This article is part of my "Marketing for Mompreneurs" training, which teaches moms how to grow their crafting business. Check out the link for more mompreneur articles!
This is not legal advice and this is not tax advice. Consult with a lawyer or an accountant as necessary. I’m just telling you about my experience.
This article is an extension of a 10 day challenge to create a mompreneur business and get a first Etsy listing up. To read more about it, visit Mompreneur Bootcamp Day 3: Register with the Government.
Many crafters do their business under the table. I don’t do that, and I don’t have any advice for those considering it. If you decide to do that, proceed at your own peril.
What are the Types of Business Structures?
The options for how to structure a mompreneur business are intimidating. Check out some of the types below and even the names are enough to turn people off:
- Sole proprietorship
- LLC (Limited Liability Corporation)
- LLP (Limited Liability Partnership)
The good news is, you don’t need to learn them all.
Which Type Should a Mompreneur Choose?
For the vast majority of mompreneurs, a sole proprietorship or LLC should be used:
Notice that in either case, there is no tax benefit. The IRS doesn’t even recognize your LLC for tax purposes – they treat your sole proprietorship or LLC is a “pass through entity”. That means all money earned is passed on to the persons who own the business and is treated like normal income.
I recommend LLC for the liability protection, but it costs more and requires some financial diligence. That may not be for everyone.
You have to register in the state you live in. To figure out what is required for that state, visit your state’s secretary of state, comptroller, or whatever government commerce website they have to figure out what is required for you to file there.
Note: You have to renew registrations every year, and that costs money. Typically, it’s less money than the initial registration, but it’s still money out of your pocket.
I don’t know when someone would want to form an LLP.
I’ve done a business with other people before, and we structured it as an LLC. You can have business partners in your LLC, but you’ll have to do a tax form called a Schedule K-1 at the end of the year. That will report to the IRS and to each partner how much of the profit they received.
If you’re making more than $50k profit per year on your business, congratulations! In that case, it’s probably time to think about switching to an S-Corp. An S-Corp is like an LLC, except you become an employee of your own company and you pay yourself a salary. Your salary gets taxed at your personal rate, and the business gets taxed on the rest at what is hopefully a lesser rate.
And no, you can’t pay yourself $1 to get a lower tax rate for most of your profits. The IRS expects you to pay yourself a “reasonable” salary.
Why is the cutoff about $50k? As of 2019, there is no tax benefit until you hit about $50k in profits. So you can create an S-Corp before you hit $50k, but it’s not helpful. Note that the cutoff estimate changes from year to year depending on tax policy from the government.
I believe these are for companies that want to issue a public stock offering. If you ever make it big enough to think about forming a C-Corp, then I need to be coming to you for advice about how to market my goods!
WARNING: An LLC does NOT automatically grant you liability protection!. You have to keep personal and business finances separate to strengthen your case to a judge on why you should get liability protection.
LLCs and S-Corps protect you from certain liabilities, but only if you keep your finances separate. If you’re being sued, a judge will look at your finances to determine whether you and the business are financially different entities. If you mix business and personal transactions on any given account, a judge will likely rule you personally liable even though you have an LLC.
The way to maintain that wall of protection in an LLC is to keep separate financial accounts for your business and for your personal life. For the LLC, create a separate bank account, a separate credit card, and never mix business and personal transactions.
The only question is whether you want to pay more and restructure your business in such a way to protect your personal assets from being liable for business debts.
Ready to Form a Business?
Have you decided which business structure you want to use?
If so, you’re probably ready to start up your own business. Let’s get started! Visit my 10 day challenge to set up your business to the point of creating your first listing on Etsy!
Based on what you have learned in this article, create one action item to do something new for your business and write it down in your MOMPRENEUR JOURNAL! Then do it! Focus on one little action item at a time and soon, your business will be booming!
What's the next thing to learn? I cover it all here - browse through and find an article to read!
You got this, mama!