Form an LLC?

Row of Vintage Buttons Lined up on Soft Square Fabric BackgroundThere are two advantages to forming an LLC. The LLC owners achieve  “pass-through” tax treatment (the same tax treatment sole proprietors and partnerships receive) and limited personal liability protection (which means owners aren’t personally liable for certain business debts and claims). In other words, the business gets the tax treatment of a partnership or sole proprietorship but the liability protection of a corporation. As a result of its ease of formation and liability shield, many businesses have converted from sole proprietorship or partnership status to an LLC. If you want to convert your crafts business to an LLC, you should consult with a tax advisor as to state tax rules.

Factors to Consider Before Converting to an LLC

Below is a checklist that can help you decide whether your crafts business should make the conversion to an LLC.

  • Is your business involved in activities that could lead to business debts and claims that could threaten personal assets? For example, do you travel a great deal or use dangerous substances in the manufacturing process? If your business is at a higher risk for lawsuits and claims, consider limiting personal liability by forming an LLC.
  • Do you own sufficient personal assets that would be at risk (such as equity in a house) if a business lawsuit resulted in a judgment that could be collected from your personal assets? If the answer is yes, an LLC may be the proper route for your crafts business.
  • How much does your state charge for creating an LLC? Does your state also charge an annual fee? This information can be located at your state government website (see below). High fees may dissuade you from forming an LLC.
  • How are LLCs taxed in your state? Again, the information is located at your state government website. A tax advisor may help you determine if the conversion is worthwhile.

What’s involved in converting to an LLC?

A sole proprietorship or partnership can convert to an LLC in most states with a modest amount of paperwork and fees, and with no change to income tax treatment and income tax filing requirements.

  • Terminate the partnership and convert to an LLC. Your partnership agreement probably requires the unanimous consent of all partners to dissolve or change the form of the business. If you don’t have a written partnership agreement, it’s best to get the written consent of all partners. Additional paperwork may be required—for example, your state may require a notice of dissolution of partnership to be published in a newspaper where the partnership was located.
  • File Articles of Organization. Your crafts business must file LLC Articles of Organization with the state filing office. Many states provide an online LLC Articles form specifically designed to handle the conversion of a partnership to an LLC.
  • State websites. One way to locate the state LLC filing office is at the National Association of Secretaries of State (NASS) website.
  • Prepare Operating Agreement. The crafts business owner(s) should create an LLC Operating Agreement that documents ownership interests, profits, losses, voting and liquidation rights and other rights and responsibilities of the members. Most crafts businesses when converting to an LLC set up an LLC that will be managed by all owners, (known as a “member-managed” LLC) versus management by a select group of owners (a “manager-managed” LLC).
  • Revise licenses, permits, and registrations. Your LLC should obtain new permits, licenses, and registrations in the name of the LLC and should cancel old licenses and permits taken out in the name of the now defunct crafts business.
  • Get an EIN? A single-owner LLC is not required to obtain an employer identification number (EIN) unless the LLC will have employees or the sole-owner establishes a retirement plan (such as a Keogh plan). If the crafts business has multiple owners (a partnership) and previously had an Employee Identification Number (EIN) the LLC can continue to use it. Otherwise, an EIN will be needed to prepare annual IRS and state information returns.


If your crafts business partnership is converted to a crafts business LLC, you continue to file a partnership tax return, IRS Form 1065, U.S. Return of Partnership Income at the end of each tax year (there are no special LLC federal tax forms.  LLCs use federal partnership tax forms). The LLC owners also continue to prepare a 1065 Schedule K-1, Partner’s Share of Income, Credits, Deductions, etc., for each LLC member. The K-1 shows the amount of crafts business LLC income or loss, deductions and credits each crafts business member must report on their individual 1040 tax returns.

Crafts business owners who receive a share of the LLC profits are not considered employees for payroll tax purposes. However, payroll taxes must be withheld and paid for anyone who receives a salary or other type of guaranteed payment from the LLC. In other words, if you not only pay out profits to an LLC member, but also employ an LLC member, payroll taxes must be withheld from and paid on the salary amount.

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