Do You Need a Business License to Sell on Etsy?
Etsy is a great marketplace for new and experienced artists who want to grow their business and sell their work.
The problem is that creative people usually don’t worry about the legal stuff as long as they are creating crafts as a hobby.
So, when the money starts to pour in, the question arises, “Do you need a business license to sell on Etsy?”
The short answer is no, but the story does not end there.
There are some considerations when creating an Etsy seller account, so you might want to read on to get to the bottom of it.
When Do You Need a Business License to Sell on Etsy?
Etsy’s Seller Policy is quite clear about this subject. Individuals selling on Etsy do not need registration with authorities.
In other words, Etsy won’t ask you for a business license. You just make an account on the platform and start selling.
Now, here’s the tricky part: Your state laws or federal regulations might not allow you to start selling on any platform without a license.
Plus, there are more details in these regulations that complicate the matter.
For example, even your state regulators might not ask you for a business license if you sell your crafts as a hobby.
In that case, you must know if your work is a business or just a hobby. Remember, it’s not about what you think of it but how the IRS views it.
How To Tell If It’s a Business?
You might wonder about the fine line between a hobby and a business. Is it a business if you’re making money but are not doing it full time?
If you start the activity as a part-time thing but now make a profit out of it, do you need to apply for a license?
The IRS provides general guidelines to determine whether you are running your Etsy store as a hobby or a business.
The most important element of these guidelines is profit.
If you’re consistently making a good amount of profit from it, you cannot get exemptions from the IRS.
Consider these major factors to classify your Etsy selling as a hobby or a business:
Time: If you’re spending enough time and effort to make the activity profitable in the long run, you are running a business.
Records: If you’re maintaining complete records of your transactions, including income and expenses, it’s a business.
Motives: If you have personal motives, such as making money or expanding your reach, you have a business.
Past Record: If you have made profits in the past from similar activities, you need a business license to sell on Etsy.
Livelihood: If you depend on the income from selling on Etsy, your activity is a business.
Assets Appreciation: If you can make money from future asset appreciation, your selling activity will be classified as a business.
These factors are general guidelines and cannot serve as legal advice. Get professional advice from a legal expert to ensure you don’t run into trouble with the IRS.
You can get more information about federal tax regulations from Section 1.183-2(b).
What if You Run It Like a Hobby?
If you’re not worried about tax deductions and love to work on your crafts, you can definitely continue selling as a hobby.
However, in that case, you cannot claim deductions from the income if you’re losing money.
For example, if you produce a craft for $100 and sell it on Etsy for $90, you cannot claim a $10 deduction above your income.
Also, even if your activity is a hobby, you will still pay taxes on any income you generate from it.
Should I Run My Etsy Store as a Hobby?
Applying for a license and running your store like a business is better. Yes, continuing your activity like a hobby is cheaper, but it’s still not worth it.
That’s because you cannot claim any loss deductions from your income when you list it as a hobby. That means your personal assets are on the line.
Also, you cannot think of expanding it beyond a certain point when it’s a hobby. It’s probably a better and more secure option to list your store as a business.
How to Apply for a Business License?
Once you’ve decided you’re running a business to generate profits, you’ll need to apply for a license.
Acquisition of a license and related regulations depend on your jurisdiction and where you want to operate from.
Also, it depends on your business type and if it’s an online business or you’re selling from your home.
In any case, you need to fill out the application form and select a name for your business. You also have to pay the registration fee.
Most startups start with a sole proprietor license, but if you’re confident in your business, you can register as an LLC or Limited Liability Company.
With an LLC, your business and personal assets are separated from each other, so your personal finance remains intact in case of a liability.
It costs more to set up an LLC, but it also looks professional if you want to bring investors on board.
You’ll also need an EIN or Employer Identification Number from the IRS that helps distinguish between your business and your personal finances.
This number will be necessary for opening business accounts, filing taxes, and applying for credit.
If you’re selling over $100,000 per year, you’ll also need a “sales and use” license from your state.
Start on Etsy Today
Even though Etsy does not require a business license from you when you start your store, you should get one anyways.
It’s safer and much more professional to obtain a license and also saves you from personal liability in case your store goes under.
Whether you have a business license or not, you can open an Etsy seller account today and start selling your crafted goods.
You can do it as a hobby initially and see if it makes any profit. Later on, you can get a license after you see the potential.
Wrapping Up
Creating an Etsy seller account is easy and only takes a few minutes. You can get 40 free listings to kickstart your business if you sign up today.
When asking do you need a business license to sell on Etsy, your business is probably booming, and you’re making profits.
If that’s the case, you should get a business license ASAP, unless you don’t plan to make money from your hobby.