is owner of George Supply Company, dedicated to helping woodshops build their brand. See more at GeorgeSupplyCo.com. You can reach him at Scott@GeorgeSupplyCo.com, on Instagram at @GeorgeSupplyCompany or Twitter @ScottChervitz
Brian Chervitz, M.S., is an Associate Instructional Designer at the University of Wisconsin Extended Campus.