Do You Actually Need a Business License to Sell on Etsy?

Q: I’ve decided to launch my own Etsy shop to sell my handmade items. Do I need a business license to sell online or set up my Etsy business account, or can I just open a shop and start selling?

A: The growing popularity of Etsy for sellers and buyers has attracted a myriad of aspiring entrepreneurs eager to showcase their crafts and products online. As the number of small businesses offering unique gifts grows, one common question that arises among new Etsy sellers is whether acquiring a business license is mandatory for Etsy seller registration and operating a shop on the platform.

Whether one needs a business license depends on local regulations and the nature of the products being sold. Here’s what prospective sellers need to know about whether they need a business license to become an Etsy seller and the potential consequences of noncompliance.

A business license is not required to sell on Etsy; however, you may be required to get a business license from your local government.

Aspiring entrepreneurs may be looking into starting an Etsy business for many reasons, whether they’re looking to sell their excess fabric through Etsy or one of the best online fabric stores or become one of the best Etsy stores for houseplants. But does one need a business license to become a seller on Etsy? According to Columbia Law School, Etsy itself does not mandate sellers to possess a business license to register an Etsy seller account and sell their items on the platform. However, the story might be different when it comes to local regulations.

Depending on the jurisdiction, an Etsy seller’s local government may require them to get a business license, especially if they’re conducting business from home or producing a significant volume of sales. These licenses are often a requirement to ensure businesses operate within the parameters of local laws, maintain a level of professionalism, and sometimes, track sales and collect local taxes.

While it’s easy for Etsy sellers to set up shop, they need to be aware of and comply with their specific regional or municipal regulations to avoid potential legal complications.

Additionally, a business license may be required if you want to sell certain items, such as health products, beauty products, or food items.

Etsy shop owners who sell things like health products, beauty items, or food might need to obtain a special license from their state or municipality. This is because products such as cosmetics or food can affect people’s health and safety. For instance, homemade beauty products can potentially cause an allergic reaction if certain ingredients are used. Also, those who sell food—even nonperishable items—without the right permits can face fines and other legal consequences if an issue arises or the product has an adverse impact on a customer’s health.

Sellers who want to create an Etsy shop under these categories will want to be particularly proactive in researching their state and local licensing requirements so they can comply with all regulations.

Some local governments also have a sales threshold where a business license becomes a requirement.

Small-scale Etsy gift shops and other sellers might be able to operate without a business license until their sales surpass a certain amount. Once this threshold is crossed, the local government may view the seller’s operation as more than just a hobby and, as such, may require adherence to more formal business regulations. These thresholds are in place to ensure that larger businesses, which potentially have a more substantial impact on local economies and resources, are appropriately regulated and contribute their fair share.

A seller’s permit may be required if your state has a sales tax requirement.

Many states in the United States levy a sales tax on goods and services. Etsy sellers who operate within such states may be required to collect sales tax from customers and then give it to the state government.

A seller’s permit is the official document that grants a business the authority to collect this tax from its customers. Without this permit, an Etsy seller might be in violation of state tax laws. Furthermore, having an Etsy seller’s permit often means that the seller is also responsible for regular reporting, which could be monthly, quarterly, or annually, detailing their sales and the collected tax amounts. Even if a business operates online, physical presence or “nexus” in a state could trigger these tax obligations.

The IRS uses nine factors to determine whether an activity is a business or a hobby; if your Etsy shop would be considered a business, it’s advisable to get a business license.

The distinction between a hobby and a business is essential in the eyes of the Internal Revenue Service (IRS), primarily because it affects tax reporting and deductions. The IRS has established nine specific questions Etsy sellers will want to consider to determine whether the activity is a business or a hobby. These factors include things like how the activity is carried out, the expertise of the person involved, the time and effort expended on the activity, and the history of income or losses, among others.

If, based on the IRS’s criteria, an Etsy shop is determined to be a business rather than a hobby, it comes with a set of financial responsibilities and implications. A business can often deduct expenses such as Etsy fees for sellers to reduce taxable income, whereas expenses for hobby sellers are more limited in their deductibility.

If an Etsy operation is classified as a business, obtaining a business license becomes even more critical. Not only does it ensure legal compliance with local regulations, but it also signifies a professional approach to the venture, potentially offering advantages in tax planning and financial management. Sellers, therefore, will want to review these nine factors carefully and consult with a tax professional to make informed decisions regarding their Etsy operations. If it’s determined that the Etsy shop is considered a business and not a hobby, the owner will want to budget for small-business insurance costs so they can purchase a policy from one of the best small-business insurance companies such as NEXT Insurance and Thimble.

If your Etsy shop functions under a partnership, corporation, or LLC, you’ll need to get an employer identification number (EIN) from the IRS to file business taxes.

An employer identification number (EIN), often referred to as a federal tax identification number, serves as a unique identifier for businesses, similar to how a Social Security number works for individuals. Getting one is a relatively straightforward process that involves a quick online application on the IRS website. An EIN allows the IRS to track a business’s tax reporting and obligations, and if the business ever plans to hire employees, the EIN becomes necessary for reporting employment taxes.

Although the answer to the question “Do I need an LLC to sell on Etsy?” is no, a seller with an LLC will need to meet more requirements than one operating under a sole proprietorship. For Etsy sellers operating under a partnership, corporation, or LLC, it’s not just about having a structured business entity; it also means adhering to the regulatory obligations that accompany these structures. Understanding the broader implications and responsibilities of operating with an EIN, especially in the context of an Etsy shop, can be crucial for long-term success and compliance.

It’s advisable to get a home occupation permit if you plan on running your Etsy business out of your home.

A home occupation permit or home business license, often required by local municipalities or county governments, serves as official recognition that a resident is conducting business activities from their residence. Such permits ensure that the business activities do not disrupt the residential nature of a neighborhood—such as increased traffic, noise, or other disturbances. Home occupation permits also often contain guidelines on the percentage of the home’s space that can be used for business purposes, ensuring that the primary use of the property remains residential.

For Etsy sellers, acquiring a home occupation permit can also help avoid potential complications with homeowners associations or rental agreements, which might have clauses prohibiting commercial activities.

If you plan on running your Etsy shop as a sole proprietorship, you’ll still need to register your business name if it’s different from your real name; you can do so by filing a DBA.

A sole proprietorship, the simplest and most straightforward business structure, means that, for tax purposes, the business is a legal extension of the individual taxpayer and not a separate entity. However, if an Etsy seller decides to operate under a name that differs from their legal name, they must register that chosen business name under a “doing business as” (DBA) license. The primary purpose of filing a DBA is to provide transparency to consumers and other businesses, ensuring they know the real entity behind a business name.

The process for filing for a DBA license varies by jurisdiction but typically involves a search to ensure the desired name isn’t already in use. This is then followed by a registration process, often with a local or state agency. A nominal fee might be associated with this registration.

Running your Etsy shop as a business under a license allows you to qualify for business loans, hire employees, deduct business-related expenses from your tax return, and protect your personal assets from business lawsuits or debts.

In addition to ensuring legal compliance, a formal business license allows Etsy sellers access to a suite of benefits and opportunities for growth. Having a business license could increase an Etsy seller’s odds of obtaining a business loan since lenders typically view licensed businesses as more legitimate and credible. Additionally, for those Etsy sellers looking to expand by hiring employees, a business license ensures compliance with labor laws, wage regulations, payroll setup, and other employment-related matters.

From a financial perspective, operating under a business license can be especially advantageous for sellers during tax season. It allows them to deduct business-related expenses from their tax returns, ranging from inventory costs and home office deductions to advertising expenses and even travel related to the business. These deductions can significantly reduce taxable income, leading to potential savings.

One of the most crucial benefits of formal licensing, especially when combined with structuring the business as an entity such as an LLC, is the protection of personal assets. In the event of business-related lawsuits or debts, a clear separation between personal and business assets ensures that the former remains shielded. This means that personal properties, savings, or other assets cannot be seized to settle business debts.

In essence, while the initial steps to obtain a business license might seem cumbersome, the long-term benefits it offers Etsy sellers—from financial perks to legal protections—make it an invaluable asset in the entrepreneurial journey.