Legal and Financial Tips for New Crafts Business Owners

See The Crafts Business Answer Book & Resource Guide for an A-to-Z compendium of information that answers most every question a creative person might have about the business side of crafting.

Also see HOMEMADE MONEY: Starting Smart, which includes an encyclopedic A-to-Z "Crash Course in Home-Business Basics" that will be invaluable to new businesses in all fields of endeavor.

Legal and Financial Tips
for New Crafts Business Owners

by Barbara Brabec

Creative people hate to be bothered by "things legal and financial," but even the smallest crafts business needs to be concerned about the topics discussed in this article. The following information is only a smattering of what you need to know if you’re going to become a serious crafts seller, but it will get you started. If you’ve been selling for a while and have neglected to take care of any of these things, do them now for it’s never too late to "get legal."

Zoning. Because so many people today are starting homebased businesses, many communities across the country have updated, or are in the process of updating, local zoning ordinances. To find out how your homebased business might be affected by local zoning laws, call your city or county clerk. (If you think you may be in violation of the zoning ordinance, you can get zoning information anonymously by asking to see a copy of your community's zoning regulations in your library. Find out what zone you're in and read the section that pertains to home occupations.)

Licenses and Permits. Many communities now have new laws on their books that require craft business owners to obtain a "home occupation permit," and annual fees vary across the country. Call your city or county clerk to see if you need any kind of permit or license to legally run a crafts business at home, but don’t volunteer any specific information unless you are asked for it.

Business Name Registration. A fictitious or assumed business or trade name (which is any name other than your own) must be registered with both your county clerk and your Secretary of State. (Call them for more information.) Registration is both easy and inexpensive to do, and important as well, since failure to register your name locally could cause you to lose it. (If someone else decides to register the same name you've chosen, they can force you to stop using it, even if you’ve been using that business name for years.) Registration at the state level will prevent anyone from incorporating under the business name you've chosen.

Bookkeeping/Accounting. You may use any system you wish to keep records of your income and expenses. You will need a separate checking account for your crafts business, however, because the IRS requires a clear separation of personal and business income and expenses. This means you must not deposit crafts income into your regular checking account or write business-related checks from that account. If you choose to ignore this law, you run the risk of losing all the tax deductions previously taken on your Schedule C tax form, and you'll have to pay additional taxes as a direct result. Note that you do not need an expensive business checking account, but merely a separate account through which you can run all business income and expenditures. (If you open a second personal account for your small business, just put your name on it, not your business name. This will be sufficient for IRS record keeping purposes and keep your bank costs low. These checks will cost less if they are ordered from a service such as Checks in The Mail, or call toll-free, 1-877-397-1541.

Taxes and the IRS. All extra income, including hobby income, must be reported to the IRS on Schedule C of your personal 1040 tax form. Call your local IRS office and request all free booklets related to running a business at home, or visit the IRS Web site to obtain tax forms and booklets. In particular, request "Tax Guide for Small Business" (#334) and "Business Use of Your Home" (#587).

If you want to stay out of trouble with state tax authorities, you must apply for a "Retailer's Occupation Tax Registration Number" or, as it is more commonly called, "a resale tax number." States have become very aggressive about collecting sales tax from crafters, often visiting shows and asking to see sellers’ permits. If your state is one of the few that does not have a sales tax, you will still need this resale tax number in order to buy supplies at wholesale. For more information, call your state capitol's Department of Revenue, Sales Tax Division.

Insurance. The minute you hang out your crafts business shingle, you need to be concerned about your home insurance policy because nothing used for business in a home would be covered on your homeowner's or renter's insurance policy in the event of a fire or other damage to the home. At the very least, you should purchase an inexpensive business rider to protect your compute, printer and software, other business tools and supplies, raw materials and craftworks-in-progress. Your local home insurance agent will be happy to discuss this with you. You may find that your present insurance company offers a special "home office" insurance package that includes liability insurance as well.

Tags and Labels Required by Law. If you simply decorate a commercial T-shirt or other garment and resell it, any labels required by law will already be in place. But if you make such items from scratch and then decorate them (such as T-shirts, aprons, vests, etc.), Federal Trade Commission (FTC) rules require that you attach a Care Label. These can be purchased inexpensively from several companies that regularly advertise in craft magazines, or you can make these labels yourself, following content guidelines specified by the FTC. Visit the FTC Web site for more information.

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