Should I Start an LLC for My Woodworking Business?

Starting a limited liability company (LLC) for your woodworking business can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a woodworking business, lawsuits can arise from things like poorly made products causing injury to customers, nonperformance of contractual obligations such as delivering a chair by a specified time, and using a copyrighted logo for your business.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your woodworking business seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

man using tools to sculpt a design on wood

Do I Need an LLC for a Woodworking Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Woodworking Business

By starting an LLC for your woodworking business, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Woodworking businesses will benefit from liability protection because of the risk of product liability, workplace accidents, and property damage.

Example 1: While walking around your storefront, a customer trips over a piece of wood that was left on the floor, causing her to drop and irreparably break her new phone. As a result, she sues your business for this property damage she has suffered. In this example, any obligation to pay damages will be limited to the assets belonging to your business.

Example 2: A customer purchases a wooden chair from your woodworking business which collapsed after they sat it in and caused them serious injury. This prompts the customer to file a product liability lawsuit against you. Limited liability would ensure that you, as the business owner, could not be held personally responsible for the injuries the customer had sustained.

Example 3: Your woodworking business fails to deliver a custom order of handmade chairs to a customer on time, inducing the affected party to sue your business for breaching its contract. In the lawsuit that follows, your personal assets could not be used by the court in order to satisfy any damages it awards the plaintiff.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Woodworking Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a woodworking business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Woodworking business rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Insurance is incredibly useful for woodworking businesses as it provides a shield against the costs associated with unforeseeable events that could occur. For instance, if your business’s workshop were to experience a devastating fire, the cost of any repairs or replacement would be covered by insurance.

Common Situations Business Insurance May Cover for a Woodworking Business

Example 1: A visitor to your woodshop turns on a circular saw when you are not looking and sustains a serious injury. He decides to take legal action against your business, claiming your company is responsible for his injuries. Your general liability insurance policy will cover your legal fees while defending yourself from his claim. The policy will also pay for a settlement if the case is settled out of court.

Example 2: You are using a dolly to move supplies from your vehicle to the inside of your shop. A potential customer has arrived, and you accidentally run over her foot with the dolly. The weight of the supplies and the dolly are enough to cause a serious injury. The general liability insurance policy you have will likely cover the cost of treating her injuries.

Example 3: You find an old sign when gathering reclaimed wood. You decide the logo on the sign is perfect for your woodworking business, so you begin to use it in your marketing materials. Another business sees you using the logo and takes legal action against your business, claiming that they own the logo. Your general liability insurance policy will pay for your legal defense as well as the cost of settling out of court if you do so.

Other Types of Coverage Woodworking Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all woodworking businesses should obtain.

Product Liability Insurance

All businesses that produce products that are purchased by the general public can benefit from product liability insurance. For example, a customer might purchase a bookcase from your woodworking shop. If she took the bookcase home, filled it with books, and then the bookcase fell over on her, she could sustain serious injuries. If she decided that her injuries were caused by your bookcase, she could take legal action against your business. A product liability insurance policy would pay for your legal costs when defending yourself from such a lawsuit, including the cost of paying a settlement if you settle out of court.

Commercial Property Insurance

You have invested significant funds in woodworking tools and supplies, all of which make it possible for you to operate your business. Unfortunately, there is the possibility that tragedy—such as a big fire—could strike and wipe out your equipment and supplies. The expense of replacing all of your equipment and supplies would probably be substantial—maybe too much for your business to afford. But if you have a commercial property insurance policy, then your policy would help to cover those replacement costs.

Workers’ Compensation Insurance

The state your business is located in most likely requires you to carry workers’ compensation insurance if you have employees. The workers’ compensation policy that you have will go a long way towards helping you protect your employees, paying for medical care to treat work-related injuries and helping to cover lost wages if employees are unable to work.

Commercial Umbrella Insurance

A commercial umbrella insurance policy is designed to take over when a general liability insurance policy leaves off. All policies have limits, and your general liability insurance policy is no exception. If you find yourself in a situation where your general liability limits are exceeded, like if you lose a big lawsuit, then your commercial umbrella policy will start paying until its limits are reached. With a commercial umbrella policy, you are not forced to pay damages out of pocket once your general liability policy is exhausted.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance and commercial property insurance.

Read our Woodworking Business Insurance article for more info.

If you are thinking about starting a woodworking business, an investment of around $6,500 is typically needed. This estimate does not factor in the cost of leasing a space for your workshop, which can be avoided by working from home and then selling your products online.

This leaves this figure available to cover the costs of the wood and other materials you need, such as wood making equipment, a computer, a website, and business cards.

Visit our How to Start a Woodworking Business guide to learn more about the costs of starting and maintaining this business.

Operating expenses for a woodworking business include wood, other building materials, and possibly rent and payroll.

Learn more about running a woodworking business.

A woodworking business makes money by producing and selling products made of wood.

Learn more about starting a woodworking business.

Woodworking businesses typically provide consumers with custom-made or limited-run wood products rather than mass-produced ones.

The profit potential for a woodworking business varies greatly, but a successful owner could potentially make a six-figure income.

Learn more about starting a woodworking business.