I know I'm late to the party, but I figure it wouldn't hurt to share my opinions/experience.
For years I worked at a Woodcraft retail store. I worked 30 to 38 hours a week, but the whole time my goal was to go into woodworking full time. SO....I got my LLC set up, and started taking jobs "on the side". The whole time I did this I knew that if the city I lived in really wanted to shut me down there was nothing I could do since I was running things out of my house. Now, because I wanted to go full time I claimed EVERYTHING that I brought in. I knew if my shop blew up my home insurance wouldn't pay. If someone broke in and stole my tools I was SOL. If someone got injured in my shop I was liable, but had no insurance. Those were the risks I KNEW I was taking, and by golly I was gonna get the shop off my property as soon as I could. After a few years I moved into a small shop space, 1350 square feet. I had to pay a bunch in build out costs, but it was great. BUT BUT BUT, now there was overhead. $750 each month plus insurance. The insurance company never even came to my place of business, and I was covered for $40000 worth of equipment, had $1000000 in leability coverage, etc.. for $105 a month. Easy peasy, but it became more difficult to make money.
So that was the city. My friend who also started a wood shop lived in my city's township. He had a separate building for his shop, he got approved to run his business out of it, and he paid his taxes. In his case, he NEVER was at risk, everything was done in accordance to "the rules", AND it was not too difficult to stay in the black. In fact, he even had to put his approvals to the test. A neighbor drained their pool right down the hill that led to his shop. He made a claim and got covered. He also took the neighbors to court and won. Later on he moved into an industrial space as well.
So I guess what I am saying is that if you set up a proper business/business name just keep it legit and pay what the government wants cuz by starting a business you basically state "I am prepared to pay the necessary taxes, insurance, etc..." Interestingly, you actually may be able to set things up on your property and be good to go in the eyes of the powers that be. It would be fairly easy to make money, and you wouldn't be "at risk". That would awesome for sure!
In the immediate future, if you don't set up a business I don't think there is anything wrong with letting people pay you for making stuff from time to time, nor do I think the government cares. That said, at a certain point if you are really bringing in some coin you may want to get your ducks in a row.
Anywho, there's what I have been exposed to. (By the way, I personally had a lot of help cuz my father-in-law is a CPA and attorney) I wish you the best, and I am happy to hear that people in your life are responding to your woodworking!
P.S. I have never had issues with not showing much profit. For years, before I was full time and after, I poured everything back into the business. Never an issue, cuz it was all on the level.