Many people have hobbies like creating crafts, art, furniture, holiday décor, and other decorative or functional items. What do they do if they decide to start selling those products on the popular site Etsy, for example?
Does Etsy Require a Business License?
Anyone may sign up to sell items on Etsy. All they need is a name for the shop, a valid payment method, and bank information. Given that Etsy is a near-global platform, laws vary by location. So a better question would be, “When does someone need a business license to sell on Etsy?” (This article will reference federal laws in the United States only. Check your local laws and how interactions with Etsy change in accordance.)
Any income derived from selling on Etsy is subject to income tax. However, there is a difference between how a hobby is treated for tax purposes and how a business is treated. Therefore, knowing how the IRS defines the difference is important.
The IRS considers nine factors to determine if a source of income is considered a hobby or a business:
- Do you treat the activity like a business, and do you keep accurate books and financial records?
- Do you have personal motives, such as pleasure or recreation, behind doing the activity?
- Are the effort and time you spend on the activity consistent with the desire to make a profit?
- Do you depend on the income from the activity for your livelihood?
- Are losses due to circumstances beyond your control or typical of early and start-up businesses?
- Do you have the knowledge to make it a successful business?
- Have you made a profit creating similar products before?
- Have you made a yearly profit and if so, how much?
- Do you expect to profit in the future from the appreciation of the assets used in your sales?
If an activity is spontaneous, done for pleasure, and makes minimal profit, it is likely classified as a hobby. The more organized and methodical the activity, and the more profit it generates, the more likely it is to be considered a business. In this case, the business owner needs to follow applicable laws and regulations for business licensing and taxes.
Why Do You Need a Business License?
The exact type and nature of a business license varies depending on the laws where the business owner lives, but in most cases, anyone running an online or home-based business must have a business license, as it defines the proper taxes and potential tax structures. It never hurts to consult with a legal professional who will understand the intricacies of local laws.
What Business Structures Are Common for Etsy Businesses?
Once a creator’s activities are classified as a business instead of a hobby, a necessary consideration is the legal business structure. While there are a multitude of options, many small-business owners tend to select one of three.
Sole Proprietorship
Making and selling artwork, handicrafts, and other small items often starts as a one-person effort, so sole proprietorship is often what new business owners choose. There is minimal paperwork compared with most other business structures and taxes are kept simple: The seller puts their Etsy income on their personal tax return as how they would report income from any other job.
Partnership
For businesses with two or more owners or creators, a partnership is a common way to start. Like the default tax structure of a sole proprietorship, business owners in a partnership can report their income on personal tax returns.
Limited Liability Company (LLC)
An LLC requires additional paperwork and planning compared with a sole proprietorship or partnership but offers stronger legal protection for business owners. Classification as an LLC may allow expenses and losses to be deducted from the business’ tax returns, but business owners also may opt to keep it simple and report on personal taxes.
Learn More About Starting a Business
A Legal Toolkit for Starting and Scaling Your Business, offered as a 100% online non-credit certificate course by Columbia Law School’s Executive Education and Non-Degree Programs teaches entrepreneurs to navigate common legal obstacles. Topics include business and tax structures, contracts, and how to protect intellectual property—all of which can help business owners protect themselves legally as they start an Etsy business.