Should I Start an LLC for My Soap Making Business?

Starting a limited liability company (LLC) for your soap making 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 soap making business, lawsuits can arise from things like customers having allergies to your products, using a copyrighted image in marketing materials, or contractual disputes with suppliers.

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

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

Do I Need an LLC for a Soap Making Business?

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

You should start 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 Soap Making Business

By starting an LLC for your soap making 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.

Soap making businesses will benefit from liability protection, as they face the risk of product liability, trademark infringement, and even workplace accidents.

Example 1: A customer sues the soap-making business after developing an allergic reaction to one of the products. If the business is a limited liability entity, the owner's personal assets, such as their savings, investments, and personal property, will be protected in the event of a lawsuit.

Example 2: The soap-making business is sued for copyright infringement after using a copyrighted image or slogan on its packaging or marketing materials. If the business is a limited liability entity, the owner's personal assets will be shielded from the fines or payments resulting from the lawsuit.

Example 3: The soap-making business is involved in a contract dispute with a supplier or distributor. If the business is a limited liability entity, the owner's personal assets will generally not be at risk in the event of a lawsuit.

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 Soap Making 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 soap making 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

Soap making businesses 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 limited liability protection from being an LLC protects your personal assets, not your business assets.

Soap-making businesses need insurance to protect their assets from financial losses that may result from unexpected events or situations, such as accidents, injuries, or lawsuits.

Common Situations Business Insurance May Cover for a Soap Making Business

Example 1: A customer visits your business to pick up their order and trips over your front steps. They want you to pay for their medical bills. A general liability insurance policy will cover the expenses related to the injury and any expenses related to lawsuits, including settlements, court costs, and attorney's fees.

Example 2: A customer claims that a certain soap product advertised as being able to heal dry skin or eczema did not heal their excessively dry skin. They sue you for false advertising. In this instance, your general liability insurance would pay for your attorney's fees and any payouts awarded by the judge.

Example 3: A rival soap making business files a lawsuit stating that you harmed their business with your verbal or written words. Your general liability insurance should cover the expenses related to the lawsuit, including attorney fees and any settlements or judgment awards.

Other Types of Coverage Soap Making 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 soap making businesses should obtain:

Commercial Property Insurance

Even if your soap making business is inside your home, you may still need commercial property insurance to specifically protect your soap making equipment and supplies from unforeseen damage, like from a weather event or fire.

Commercial Auto Insurance

If you deliver products to stores and customer homes via a vehicle, even if you also use that vehicle as your personal transportation, you will need commercial auto insurance. This is because many individual car insurance policies do not cover accidents caused while driving for work or for hire.

Product Liability Insurance

Product liability insurance protects you in the event that someone becomes injured by your handcrafted products. This includes medical expenses incurred if your products cause an allergic reaction, burn, or another injury.

Cyber Liability Insurance

If your soap making business has a website that contains customer information and/or payment methods, you will need cyber liability insurance in order to protect you against lawsuits that are the result of your website getting hacked.

Workers’ Compensation Insurance

Workers’ compensation insurance is needed if you employ other individuals to help you manufacture and/or sell your soap on your property. This insurance pays for medical bills and other expenses that are caused by on-the-job injuries.

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.

Read our Business Insurance for Soap Making Businesses article for more info.

To start a soap-making business, you will need capital to purchase some essential items. These items include ingredients, soap-making equipment, marketing tools, professional services, professional association, and insurance. All these would require about $2,000 or more.

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

Some of the main operating expenses for a soap making business are ingredients and marketing costs.

Learn more about running a soap making business.

Soap making businesses make money by making soaps and selling them to customers.

Learn more about starting a soap making business.

With low startup costs, soap making could be a good option for someone interested in the craft. One advantage of a soap making business is that it doesn’t need its own physical store. This can keep expenses low and allow you to build the business slowly.

Learn more about starting a soap making business.