What Travis says is correct, kinda. As a word of introduction, which I did not include in my profile, I practiced law in Georgia for 35 years and did advise clients as to their form of business. So here goes my opinion , you will notice that I did not say advise. I am retired now, and not licensed to give “advice”.
These are my opinions and as such I am not liable if you use it.
As Travis said, if you are a sole proprietor you are personally liable for both debts and negligence , both business and personal. As to debts, even if you are a closely held corporation, LLC or what ever and want to borrow money or otherwise incur debt the creditor will probably require that you personally guarantee their extension of credit, so you might as well be a sole proprietor. As to the negligence, what negligence. If you make a knife and it breaks? The measure of damage might be the value of the knife. If you make a knife and it breaks and therefore cuts the user, maybe, maybe you might be liable,,, if it can be shown that you were negligent in the construction or making. Even then, if the injured party is going to sue, he is going to sue the corporation, LLC, or whatever, and you personally. If you are worried about this buy insurance. By the way, your Homeowner’s policy will probably not cover this. Get an umbrella policy or a business policy.
Never, never enter into a Partnership. In a partnership, you and all partners are equally liable for partnership debts and negligence to the extent of the partnership and you personally. That means that if your partner is driving his pick-up, on partnership business, and has an accident, and he is at fault, the partnership is liable, he is personally liable, and you are personally liable. He causes an accident and suddenly your home and everything else you have or might ever have is at risk. This is even if you own 90% of the partnership and he owns only 10% the judgment can be collected 100% from you. AND you can bet if the attorney knows that you and he/she are involved in a partnership he is going to claim that your partner was on the business of the partnership. So if you did not understand it when I said Never, never above let me stress NEVER!!!! enter into a partnership. Another word of caution about a partnership: When one of the partners dies the partnership dies, the assets of the partnership must be distributed between the surviving partner, or partners, and the heirs of the deceased partner. This can be a mega problem if the heirs want to sell all assets and distribute the cash and you don’t have the disposable cash to buy them out (unfortunately, the heirs are not knifemakers and don‘t want all of that knife making stuff). If you have a corporation with other share holders and a share holder dies the corporation lives on. Now, unfortunately, you may have fellow share holders who are not knifemakers, do not contribute to the business but want their share of the money that you have made. This is just more problems. In either case, if you insist on doing business with someone else, have a Buy Out Agreement and fund it with life insurance.
If you form a corporation, LLC, or whatever, you have just doubled your book work, accounting fees and exposure to the IRS. You must be very careful to dot every i and cross every t. Everything has to be kept separate, your personal books and money and your corporate books and money. If you are at the grocery store and at the check out the ticket is $101.00 and you only have $50.00 cash with you and $25.00 in your personal account, but have $10,000.00 in the corporate account you can not pay for those groceries with a check on the business account. That is not your money, it belongs to the corporation. You could, of course, write a check from the corporation to you, deposit it in your personal account, then write the check from your personal account, or even, if the grocery store would accept the check written on the corporation to you, you could endorse it and tender it to the store.
Lastly, if you make any money the IRS wants their cut. It does not make any difference if it is “Hobby Income”. If you get a scholarship from a Knifemaker group, or Blacksmith group, or win the lottery, they want their cut.