If you’re a small producer of artisan product, you already know Etsy is most important marketplace to be part of. But what you might not know, is whether or not an LLC or a sole proprietorship is a requirement for an Etsy shop.
The simple answer is no. You are not required to operate as an LLC to sell on Etsy. While it’s not a requirement, some of the biggest sellers on the platform still decide to form an LLC for tax purposes and to protect personal assets in the event you’re sued. Here are two places you can form an LLC for an Etsy shop:
- ZenBusiness ($49 to form an LLC + State Fees)
- Northwest Registered Agent ($225 to form an LLC + State Fees)
In this guide, I break down the distinctions between an LLC or sole proprietorship for your Etsy account. Here’s everything you need to know to make an informed decision.
- Do you need a business license to sell on Etsy?
- LLC for Etsy
- Sole Proprietorship for Etsy
- Corporation for Etsy
- What type of a business is an Etsy Shop Considered?
- Can My Etsy Shop Have a Different Name than My LLC?
- Do I Need an EIN To Sell on Etsy?
- Can an LLC Help with My Taxes?
- How to Form an LLC for Etsy
Do you need a business license to sell on Etsy?
Before we explain why you don’t need a business license to sell on Etsy, we’ll have to break down what Etsy is and the rules surrounding this online marketplace to better understand the process and how selling on Etsy works.
What is Etsy?
Etsy is an online platform for where artists can sell their products and goods. By artists, Etsy means business owners who produce their own goods. These can be handmade collectibles, trinkets, toys, art, jewelry, vintage furniture, clothing, and home goods. You can also sell crafts, art, posters, and art supplies on Etsy.
There are limitations as to what you can sell on Etsy. Harmful goods such as hazardous materials, alcohol, drugs, tobacco, drug paraphernalia and the like are not allowed to be sold on their online marketplace.
What are the requirements to opening an Etsy shop?
Opening an account on Etsy is relatively easy. There are no major requirements except for your email address and name. All you have to do is register on their site and registering is free. Your account will allow you to sell items and buy products from other accounts as well. If you’re selling on Etsy, you’ll have to connect your bank account to your shop so you can transfer your customer’s payments easily to your account.
Do you need a business license to sell on Etsy?
As mentioned on their website, no business registration or license is required when you sell on Etsy.
Should you get a business license?
Now here’s where things can get a little confusing. Yes, it’s true that Etsy doesn’t require a business license from you. But should you still get one?
What you need to know is that it’s important for you to differentiate why you’re opening an Etsy account in the first place. If you’re registering on Etsy to sell products because the art you’re making is a hobby, then you don’t need to get a business license.
However, if you’re opening an Etsy account to sell your art for business, then you need to register your business and get a business license. Why? This is because if you depend on the income you receive from selling your products to support your livelihood, then the IRS sees this as a business and it is your responsibility to register it and pay your taxes.
So in conclusion, getting a business license all boils down to determining whether you’ll be opening an Etsy account to sell products as a hobby or as a business.
LLC for Etsy
Let’s say you’ve decided to open an Etsy shop as a business which means you’re going to get a license for it. The next question would be what type of business structure will you be registering your business as?
Here are four business structures that are commonly used when registering a business:
- Sole Proprietorship – A sole proprietorship is a business structure with only one owner. Taxes are filed through the owner’s personal income tax. Registering requires minimal paperwork but does not have limited liability protection.
- Partnership – This business structure has two or more owners. Income, gains, losses, and deductions from the operations of the business are filed in an annual information return. There is also no limited liability protection.
- Corporation – A corporation’s owners are called shareholders. This business structure undergoes double taxation which means taxes are filed once at the corporate level then a second time after the shareholders receive their profits. A corporation has limited liability protection.
- LLC (Limited Liability Company) – An LLC is a mix of a sole proprietorship, a partnership, and a corporation. An LLC has limited liability protection wherein if the business runs into any legal trouble, the owner’s assets are safe.
Out of all these options, you might be inclined to choose an LLC for your business for its limited liability protection. Here are two things you can weigh in:
Single Member LLC for Etsy
If you decide to become the sole owner of your shop on Etsy, then you will be taxed under the rules of a sole proprietorship. And as mentioned above, this means that the business does not have to pay taxes. Instead, you as the owner should file this via your personal income tax.
Though the rules of a sole proprietorship follow, don’t be dismayed. You’ll still get the protection benefits of an LLC.
Multiple Member LLC for Etsy
A multiple member LLC for Etsy means that there are two or more owners who will be running the shop. The tax rules for a partnership are followed and the owners will also receive the protection benefits of an LLC.
Sole Proprietorship for Etsy
As mentioned above, sole proprietorship means there is only one owner running the business. And that usually is the case when people register their shop on Etsy. Remember that on Etsy, handmade items are mostly sold there. This is also usually done by one person. So if you registered your business, a sole proprietorship is ideal.
Whether you want your business registered as an LLC is up to you. There is no right or wrong choice here. Rather, you should weigh the pros and cons of having a sole proprietorship or a single member LLC and which one is advantageous for you.
Corporation for Etsy
You may also choose to register your business as a corporation. This allows you to invite investors to help your business grow. Businesses registered as a corporation is protected. This means that when the corporation faces any lawsuits or business problems, personal assets are not targeted.
Businesses registered as a corporation also adds to the business name’s credibility. This makes your customers trust you and your products. But there will be lots of paperwork compared to registering to other business structures so be prepared for that.
What type of a business is an Etsy Shop Considered?
Etsy is a place where people can sell their handmade items. These can be souvenirs for your parties, arts and crafts, trinkets, and the like. Usually, Etsy sellers are considered sole owners to their businesses so they’re under the classification of sole proprietorship. However, not all Etsy sellers have their business registered and Etsy doesn’t require their sellers to have a business license.
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But do know that your Etsy shop can be any type of business you want whether that’s a sole proprietorship, a partnership, a corporation, or an LLC. It all depends on your business operations. For example, if you have someone else working with you that you consider a partner wherein profits are split, then you can’t call your business a single member or sole proprietorship. It’s already a partnership.
If you’re also still undecided whether or not to register your business and get a license, it’s also best to sit down and do a run through of how your business will function. Will it only be a hobby? If not, you’d have to register it. Will you be doing business outside of Etsy? If yes, then you most definitely have to register it so you can issue legal receipts for your customers.
Can My Etsy Shop Have a Different Name than My LLC?
Here’s a scenario: you already have a business and would like to sell on Etsy under a different name. It happens. Sometimes there’s a change of aesthetic that just doesn’t match your new business. So is it possible to have a different business name? It is! But there’s something important you should know. You need to register a DBA or a Doing Business As with your local state. This is for the protection of the consumers buying your products so they’re aware that the business they’re conducting with has a different registered name.
The procedure for filing a DBA varies from state to state. To register for a DBA in some states, you need to go to your county offices. You’ll then pay a registration fee. Cost can range from $ 10 to $ 100. Some establishments like banks might also require a fictitious name certificate for you to be able to do business with them. So it’s still recommended that you check your local state laws for any rules and requirements as well as getting the correct fee information so you’re prepared when you file for a DBA.
Do I Need an EIN To Sell on Etsy?
You might also be wondering about another important detail when it comes to selling on Etsy: do you need an Employer Identification Number?
An Employer Identification Number or EIN is a way for citizens who own a business to report their taxes to the IRS. But not all business owners is in need of an EIN. For example, if you are a sole proprietorship, you do not need to get an EIN because you’ll be filing your taxes on your personal tax returns. However, if you’re a partnership, a corporation, or an LLC, you are required to get an EIN.
So do you need an EIN to sell on Etsy? If you’re running the business by yourself, then the answer is no since this classifies under sole proprietorship. Also, most Etsy users are sole owners of their businesses so a majority might not even have EINs.
Can an LLC Help with My Taxes?
An LLC may provide the benefits of a limited liability protection but do they also provide any tax benefits? Yes, there is. Remember that an LLC can be a sole proprietorship, a partnership, or a corporation. And a sole proprietorship and partnership doesn’t go through double taxation.
So if you registered your LLC as one of those two, you enjoy the benefits of not getting double taxed. But if you do choose to register as a corporation then you have no choice but to face double taxation.
How to Form an LLC for Etsy
We understand that by this point, you’ve probably decided to apply for an LLC. Whether that’s for Etsy or outside Etsy, it’s still advantageous for you to have an LLC since it adds credibility to your business and protects you from any legal trouble.
To apply for an LLC, just follow these steps:
- Check your state laws – It’s advisable to register your business in the state you’ll most likely be in to run your business operations. So check your state laws to know what the requirements and fees are since they vary per state.
- Choose your LLC name – Your business name has to be unique. Your state laws will also have business name guidelines that you can follow.
- Choose a Registered Agent – A lot of states require that you hire a registered agent to send, receive, and process your legal paperwork on your company’s behalf. Be sure to hire a professional and credible one to avoid any scams.
- Start filing LLC Articles of Organization – File your formation documents at the Secretary of State. You can file these by mail or online. There are filing fees for this which you should check with your local state.
- Draft your LLC Operating Agreement – An LLC Operating Agreement is an outline that shows the business ownership structure as well as member roles of your LLC.
- Apply for your EIN – As explained, an EIN is needed if you registered for an LLC as a corporation. But you may be asked for an EIN when you transact businesses such as banks or hiring employees.
In summary, Etsy is an important platform to sell your handmade items and start a new business. So if you’re serious about it rather than choose to use Etsy as a hobby, it’s advisable to register your business, whether that’s a single member or multiple member LLC to increase credibility and for tax advantages.
Ready to form an LLC for your Etsy shop? Click here to get started for only $49 + State Fees.