Sole proprietor, LLC or S corp for a handmade shop

The three structures handmade sellers really choose between

Almost every handmade seller ends up in one of three places: a sole proprietorship, a single-member LLC, or an LLC that has elected S corporation tax treatment.

These are not three equal options sitting on a menu. They are stages. A sole proprietorship is where you are by default. An LLC is a state filing that adds a liability wall and a yearly cost. An S corporation is not a separate kind of business at all, but a federal tax election made on top of an entity that already exists.

Two people making and selling together have a fourth default, the general partnership, and it is the one to get out of quickly. Everything else, such as a C corporation, is built for outside investors and rarely fits a maker's shop.

If you have not yet worked out whether you need anything beyond the default, read whether you need an LLC yet before comparing structures.

The SBA describes a sole proprietorship as easy to form and giving the owner complete control of the business. — U.S. Small Business Administration, retrieved 2026-09-27

How a sole proprietorship works for a maker

A sole proprietorship is you selling what you make, with no separate legal person in between. It costs nothing to start and nothing to keep, and it carries unlimited personal liability.

For tax, the shop's income and expenses go on Schedule C attached to your Form 1040. If net profit reaches the self-employment threshold, Schedule SE adds Social Security and Medicare tax on top. That is the full federal picture. There is no separate business return.

The liability side is the cost. A lawsuit or unpaid debt of the shop can reach your savings, your car and your house, because there is no business separate from you for it to stop at. For a low-risk product line with no contracts or employees, many sellers decide that exposure is manageable with insurance. For a riskier line, it is the main argument for moving on.

A sole proprietor typically files Form 1040 with Schedule C and Schedule SE, plus Form 1040-ES if estimated tax applies. — Internal Revenue Service, retrieved 2026-09-27

What a single-member LLC changes and what it leaves alone

A single-member LLC adds a legal wall between the shop's debts and your personal assets. It leaves your federal taxes exactly where a sole proprietorship had them.

The IRS disregards a one-owner LLC by default, so its profit still flows onto Schedule C and still carries self-employment tax. The paperwork that changes is at the state level: a formation filing, a registered agent, recurring reports, and in California, the $800 annual tax covered on the California LLC tax page.

The wall itself has limits a maker should understand. It protects against the business's debts and most claims against the company. It does not protect you from liability for harm your own work caused, and courts can disregard an LLC whose owner treats its bank account as a personal wallet. Keeping the shop's money separate is what keeps the wall standing.

A single-member LLC owned by an individual generally reports its activity on the owner's Schedule C, E or F unless it elects corporate treatment on Form 8832. — Internal Revenue Service, retrieved 2026-09-27

The SBA says LLCs protect owners from personal liability in most instances. — U.S. Small Business Administration, retrieved 2026-09-27

When an S corporation election starts to pay a handmade shop

An S corporation election can lower self-employment tax once profit is high enough to pay yourself a reasonable salary and still leave meaningful distributions. For most small shops, that point is some way off.

Here is the mechanism. Without the election, all your Schedule C profit carries self-employment tax at 15.3 percent up to the Social Security wage base. With it, you become an employee of your own company. The salary carries payroll tax, and the remaining profit paid out as distributions does not.

The catch is the salary. The IRS requires an S corporation to treat payments to an officer as wages to the extent they are reasonable pay for the work. A shop netting $15,000 whose owner does all the work has little room above a reasonable wage.

The election also brings payroll, quarterly payroll returns and a corporate tax return, which cost money and time every year. Compare that running cost with the tax saved before filing Form 2553, ideally with a tax professional who has your numbers.

15.3%The self-employment tax rate is 15.3 percent, made up of 12.4 percent for Social Security and 2.9 percent for Medicare. — Internal Revenue Service, retrieved 2026-09-27

Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent they are reasonable compensation for services rendered. — Internal Revenue Service, retrieved 2026-09-27

100 shareholdersAn S corporation must have no more than 100 shareholders and only one class of stock, and it elects S status on Form 2553. — Internal Revenue Service, retrieved 2026-09-27

Two makers selling together are a partnership by default

Two people who make and sell together without filing anything are treated as a general partnership, and each partner can be held responsible for the other's business debts.

This catches friends who open a shared shop, and couples who run one together without a plan. Nobody signs anything to create the partnership. It exists because two people are running a business for profit together. It also changes the tax filing: the IRS lists operating a partnership among the situations that require an EIN, and a partnership files its own return.

A multi-member LLC fixes the mutual-exposure problem and makes you write down the questions that cause fights later: who owns what share, who can sign for the shop, and what happens if one of you leaves. If you already sell with a partner, this is one of the clearest triggers for forming an entity.

The IRS lists operating a partnership or corporation among the situations that require an EIN. — Internal Revenue Service, retrieved 2026-09-27

How to pick a structure for the shop you have this year

Choose the structure that fits this year's shop, not the shop you hope to have. Stay a sole proprietor until a real trigger arrives, then form an LLC, and consider the S election only later.

The triggers are concrete: higher-risk products, an employee, a partner, or contracts with real money attached. Until one of them applies, a separate bank account, good records and product liability cover do most of the work people expect from an LLC, at a fraction of the recurring cost.

When a trigger does arrive, the setup guide shows where the LLC filing sits in the sequence, and the formation-services comparison lists what each service charges next to filing it yourself.

The SBA says S corporations allow profits, and some losses, to pass through directly to owners' personal income without being subject to corporate tax rates. — U.S. Small Business Administration, retrieved 2026-09-27

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