Do you need a business license to sell on Etsy? If you’re asking yourself this question, you’re probably wondering about taxes and what you need to do to stay legal and ensure the IRS doesn’t come knocking on your door.
Well, the good news is that if you have to ask these questions, your Etsy business is probably growing. And that also means you’re in the right place to find the answers to those questions!
Before we dive into the details, it’s crucial to understand, this is not tax or legal advice. The purpose of this article is to help you understand that your Etsy shop may require a business license from your local regulatory agency. For specific questions about your scenario, you should speak to a business attorney.
Do you need a business license to sell on Etsy?
Etsy’s seller policies explain that individuals do not need a business license to sell on the Etsy marketplace. In other words, Etsy doesn’t require it or enforce it. But your local government might.
Here’s where it gets complicated. A seller on the Etsy marketplace may in fact need a license or permit from your local, country, state, or federal agencies that regulate business. So it really depends on where you live, what you sell, and who you sell to.
Here’s another way of looking at it. To put it as black and white as possible, your Etsy shop is either a hobby or a business.
Is my Etsy shop a hobby or a business?
The IRS has a comprehensive guide to establishing whether your Etsy shop is a hobby or a business.
Part of this guide is asking yourself whether:
- You carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- You have personal motives in carrying on the activity.
- The time and effort you put into the activity indicate you intend to make it profitable.
- You depend on income from the activity for your livelihood.
- Your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- You or your advisors have the knowledge needed to carry on the activity as a successful business.
- You were successful in making a profit in similar activities in the past.
- The activity makes a profit in some years and how much profit it makes.
- You can expect to make a future profit from the appreciation of the assets used in the activity.
Long story short, if you make a profit then your Etsy shop is a business. And you might need a license.
While applying for a license can be time-consuming and come with some out-of-pocket expenses, the good news is that you can write off these business expenses when you file your taxes.
So, if you decide that your Etsy shop does in fact need a license (or if you want to apply for one anyway), here’s what you need to know:
Applying for a business license to sell on Etsy, legally
What you need to obtain a business license varies by jurisdiction and whether you’re a home-based or an online business.
If you’re making things out of a spare room in your house, you’re probably a business with a home office space. But if you don’t have a dedicated workspace and only sell print on demand, then it’s arguable that you’re just an online business.
Regardless, you’ll need to complete an application and pay your fee for the business license, pick a business name and set up your business structure (usually a sole proprietor).
A limited liability company (or LLC) is another option. It costs more, it’s a little more complex to set up, but the advantages include:
- Separation of your business activities and personal finances
- Tax advantages
- Liability protection
- Looks better, should you need to talk to investors or banks
Other licenses and permits to sell on Etsy
Should you go down the path of obtaining a business license, you’ll probably need a few other permits and licenses to operate your Etsy shop.
An EIN (Employer Identification Number) helps the IRS distinguish the differences between your business and yourself. You use this number to open bank accounts, apply for credit, and file your taxes.
A seller’s license or a “sales and use” license is a state-issued permit that allows you to sell your goods to people in that state.
You’ll only need this license in certain states if you’re selling over $100,000 a year or make at least 200 transactions. But it’s also important to remember that Etsy may handle the sales tax obligations for you. Check Etsy’s Seller Handbook for more information on the area you’re most interested in.
Your local HOA may also require you to get homeowner’s association approval if you’re running your Etsy business from your home. Check with your HOA for more information.
Is my Etsy shop a hobby?
If your Etsy shop is, by classification, a hobby, you can’t claim any deductions from the income you generate by selling on Etsy.
And if you spend $50 making a product, but after fees, your profit is only $40, you cannot claim that loss.
So if you’d prefer to operate your Etsy shop without a business license, you should be prepared to operate this way.
Despite this, you’ll still need to pay taxes on any income. In other words, all income, whether you’re selling at a profit or a loss, is taxable.
It’s important to remember that laws vary from state to state. To be sure you won’t get a knock on the door from the IRS, find your local Small Business Administration and speak to them about your requirements as a small Etsy shop.
Physical vs. digital sales
Yet another thing that varies from state to state is tax requirements (and rates) for selling physical products instead of digital ones. That’s because different governments tax them differently. Sales taxes only apply to physical products for some states, and selling digital goods is tax-free. However, some states look at physical and digital products the same way.
If you decide to go down the digital route and sell these types of products on Etsy, do the research into selling digital goods in your state.
Should I operate my Etsy shop as a hobby?
When operating an Etsy shop, whether you’re running at a loss or not, it pays to avoid having your business listed as a hobby.
Yes, it’s cheaper and it means you don’t need to go through the process of getting the business licenses; it also means you can’t make deductions and that your personal wealth is on the line.
Whether you’re serious or not about making money on Etsy, you should probably get a business license.
Here’s everything you need to know to apply for a business license in all 50 states.
Why you should get a business license to sell on Etsy
Paying taxes isn’t fun for anyone. Just ask this kid:
And neither is having to go through the process of getting a business license. But the truth is that it’s the safest way to go about your business. When you’re operating correctly (and legally), it’s easier to scale up your business, easier to sell more, and you as an individual are simply safer.
Spend the time fine-tuning what’s needed in your state to operate as a business, then get yourself set up. You’ll be safer, your business will be happier, and have greater peace of mind.
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