So far, it’s clear that Etsy is one of the best marketplaces for selling handmade products. Its annual revenue growth is a clear indicator that both sellers and buyers love using the platform.
If you’re thinking of starting your own Etsy store but are curious about the legal requirements, you’ve come to the right place. Keep reading to see whether you need a business license for your Etsy store. Afterward, we’ll move into more details.
Do Etsy Sellers Need a Business License?
Etsy is an appealing platform that counts millions of active users. With over 4 million Etsy sellers, it keeps proving that growing an eCommerce business on the platform is a viable option for millions.
If you’re thinking of starting, you must be wondering whether you need a business license to sell on Etsy. The answer is both yes and no. If you take a look at the US Federal Tax, the IRS allows you to classify your Etsy income as a hobby, which frees you up from running it as a business.
However, if it turns out that you’re making any kind of profit, you’re running a business.
Therefore, proving that you’re running the store as a hobby can be much more complex than simply registering a business and getting you EIN. That’s why we recommend that you register a company from the start. It’ll simplify the whole process.
What Business Licenses Do You Need To Run an Etsy Store?
Multiple factors will affect which business licenses you’re going to need to sell on Etsy legally. But generally speaking, the following are the commonly required ones.
1. Business Operation License
To run your own business, you’ll need to get an operating license. It’s best to reach out to your local Small Business Administration for all the details. Explain what your business model is, and you’ll know which permit to get.
When it comes to eCommerce, getting the permit will cost you somewhere between $50 and $100. The price will depend on your location, as different states have different rates.
2. An Employer Identification Number
An Employer Identification Number is necessary for the IRS tax report. However, that only applies to those who register their business as an LLC or a Partnership.
If you’re registering your Etsy business as a sole proprietorship, as most sellers do, you won’t need to get an EIN. You’ll simply report taxes on your tax return.
3. Home Occupation Permits
The requirement for the Home Occupation Permit will range from one state to another. However, you’ll likely need one if you’re running your Etsy store and making your products in your home.
Again, reach out to your local Small Business Administration to learn all the details.
4. License to Sell Food
If you’re planning to sell food on Etsy, you’ll need a permit to do so. It’s necessary to get a certificate from the Health Department to sell food online.
Take a look at the FDA’s guide on how to start a food business. You’ll see all the steps you’ll have to take to be able to sell food online.
Can You Sell on Etsy Without a Business License?
Technically, the answer’s yes. If you’re running your Etsy store as a hobby, you don’t need any licenses. There’s always the risk of being caught by the IRS, though. It will lead to an investigation of whether you’re running a store as a hobby or for profit.
We recommend a much better approach, as you get all the benefits of running a business without having to pay taxes right from the start. If you want to try out your business idea, you can always file form 5213.
What does this mean? Well, by filing this form, you postpone the IRS's decision on whether your business is for-profit. It gives you plenty of time to grow your business, and in case it becomes for-profit, you then pay the taxes for that whole period.
But if your business goes south and does not become profitable, it won’t be taxed as a for-profit business.
Check Your Territory Requirements
Please remember that all the regulations depend on the territory of your residence. Each US state has its local laws. That’s why it’s always good to reach out to the local SBA and learn all the local requirements of running a business.
Different states have different sales tax regulations. Ask around and check what your local taxes for running an eCommerce business are. The chances are that you’ll have to collect sales tax.
Use Alura Etsy Fee Calculator to make sure that you’ve included all the costs when you’re forming product prices.
Physical and Digital Sales
That’s yet another element that varies from one state to another. Different territories look at physical and digital products differently. In those cases, sales taxes apply to physical products only.
On the other hand, states that look at these products as equal will tax both types the same way. Do your homework if you’re planning to sell digital goods too.
Fictitious Business Names
Since your Etsy nickname is most likely different than your business name, you might have to register DBA (Doing Business As). This regulation helps the public know which entities are behind your company name.
These are only some examples of different regulations you might face across various states in the US.
Since we’re talking about a global platform here, ensure that you check your legal requirements before running an Etsy store. Each country has different legislation regarding eCommerce businesses.
Once you’ve done everything to make your Etsy shop legal, it’s time to focus on your business. Check out the Alura tool! It’ll prove helpful time and time again as you grow your Etsy store. Its set of features is just what you need.
If you want to learn more, contact us. We’re looking forward to helping you out.