Taxes, LLC, and insurance for a handmade business

This is the least fun chapter and one of the most important. The business-setup footwork — how you’re structured, your tax numbers, and whether you’re insured — is easy to put off because none of it makes a single candle. But it’s also what stands between a bad day and a disaster: a product that causes harm, an audit, or a stockist who won’t work with you because you can’t show proof of coverage.

None of this is complicated once you see the pieces. Work through them in order, and know up front: this chapter is footwork, not legal advice. For anything you’ll rely on, a short conversation with a local attorney or accountant pays for itself.

Sole proprietor or LLC

By default, if you start selling and do nothing else, you’re a sole proprietor. It’s the simplest and cheapest way to begin — no formation paperwork, and you report the business on your personal taxes. The catch is that there’s no legal wall between the business and you: if the business is sued or owes money, your personal assets are on the line.

That’s exactly why many makers form an LLC (limited liability company). An LLC creates a separation between the business and your personal assets — meaningful in a business where a product could cause harm, which candles and cosmetics genuinely can. If something goes wrong, the liability is generally the business’s, not your house’s.

The cost is modest. Filing fees run about $35 to $500, with most states between $50 and $200 (per LLC University, 2025–2026), and some states add a small annual fee to keep the LLC active. Weigh that against what you’re protecting. A lot of makers start as a sole proprietor to test the waters cheaply, then form an LLC once real money and real product are moving.

Whichever you choose, the honest move is to look up your own state’s specifics rather than trust a general rule — formation rules, fees, and annual requirements vary widely by state.

Get your free EIN

An EIN (Employer Identification Number) is a federal tax ID for your business. Get one even if you’re a sole proprietor with no employees, because it lets you keep your personal Social Security number off wholesale paperwork, supplier forms, and applications.

Two things to burn into memory:

• It’s free, directly from the IRS at irs.gov, and issued immediately when you apply online.
• Never pay a third-party site for one. Plenty of sites will happily charge you for an EIN; the IRS never charges for it, and those sites are just reselling a free government service.

Sales tax and business licenses

Most states require you to register for a sales-tax permit and collect tax on taxable in-state sales. Marketplaces often collect and remit sales tax for you on their own platforms, but that doesn’t automatically cover sales through your own store or at a craft fair.

Because the rules vary widely by state and change often, the reliable path is to register with your own state’s tax authority and check, channel by channel, whether each one collects on your behalf. Then keep the tax you collect separate from your revenue — a dedicated account or at least a separate line in your books — so you’re never scrambling to cover it at filing time.

Most localities also require a business license or permit to operate, sometimes at both the city and county level, and craft fairs may require a temporary seller’s permit for the event. Look up your own city and county before your first paid sale. It’s usually a small fee and a short form, but selling without it can bring fines that dwarf the cost of doing it right.

Product-liability insurance

Candles carry fire risk. Cosmetics and soap touch skin. Jewelry can cause reactions. Handmade products can cause real harm, and if one does, product-liability insurance is what stands between a claim and your savings.

There’s also a purely commercial reason to carry it: many venues and stockists require proof of coverage before they’ll let you sell. A craft fair or a boutique may simply turn you away without it.

The cost is more approachable than most new makers expect. Handmade product-liability policies commonly run about $200–$550 a year — roughly $285 a year for $1 million of coverage from maker-focused artisan insurers, and craft-guild programs come in under about $550 a year including the premium (per Handmade Artisans, ACT, and the Handcrafted Soap & Cosmetic Guild, 2025). For most makers who sell in public, that’s cheap insurance against a category of risk that could otherwise end the business.

When you shop for a policy, confirm it actually covers your product type — a general small-business policy may exclude candles or cosmetics — and check the coverage limits against what your venues require. Maker-focused and craft-guild programs exist precisely because handmade products fall into categories that some general insurers won’t touch, so it’s often worth starting your search with insurers who understand what you make.

Keep clean books from day one

None of the setup above works without records behind it. You can’t file taxes, prove your sales-tax collection, or renew an LLC cleanly if your business money is tangled up with your grocery money. So separate them early:

• Open a dedicated business account and run every sale and every material purchase through it. This one move makes tax time an afternoon instead of a nightmare.
• Keep your receipts. Your material invoices aren’t just for taxes — they’re the source of the true cost per unit your pricing depends on.
• Set aside sales tax and a slice for income tax as the money comes in, so neither is a surprise later.

Good books are also what make growth decisions honest. When you can see real revenue, real costs, and real margin, you know whether the business is actually working — which is the whole point of doing this footwork instead of running on a hunch.

Fold it into your costs

None of this is free, and that’s the point of naming it here: licenses, insurance, and any annual LLC fee are real overhead, and overhead belongs in your pricing. When you cost a unit in pricing handmade products, a share of these business costs should sit inside the number, the same as rent and tools. Skip that step and your “profit” is quietly paying your insurance premium out of what should have been your margin.

Get the structure, the tax registration, and the coverage in place early, then keep building. It’s the boring part of a real business — and doing it is part of what separates a business from a hobby. If growth is on your mind next, scaling a handmade business past the kitchen table picks up from a solid foundation.