Do You Need a Business License To Sell on Etsy?

If you have creative talent and want to sell items online, Etsy is a great tool.

Etsy is an online platform primarily used by sellers of hand-made or specialty items. It is a popular way for sellers to connect with customers looking for unique crafts, craft supplies, and products.

By the end of 2020, over five million sellers were using Etsy. So if you are looking to become a seller on Etsy, you are in good company.

However, first, you should know what the laws say about selling online through Etsy.

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Do You Need a Business License To Sell On Etsy?

Etsy's seller policies do not require you to have a business license to sell on their platform. However, the inquiry doesn't end there. A seller of goods on Etsy may need a license or permit from municipal, county, state, or federal agencies regulating businesses.

Your Etsy shop is either a business or a hobby. If you have a business, you need a business license. If you are engaging in a hobby, you don't.

So, therefore, the first thing to do is figure out if your Etsy activity is a business or a hobby.

Do You Have a Business?

The IRS has nine factors in determining if your activity is a hobby or a business. For example, they look at the time and effort you spend on the activity. They also consider if you operate the activity like a business and depend on the income for your livelihood.

If you profit from your activity in at least three of the most recent five tax years, the IRS considers that a business. Or, if you intend to engage in a profit-making venture, you have a business.

The advantage of having a business is that you can write off business expenses from your Etsy profits. But the drawback is that you need to apply for a business license.

Do You Have a Hobby?

If your Etsy activity is a hobby, you cannot claim any deductions above the income you generate from the hobby. So, for example, if you spend $200 to make an item and sell it for $150, you can't write off the $50 loss.

So if you are merely engaging in a hobby, you do not need a business license.

However, keep in mind that despite the classification, you still pay taxes on any income. So, unfortunately, any money generated from your Etsy shop is taxable.

Applying For a Business License

Business license requirements vary by jurisdiction for a home-based or online business. To get a business license, you complete an application for a business license and pay a license fee. You will then pay a fee to renew your business license each year.

First, however, you need to decide on a business name and then a business structure.

Business Name

Select a name for your business venture. Choose a business name carefully because it becomes your brand. You can use part of your name or describe your product in your business name.

When considering a name, think of something memorable and easy to pronounce and spell. Especially if selling online, you want your name to stand out among your competition.

Business Name and Trademark Search

Once you settle on a name, be sure no one else is using it. To do this, search your Secretary of State database and USPTO's trademark database for prior name registration. If you see the name already registered, do not use it.

Business Name Registration

If the business name is available, you want to secure it for your business.

If you are a sole proprietor, you register it by filing a fictitious name or DBA (doing business as) with your local government.

If you are forming a corporate entity, you register the name when filing the formation documents with the Secretary of State.

Business Structure

On a business license application, you indicate your corporate status. That is sole proprietorship, corporation, limited liability company (LLC), or other business entity.

Sole Proprietorship

As a one-person Etsy shop, you act as a sole proprietor. Therefore, you record any Etsy income (or losses up to your Etsy income amount) on your personal tax return.

The advantage to a sole proprietorship is that there is little paperwork to do. Therefore, a one-person Etsy shop may most likely be a sole proprietor.

Corporation or Limited Liability Company (LLC)

However, a formal corporate entity like a corporation or limited liability company (LLC) offers other benefits to an Etsy seller:

• Liability protection. A corporation or LLC separates your business activities from your personal finances. Therefore, any lawsuits or debts of your company do not affect your personal assets. Suppose a customer sued you for a defective product or personal injury from your product. In that case, the customer could only go after company assets. Generally, there is a low risk of lawsuits against Etsy sellers. However, if you sell products that may have defects or cause personal injury, you should have a corporate entity.
• Tax advantages. There are tax advantages to having an S corporation or limited liability company. An S corporation is a special IRS designation allowing corporate income and losses to pass through to your personal income tax return. An LLC also provides similar tax treatment. As a formal business entity, you can deduct all expenses relating to your Etsy business, even if they exceed your profits.
• Other advantages. There are other benefits to a corporation or LLC. For example, you will project a more professional image and secure business lines of credit or loans for your business. And if your Etsy business expands, you can attract investors and employees. It is a good idea to discuss the best business structure for your type of Etsy venture with a local business attorney.

Other Licenses and Permits

In addition to a business permit, businesses must hold other licenses and permits to operate their business.

Employment Identification Number (EIN)

If you have a corporate entity, you file for an Employment Identification Number (EIN). The IRS gives your business a nine-digit number to identify your business as separate from yourself. Use the number to open a business bank account, get lines of credit, or file business taxes.

If you are a sole proprietor, you use your social security number. You do not need to get an EIN, although there are some reasons you may want a different number for your business activity. For example, to reduce the threat of identity theft.

Seller's License

A seller's license is also called a “sales and use" license or a “sales tax ID." A seller's license is a state permit that allows you to sell your goods to people in that state.

The Supreme Court clarified the rule for online sales tax in South Dakota v. Wayfair. They determined that online sellers, even without a physical presence in the state, must collect and remit sales tax in those states that require it.

In many jurisdictions, you may only need a license for your business if your online sales exceed a specific dollar amount or a set number of sales transactions. For example, sellers who sell over $100,000 or have over 200 transactions annually.

However, Etsy may handle the sales tax obligation for you. According to Etsy's Fees and Payment Policy, “In some states, Etsy will collect the sales tax amount from the buyer and pay this to the relevant tax authority." To see if Etsy collects sales tax in the states you sell in, refer to their Where Etsy Collects and Remits State Sales Tax guide.

Be sure that Etsy is handling the collection and remittance of state sales tax for you.

Home Occupancy Permits

Most likely, you operate your Etsy business from home. There are specific requirements for home-based businesses. Check what licensing requirements you need for a home-based business in your city and state.

HOA Approval

Additionally, your homeowner's association may have rules for home-based businesses. So review the HOA guidelines for operating out of your home.

When You Need a License to Sell on Etsy

An Etsy seller needs a business license if their Etsy activity is a business. If it is a hobby, no license is necessary. However, it is hard to follow the IRS guidelines to determine whether you have a business or a hobby. Therefore, you may want to consult a small business attorney to guide you in the right direction.

And when you are ready to get a license, use a simple DIY business formation process to ensure you meet all the legal requirements in your state.