Do I need a business license to sell on Etsy?
Etsy is the gold standard for crafters looking to start an online business to sell their handmade goods. From jewelry to digital products to furniture and more, Etsy has become an eCommerce hotspot shoppers flock to to find unique items from artists worldwide.
If you’re an entrepreneur looking into starting a business on Etsy, you might be wondering what you need to have in place to get started. Etsy has guidelines on what you need to know before you sell on their platform, but there are more pieces to put in place before you’re ready to open up shop.
One of these pieces is a business license. Let’s break down what you need to know about a business license for your Etsy eCommerce store.
What is a business license?
A business license is a document issued by the government that officially recognizes a business as a business. A business license adds legitimacy and separates hobbyists from professionals.
Local laws require different levels of licensure. Some areas do not require online sellers to have a business license at all as they are more concerned with regulating businesses that have a physical presence in their municipality.
Other states and cities provide industry-dependent local regulations. For example, you may not need a business license to sell digital goods in your Etsy shop, but you would need multiple licenses in place to operate a restaurant or a salon.
Why do I need a business license?
If you intend to sell goods for profit, you will almost always need a business license to be seen as legal and compliant with government laws. However, regardless of whether or not you need a business license, there are plenty of reasons you may want one.
For example, the presence of a business license asserts that you are a professional entity that intends to properly follow the rules and regulations as laid out by local and federal governments. When a customer sees that a business is licensed, it engenders trust and instills confidence. It helps to assuage concern about scams or other unprofessional activity.
Do I actually need a business license to sell on Etsy?
Maybe. To determine whether or not you can sell on Etsy without a business license in 2021, you must first consider whether you want your Etsy store to be a business or a hobby. If it’s a hobby, you don’t need to worry about a license. If it’s a business, you will most likely need a business license to run your shop.
Is my Etsy shop a business?
The IRS lays out 9 factors that can help you officially determine whether you have a business or a hobby. Review them and see if you qualify as a business or if your Etsy shop is more of a hobby for you.
One of the main considerations is whether or not you intend to make a profit with your shop. Some start up an Etsy store simply as an outlet for their creativity. They want to share their art and creations with the world—they’re not concerned about developing their store into a profitable business. If this is you, you likely have a hobby on your hands. However, if you intend to earn your living through your shop—either now or in the future—you technically have a business.
The benefits of running your Etsy shop as a business
Selling things on Etsy doesn’t automatically make you a business. You must register as an official entity, which includes getting a business license. There are many benefits to this choice. For example, If you choose to structure your Etsy shop as a business, you will be able to write off costs related to your shop as business expenses. This can include craft supplies relevant to the type of product you sell, advertising to generate active buyers, and even home office space. You cannot do this if your shop is a hobby.
Note that you will have to pay income tax on any income you receive whether or not you run a business or a hobby. So, depending on how much money you earn, you may receive a greater tax benefit if you operate your shop as a business than if you choose to operate as a hobby. If you are unsure whether or not to open your Etsy shop as a hobby or business, seek legal advice from a licensed professional.
How do I apply for a business license?
Business license requirements vary by state. To receive a business license, you will need to check your local government’s guidelines and follow the steps necessary to qualify.
Some steps you will likely need to complete are:
- Determine your business structure. You can register as a sole proprietorship, a Limited Liability Company (LLC), a partnership, or a corporation. Keep in mind that if you register as a sole proprietor, your personal assets are on the line if your business gets sued
- Register your business name
- Register a “Doing Business As” (DBA) if necessary
- Apply for an Employer Identification Number (EIN) if you are registering as a corporation. An EIN is like a social security number for your business. It lets the IRS know that your business is a separate entity from yourself when filing your federal tax return.
- Check for any federal licenses and permits your business will need in addition to your business license. For instance, you may be required to procure a home occupation permit and/or a seller’s permit to run your business on Etsy. It is also possible that you will need to collect state sales tax on your items, depending on where you live. Check with the Small Business Administration (SBA) to determine any other rules you need to follow to operate your business legally.
Isn’t a business license the same thing as a “Doing Business As (DBA)?”
No. A DBA is a registered business name that is different from your legal business name. So, if you register your business under your legal name but wish to use a different name for your Etsy shop, you will also need to register a DBA. If you wish to open multiple Etsy shops under different business names, you will need a DBA for all of them.
How do I start a small business through Etsy?
The Etsy Seller’s Handbook includes this guide, explaining exactly what you need to know to create an Etsy store. In addition, Etsy offers resources that lay out what you need to know to run your shop once it’s open, so you remain compliant with the rules of its platform. Their guides include topics like what can and can’t be sold, how to be a positive member of the Etsy community, and how to handle disputes.
However, on the topic of business licenses, they aren’t clear. On the one hand, they state that they do not require you to have a business license to sell on their platform. On the other hand, you may still need to procure a business license if you intend to earn income selling on the platform. In short: Just because Etsy will let you sell without a license doesn’t mean you don’t need one.
Ultimately, It is up to you to do your due diligence to ensure that you have all necessary licenses in place before you start your business. If you want to be safe, it is a good idea to register as a business and procure your business license. Just make sure that when you do, you also follow the proper protocols to maintain your business, which may include paying quarterly business taxes and filing for a sales tax permit.
In addition, you may find that you will benefit from opening a separate bank account that is specific to your Etsy business. To do so clarifies personal versus professional spending and makes filing your taxes a little easier. A business credit card may be a good option for the same reasons.
Do I have to file taxes for Etsy sales?
Whether you’re a business or a hobby, you must pay tax on any income received. If you are registered as a business, you will pay taxes on income minus expenses. If you are a hobbyist, you will pay taxes on the full amount.
In most cases, Etsy will report your gross income to the IRS via Form 1099-K. However, even if you don’t receive a 1099-K from Etsy, you are still responsible for reporting any income earned.
If I have a business license, do I need business insurance to sell on Etsy?
A business license is not business insurance. Etsy does not require you to have insurance in place to sell on their platform, but this does not mean you should forgo it.
What are the types of insurance available for me to sell on Etsy?
Etsy’s terms of service make it clear that you are responsible for damages associated with your business or products. In addition, to sell on their platform, you must agree to defend them should they get sued for something you did. Therefore, Etsy sellers may enjoy several insurance policies to ensure that their business is well-protected against lawsuits and costly damages. These include:
- General Liability Insurance: General liability covers your business against claims of bodily injury or damage to personal property. You may also find general liability as part of a Business Owner’s Policy.
- Professional Liability Insurance: Also known as Errors & Omissions, this policy protects you if a customer files a lawsuit against you for negligence
- Commercial Property Insurance: Helpful if you run a brick-and-mortar in addition to your Etsy shop. This form of insurance covers you in the case of damages to your housed equipment or to the building itself
- Workers’ Compensation Insurance: Required if you have even a single employee. Workers’ comp covers you if your employee(s) become injured or sick while on the job
Selling on Etsy can be a rewarding experience. Just ensure that you have all necessary licenses, small business insurance policies in place. Then, you can sell with confidence, knowing you’re legal and protected.
Launch your Etsy shop with small business insurance from Huckleberry
At Huckleberry, we believe getting small business insurance for your Etsy shop should be simple, not painful. That’s why we make it easy to get your business insured online in minutes. If you do plan to hire employees now or in the future, go ahead and grab a quick workers’ comp estimate to see how much you’re likely to pay each month. Happy selling!