Etsy is one of the best places to sell aesthetically appealing products and knick-knacks. So it’s no surprise people want to get in on the action by selling their passions online.
But what are the legal requirements? Do you need an LLC to sell on Etsy?
In this article, you’ll learn all about starting your business on Etsy and the legal requirements and responsibilities that come with owning a business.
Decide First if You’re Doing a Business or a Hobby
Before we get into the details of how to start a business on Etsy, let’s first determine whether this hustle will be a hobby or a serious business.
This decision will determine whether you need an LLC, a business license, or any other legal documents before selling.
You will find out from the Internal Revenue Service (IRS) whether your company is a reputable one or not. This is an important indicator of what your company structure will look like and what legal aspects are involved.
Below you’ll find the details on what consists of a legitimate business entity in comparison to a hobby.
Selling as a Business
The IRS determines if your activity is a business or a hobby based on the hobby loss rule.
This means if your expenses outweigh your income, it may cause an offset in your revenue, resulting in the IRS claiming your business as a hobby rather than a business entity.
Here are some key ways the IRS would consider whether your business is a hobby or not.
- Is your business demeanor professional?
- Are you an expert and or provide excellent value?
- Have there been occasional profits?
- Is this a full-time effort?
- Is there financial stability?
These are a few examples of how the IRS determines your ventures as a hobby or a serious business.
Read the full article on the hobby loss rule and how to avoid it here.
Selling as a Hobby
When it comes to pursuing your hobby, you do not need a business license.
However, if you wish to claim any deductions or enjoy the legal benefits that come with owning a business, this will not be viable.
For example, say you invested in a few tools to start a side hustle in carpentry. Those expenses can stack up quickly, and it would be wise to add them to a list of deductions for your business.
But as mentioned above, if your efforts of maintaining your hobby aren’t considered serious and don’t develop a degree of revenue over the course of 3-5 years, the IRS will mark your business as a hobby, and won’t qualify your business to make deductions on your initial investments.
The best way to avoid your business being marked as a hobby is to ensure a recurring stream of income that showcases your diligence to the company.
Now, let’s go over which business structure is best for you if you’re ready to take your passions a step further.
Decide the Business Structure: Sole Proprietorship or LLC
If you’re serious about your business and wish to make your passions into a full-time job, the next thing to know is what type of business structure would be best for you.
Below are two common business structures people choose when it comes to selling on Etsy.
A sole proprietorship is a type of business structure where a single individual owns and operates the business and is personally liable for its debts and obligations. This business structure is a common choice when it comes to selling on Etsy because of its simplicity. There’s much less paperwork, and setting up the initial steps is easy.
Some of the main advantages of a sole proprietorship are:
- Low-cost startup
- Being your own boss
- Keeping all the profits
- Ease of changing your business structure in the future
However, there are also some disadvantages to being a sole proprietor. For example, the legal obligations associated with a sole proprietorship can be problematic in the event of a lawsuit. This is because your personal assets are tied to your business accounts and are not protected from liabilities.
In addition, raising capital is also more difficult, as banks and investors do not easily trust a business that doesn’t have liability protection in place.
A Limited Liability Company (LLC) is a type of business structure that combines the liability protection of a corporation with the flexibility and tax benefits of a partnership or sole proprietorship.
Depending on how you plan to operate your Etsy business, an LLC may be a good choice when establishing your business structure.
It offers the most flexibility when it comes to taxation, ownership, and legal action — making the legal structure of an LLC one of the biggest advantages as a business structure.
However, there can be some disadvantages to an LLC such as cost, extensive paperwork, and complex taxation.
If you’re still unsure about which business structure best suits your needs or have more questions about LLCs, check out this blog to get more details on LLC business formation.
Some Tips When Selling on Etsy as a Business
Starting a business on Etsy can be a lucrative venture, but it also requires careful planning and strategy to be successful. Here are some tips to keep in mind when selling on Etsy as a business.
Familiarize Yourself with the Ins and Outs of Etsy
The sign-up process is straightforward and requires basic information such as your name, email address, and password. Once you have created your account, you’ll be able to start listing your products.
To sell your products, you need to get the word out. You can do this by promoting your products through social media, running ads, and collaborating with other Etsy sellers.
Some sellers claim that listing your product on Etsy isn’t enough to drive sales, so make sure you’re willing to put in the time and investment to run a successful campaign.
When it comes to payment, Etsy allows sellers to accept payments via credit/debit card transactions, PayPal, Google Pay, Apple Pay, and some other third-party providers. You can view Etsy’s full payment policy here.
Open a Separate or Business Bank Account
One of the most important things you can do when starting a business on Etsy is to open a separate business bank account.
Separating your personal and business finances is important for several reasons:
- Organization: Having a separate bank account for your business makes it easier to keep track of your income and expenses. This makes it easier to manage your finances and prepare your taxes.
- Professionalism: A separate bank account gives your business a professional image and shows customers that you take your business seriously.
- Compliance with laws: In some countries, it is required by law to maintain a separate bank account for your business. This ensures that your personal assets are protected if your business runs into financial difficulties.
- Better record keeping: Keeping separate records for your business transactions makes it easier to reconcile your accounts, monitor your cash flow and make informed financial decisions.
Overall, opening a separate bank account or business account is a crucial step to starting a successful business on Etsy. By separating your personal and business finances, you can better manage your finances, meet legal requirements, and create a professional image for your business.
When starting a business on Etsy, one important aspect to consider is insurance. Protecting your business from potential risks and liability claims is important to your success and peace of mind.
Here are some types of insurance you should consider when starting a business on Etsy:
- Product Liability Insurance: This insurance protects you in the event that one of your products injures or causes harm to a customer. This is especially important if you sell products that could be potentially dangerous.
- Commercial Property Insurance: If you have a business or workplace, this insurance covers damage to your property and its contents, such as equipment and inventory.
- Home-Based Business Insurance: If you run your Etsy business out of your home, this type of insurance can protect you from liability and damage to your personal property.
- Commercial Umbrella Insurance: This type of insurance provides additional liability protection beyond what your other insurance policies cover. It’s especially important for businesses that are exposed to high risks such as metalwork or carpentry.
It’s important to determine your business’s needs and understand the types of insurance available. With the right insurance coverage, you can protect your business and ensure you are prepared for all potential risks and liabilities.
Taking Your Etsy Business to the Next Level
Starting a business on Etsy can be a lucrative and fulfilling endeavor, but it can be daunting when there are so many things to consider to make it successful.
Fortunately, there are countless resources that can help you scale your business smoothly.
At doola, we offer a variety of services that make building your business structure a breeze. This will save you the time of investing in learning all the confusing legal aspects and allow you to get back to focusing on your craft.
For example, doola’s Bookkeeping is one of those services aimed at simplifying your life.
We keep all of your expenses organized, up to date, and compliant so you can continue working without having to constantly worry about taxes.
In short, the appeal of selling on Etsy is tantalizing and a worthwhile venture, but it’s also best to take proper action to ensure a profitable and compliant business.
Does an Etsy shop count as a business?
Yes, if you are selling products or services on Etsy with the intent to make a profit, your Etsy shop can be considered a business and subject to tax obligations.
Am I self-employed if I sell on Etsy?
If you are running an Etsy shop with the intention of making a profit, you are considered self-employed and responsible for paying self-employment taxes.
Do you pay taxes when selling on Etsy?
Yes, you are required to pay taxes when selling on Etsy as income. Etsy sales are considered taxable income.
Do I need a business account for Etsy?
It is not required to have a business account; however, there are benefits to doing so such as organization, bookkeeping, and liability protection.