Legal Guidelines for Starting a Craft Business in the US

Making a living off your hobby can be amazing.

If you are great with crafts and handiworks, you could eat, breathe and live off your hobby of crafts instead of doing it in your free time.

But like most other things in life, a craft business doesn’t come that easy. Starting and sustaining a business revolving crafts can be grueling. Among the various other things, you also need to keep in mind the relevant legal guidelines to start a craft business in the US.

Today, I’ll walk you through with all the legal guidelines you need to know to start a craft business in the US. Following are the most important aspects about which the details you need to know before you start:

1. Choose A Business Name
2. Register Your Business
3. Get Federal and State Tax ID Numbers
4. Pay Taxes
5. Required Licenses and Permits

1. Choose A Business Name

The first order of business (literally), is to come up with a name for your craft endeavor.

But this isn’t just for the purposes of giving your business a name that will recall its brand identity or substantiate your corner of the craft business world.

That’s right; name registration is important if you want to protect your business. This works in a few different ways that are legally independent.

First of all, you can register your business as an entity. This helps the state to identify your business. This entity name also works to protect the rights of you as a business owner and your business as a separate entity.

Furthermore, it will prevent other business owners from using the same name as yours.

The second type of name is a trademark. A trademark offers protection at the federal level. More importantly, a trademark will also prevent others from using the same name as their own. And if any invention is involved with your craft which has novelty and utility, you may look for patent protection as well. Some business opts for the protection of trade secret, rather than patent initially because it involves fewer formalities. The only thing you need to make sure is that you need to keep your process secret from everyone else.

Finally comes the DBA, which stands for “doing business as.” This might be a legal requirement in some states, although it does not provide legal protection. A DBA is also known as “fictitious name,” “trade name” and “assumed name.”

Additionally, there is your domain name, should you choose to open a website. This protects your business website address and ensures your online brand presence. Note that you will have to renew the domain every now and then, depending on the registrar.

2. Register Your Business

Why do you need to register your business? To make it a separate legal entity, of course. Read on to find out why this is necessary.

The very first thing you need to do is take into account the location you will be running your business in. Second, your business structure. Those two factors will determine how your registration process will go.

Usually, you have to register the business name with both state and federal governments. However, there are some cases in which you won’t need to register at all. For example, if you do business using your own legal name, registration is not required.

However, note that without registration, you will be deprived of certain advantages such as tax benefits, legal benefits, and personal liability protection.

Now let’s look at the two main ways of getting your business registered: federal and state.

When it comes to the federal government, most businesses don’t need to register to become a legal entity. Usually, all you have to do is apply to get a federal tax ID. But you may choose to register if you want to receive tax-exempt status or trademark protection.

Should you choose to get your business trademarked, you will have to file with the United States Patent and Trademark Office. From there, if you are looking to get tax-exempt status, you will have to register your business at the IRS as a tax-exempt entity.

Now let’s look at state government laws.

If your business is a corporation, LLC, partnership, or nonprofit corporation, you will most likely have to register at any state where you are operating business activities.

To determine whether you fall into that category, you have to see if you check the following points.

Does your business have a physical presence in that state? Is the majority of your business’s revenue generated in that state? Do you usually have physical meetings in that state? Finally, do your employees work in that state?

In all of these cases, you will need to register.

Although you will be able to register online in many states, some will require you to submit documents via mail or in person. You will have to look into that yourself.

3. Get Federal and State Tax ID Numbers

Just like you, your business also requires an identification number. These come in the form of federal tax ID numbers and state tax IDs. These are also known as an Employer Identification Number (EIN). You need this number to be able to pay state and federal taxes.

Your federal tax ID is the same as your EIN. This is required for a number of activities, such as hiring and paying employees, paying federal taxes, opening bank accounts, or applying for necessary permits and licenses.

The good news is, applying for an EIN is free!

Now let’s move on to your state tax ID number.

You will have to do your own research to determine whether you need a state tax ID. Look up your state’s laws regarding employment taxes and income taxes.

You need a state tax ID number if your business is required to pay state taxes. They can also serve other purposes. For example, if you are a sole proprietor, it can help protect you against identity theft.

Acquiring a state tax ID number is similar to getting an EIN. However, this will, of course, vary from state to state. So, get researching!

4. Pay Taxes

In order to enjoy a good legal standing, your business is required to meet its federal, state, and local tax commitments. Once again, the taxes you must pay will be determined by the location you are operating from, and your business structure.

A tax year is a consistent annual schedule that every business has to follow. Legally, your business will have to do the same by keeping accounting records and paying taxes. You will likely benefit from making your tax year equivalent to your calendar year.

You can choose your tax year depending on a number of factors. First of all, decide if you want your 12-month accounting cycle to end in any month other than December. That is a fiscal tax year.

A calendar tax year like the one I mentioned above is best suited to business with special accounting needs, or one that doesn’t require much bookkeeping. You will still need to check with the Internal Revenue Service (IRS) to see if this applies.

If you change your accounting period or your business has not existed for a whole tax year, then you can choose a short tax year.

After choosing your tax year, you will have to determine your state’s specific tax requirements.

Your business might need to pay state and local taxes. Tax laws vary by location and business structure, so you’ll need to check with state and local governments to know your business’ tax obligations.

Income taxes and employment taxes are the two most common types of local and state tax obligations.

Your business structure determines your state income tax requirements. For example, if you are running a corporation, that means your business is a separate entity and will be taxed accordingly. However, if you are a sole proprietor, you will report your business taxes along with your own.

You’ll have to pay state employment taxes if your business employs people. Once again, this differs from one state to another but will tend to encompass such things as workers’ compensation insurance or temporary disability insurance.

Now let’s move on to federal tax requirements.

Once again, this is determined by your business structure. It’s very important to keep up with what tax requirements you have to follow.

In general, there are 5 types of business taxes on a federal level: income, self-employment, estimated, employer and excise.

Each kind of business tax follows specific rules and qualifications. It will also require you to fill out a number of IRS forms, depending on your individual business type and structure.

5. Required Licenses and Permits

As a craft business owner, there are a number of licenses and permits from both federal and state agencies that you require.

If your business activities are regulated by a federal agency, you’ll need to apply to get a federal license or permit.

The industry you are operating in will determine which government agency will issue the licenses or permits you need. You need to be very thorough in this case.

For example, for business in the agriculture industry, the U.S. Department of Agriculture will be the one to issue permits. So, make sure to check which agency fits you as a craft business owner.

You will also have to pay certain licensing costs for your business. These will, of course, vary depending on location, business activities, and government rules and regulations.

You will also have to take state permits and licenses into account.

In comparison to the federal government, state governments usually regulate a wider range of activities. Some business types may be more heavily regulated than others.

Keep in mind that certain licenses and permits will expire after a certain date. Therefore, you have to keep a close watch on renewal dates. If you miss a date, applying for a new permit can be a much bigger hassle than just renewing on time.

Once again, make sure to research your specific city, county and state regulations.

Additional Tips for Starting a Craft Business in the US

Here are a few more guidelines you might benefit from if you are thinking of starting up your own craft business.

When your business is ready to start making revenue or paying expenditures, it’s time to open a business bank account. By doing so, it will be easier for you to comply with legislation and stay protected. Of course, it will also create benefits for your employees and customers.

The most common kinds of business bank accounts are checking accounts, savings accounts, credit card account, and a merchant services account. A merchant services account is very important as it will enable you to make credit and debit transactions with your customers.

Business bank accounts come with advantages that personal bank account holders can’t enjoy. The most important one of these is protection. It keeps your business funds separate from your personal funds; thereby giving you limited personal liability protection.

A bank account will also increase your purchasing power as a business owner and create a credit history for your business. Furthermore, because most business accounts come with a line of credit, you can use that in the event of emergency purchases for your business.

Another important point is that it will augment your professionalism. Your business customers will be able to put more stock in your business if they are paying the business itself, instead of you, the owner.

Moreover, you’ll have the ability to give employees the authority to perform daily business activities using the bank account.

When opening a bank account, the bank you have chosen will usually ask for the following documents: EIN or SSN (if you’re a sole proprietor), business formation documents, business license, and ownership agreements.

There are many unexpected costs you may encounter when you are running a business. Insurance protects you from such costs. They may manifest in the form of natural disasters, accidents or lawsuits.

The first thing you need to do is to pick the type of business insurance best suited to your business. For example, if you are a corporation or an LLC, the insurance you get will only protect your personal property from lawsuits.

In some cases, purchasing certain kinds of business insurance is a legal requirement. The federal government, for example, requires any business with employees to provide unemployment and workers’ compensation, amongst other factors.

Depending on your state, you may have to get additional insurance. Once again, you’ll have to do your own research in this regard.

The 6 most common types of business insurance are general liability insurance, product liability insurance, professional liability insurance, commercial property insurance, home-based business insurance, and business owner’s policy. This last one is the most common for small business owners, so it’s probably the most relevant to you.

When trying to find the best legal structure for your business, it can be difficult to sift through the many available options.

A sole proprietorship is probably the best way to go if you’re just starting out. It’s the least complicated and least expensive way of operating a business.

The reason why so many small business owners prefer this business structure is because it doesn’t require you to pay any fees or file any legal forms.

However, if you want to operate your sole proprietorship using a name different from your own, you will have to file a certificate for DBA—remember DBA? Scroll up to read more on that.

Of course, as I have mentioned earlier, there are also certain licenses or permits you might have to apply for. Once again, check your specific city and state requirements!

Final Words

Everywhere you go, there will always be creative folks creating beautiful things. Artisanal bowls, wooden items, hand-made necklaces, so many things.

No matter what your craft, if you believe you’re good enough, you’ve probably considered selling your items. You don’t always have to set up a business to do this; word of mouth is usually enough.

However, if you’re starting to think big, you could benefit from starting up a small business. Hopefully, this article will help you to comply with the legal issues.

So, to recant get yourself a DBA, pay your taxes, set up shop online, and learn about business laws. All the best of luck.

Judy Eaton
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