Before talking about how to limit personal liability, let’s define what liabilities are. They’re basically debts—money that you owe. Every crafts business carries some liabilities—for example, ongoing payments to suppliers, rent for the studio, compensation to employees or booth fees at a show. Additional liabilities may arise if your business is devastated by a fire or flood or if you are the victim of a lawsuit—for example, someone is injured in your studio and sues you for damages.
If you operate your business as a sole proprietorship (when one person runs the enterprise, the most common business form for crafts businesses), you will be personally liable for all business debts. The same is true for a partnership. A creditor can collect a partnership debt against any partner, regardless of which partner incurred the debt. That means that if your partner orders $50,000 worth of glass-blowing supplies without telling you and then moves to Venezuela, you could be on the hook for the entire amount. A written partnership agreement can apportion liability among partners, but it won’t absolve you of personal liability.
The Business Entity as Shield
Corporations and limited liability companies (LLCs) are created to shield the owners from personal liability.
Example: People’s Pottery, the 52-store chain that sold made-in-America crafts, filed for bankruptcy in 2001, owing millions to crafts businesses. However, the owners were not held personally liable because they had created a corporate entity that owned the company.
In short, if you operate as a corporation or LLC, creditors can—with rare exceptions—only collect their debts from the business’s assets, not from the owners. This protection comes at a price. To acquire corporate or LLC status, you need to pay fees and file paperwork with your Secretary of State or other state filing office. And LLCs and corporations require some continuing legal attention.
Bottom line. If your crafts business simply isn’t going to run up many debts or run many risks you probably don’t need to convert from a sole proprietorship to an LLC or corporation. (18 million small businesses in the U.S. have not chosen to incorporate or form an LLC.) These entities and corporations can shield your personal assets—your house and savings —from many business debts and court judgments but they may not be necessary for businesses that are low on the liability scale. (Insurance may be a better method of protecting assets.)