Do You Need an LLC for Your Woodworking Business?
It is recommended that most businesses form an LLC, though each business is different.
Woodworking is one industry that is especially well suited for small businesses. Many customers prefer buying custom-made or limited run wood products rather than mass-produced ones.
Many woodworking business owners start out as hobbyists. This can be another advantage since they will already own a lot of the necessary equipment.
Woodworking business owners should consider the following factors when deciding if an LLC is the right choice:
- Level of risk
- Potential profit
- Credibility and consumer trust
Risk and Limited Liability
A woodworking business faces the risk of product liability, workplace accidents, and property damage.
Example: 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.
Any business that carries risk needs to be legally separated from its owner.
This separation is known as limited liability protection.
Limited liability protects a business owner’s personal assets (e.g., car, house, and savings) in the event that a business is sued or defaults on a debt.
Profit and LLC Taxes
The profit potential for a woodworking business varies greatly, but a successful owner could potentially make a six-figure income. A woodworking business that earns a steady profit can benefit from the flexible tax options that an LLC offers.
LLC owners can choose between pass-through taxation or the S corporation (S corp) tax classification.
Pass-through taxation works best for businesses with less profit and an S corp is best for businesses that need to carry substantial profit over from year to year.
Visit our LLC vs. S corp guide for help with choosing how your LLC should be taxed.
LLC vs. Corporation
Limited liability protection is created by forming and maintaining an LLC or corporation. But which business structure is right for your woodworking business?
A corporation is only useful for business owners that must rely on outside investors. This is because of the way corporations are taxed. A woodworking business might benefit from starting a corporation if outside investors are important.
Any woodworking business that doesn’t need outside investors will do better at tax time by choosing an LLC.
Credibility and Consumer Trust
Woodworking businesses rely on consumer trust and recurring purchases. Credibility plays a key role in creating and maintaining any business.
Businesses that form LLCs gain a level of consumer trust and credibility simply by forming an LLC.
What Is an LLC and Why Form One?
An LLC is a US business structure that offers the personal liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership. Read our LLC guide to learn more.
By starting an LLC for your business, you can:
- Protect your savings, car, and house
- Increase your peace of mind
- Protect your privacy
- Allow for greater profit
- Allow for accelerated growth
- Increase credibility
- Personal Liability Protection. LLCs provide personal liability protection. This means your personal assets (car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.
- Tax Benefits. LLCs have options to customize their tax structure. This allows businesses to use the best tax strategy for their circumstances.
- Growth Potential. LLCs can grow in profit and risk because they provide personal liability protection and tax benefits.
- Credibility and Consumer Trust. LLCs generally earn more trust from both banks and consumers than do informal business structures like sole proprietorships. This can impact a business's ability to take out loans and can affect marketability.
The main cost of forming an LLC is the state filing fee, which ranges between $40 and $500, depending on your state. Our Cost to Form an LLC guide details LLC fees for all 50 states.
There are two options for forming your LLC:
- You can hire a professional LLC formation service to set up your LLC (for an additional small fee).
- Or, you can use our free Form an LLC guide to do it yourself.
When to Form an LLC
Becoming an LLC is the next step in growing your business and protecting your assets.
You should form an LLC when:
- There is risk of liability
- You need to scale your business
- When you need to increase credibility
Converting an Existing Sole Proprietorship to LLC
If you are operating an existing business as a sole proprietorship, we strongly recommend forming an LLC to protect your personal assets.
There is a common misconception that when a sole proprietor registers a “doing business as” (DBA) name, they are forming a business entity. This is not the case — a DBA is only a registered business name.
You can change a sole proprietorship to an LLC by taking the same steps that any new LLC would need to take.
Visit our Sole Proprietorship to LLC guide to learn how to convert your business and protect your personal assets.
How to Form an LLC
Six Basic Steps to Start an LLC
Step 1: Select a State
Step 2: Name Your LLC
Step 3: Choose a Registered Agent
Step 4: File the Articles of Organization
Step 5: Create an Operating Agreement
Step 6: Create or Transfer an EIN
Step 1: Select Your State
For most new business owners, the best option is to form your LLC in the state where you live and where you plan to conduct your business.
Visit our Best State to Form an LLC guide to learn more.
Step 2: Name Your LLC
You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLCs formation documents.
Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their business. After you have a name for your business, create a logo with our Free Logo Generator.
We recommend that you check online to see if your business name is available as a web domain. You may want to buy the URL to prevent others from using it.
DBA Transfer for Existing Businesses
You may already have a DBA name for your sole proprietorship (or partnership) that you will want to carry over to your new LLC. The steps for transferring or converting a DBA name vary from state to state.
We recommend selecting your state on our Form an LLC guide to learn more about searching and registering your business name.
You may also need to contact your state for specific directions on how to transfer your DBA registration. You can find your state's contact information on our guides.
Step 3: Choose an LLC Registered Agent
Your LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Hiring a registered agent service offers a number of benefits, including privacy and peace of mind.
Step 4: File Your LLC's Articles of Organization
The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.
Step 5: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
Step 6: Get a New EIN or Transfer Existing EIN
Get an EIN
An Employer Identification Number (EIN) is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS. Visit our EIN guide for instructions for getting your free EIN.
Transfer an EIN
According to the IRS, sole proprietors that incorporate (i.e., form an LLC or corporation in IRS language), must get a new EIN.
Recommended: Are you ready to take the next step in starting a business? Visit our guide for help with planning and starting your new business.
Should I Start an LLC FAQ
What is limited liability protection?
Limited liability protection is one of the benefits of an LLC. It means that the owner’s personal assets are protected if the company is sued or goes into debt.
Visit our corporate veil guide to learn more about maintaining your LLC's limited liability protection.
What is a corporate veil?
LLCs and corporations protect their owners from personal liabilities for the business’s debts. This protection is often referred to as the corporate veil.
Is a single-member LLC the same as a sole proprietorship?
No. A single-member LLC is a type of limited liability company, which is different from a sole proprietorship. Unlike sole proprietorships, a single-member LLC is formed by filing organization documents with your state government office.
Single-member LLCs are legal business structures that offer liability protection, branding, credibility, and privacy that a sole proprietorship doesn’t.
Which is better — LLC or sole proprietorship?
The better business structure depends on your business’s unique circumstances and needs. However, unless your business is low profit and low risk, an LLC is likely the better option.
How much does an LLC cost?
The primary cost of forming an LLC is the state filing fee. This fee ranges from $40 to $500 depending on your state. You can read more details in our How Much Does It Cost to Form an LLC article.
What are the benefits of an LLC?
Some advantages of an LLC include personal asset protection, reduced paperwork when compared to corporations, tax flexibility, and increased credibility with customers and creditors.
Can I transfer my DBA name to my LLC?
The rules regarding DBAs can vary from state to state. Read our How to File a DBA guide for more information.
Is an LLC the right business structure for a woodworking business?
Yes. An LLC will give you personal liability protection against potential business risks as well as give your company more tax options and credibility.
Do I need to open a business bank account for my LLC?
Using a dedicated business banking account is essential for personal asset protection.
When you mix your personal and business accounts, your personal assets (e.g., your home, car, and other valuables) are at risk in the event your LLC is sued. In business law, this is referred to as piercing the corporate veil.
How do I pay myself from my LLC?
How LLC owners pay themselves depends on how the LLC is taxed, the number of members, and any agreements regarding profit sharing and sweat equity.
Visit our How Do I Pay Myself From My LLC? article to learn more.
What are the startup costs for a woodworking business?
The biggest startup expenses for a woodworking business are woodworking tools and machines as well as a workshop.
What are the ongoing expenses of running a woodworking business?
Operating expenses for a woodworking business include wood, other building materials, and possibly rent and payroll.
How does a woodworking business make money?
A woodworking business makes money by producing and selling wood products.