If it is a money issue, you can also rent your own room as a shared room and still stay in your house for the cost of buying your shed !  

Would this work or are there any legal issues that I'm not seeing?

I have friends who do this and I am aware of some of the issues, tenants, laws etc.

Although we made a little (~$5,500), it was pure stress and we learned never to compromise on certain issues.

Does anyone have any insight or experience with this issue, and any tips on which insurance to choose for large groups of bachelorette parties, families, and random drunks in Wine Country?

I know that the obvious issues would be to do with the structuring of the partnership/LLC/whatever.

I'm currently working with a hard money lender who initially had some great terms for my business partner and I, however, we ran into a little bit of a problem due to some tax issues with my business partner.  

I have raised the issues of misleading sellers hundreds of times on BP.

That can always be an issue.

The members of an LLC are issued K-1 Form and have to pay taxes on all profits as though it were income, which could expose the owners to high employment taxes.