If you’re an artist and trying to sell your art online, Etsy is a great option.
Etsy is an online marketplace used mainly by creators of hand-crafted or other distinctive products. It’s an intelligent way for sellers to connect with buyers looking for unique items, craft products, and materials.
At the end of 2020 was when more than five million users had registered on Etsy if you’re considering becoming a vendor through Etsy and finding yourself in an excellent company.
However, you must know the law surrounding selling your items online on Etsy.
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Do You Need A Business License To Sell Products On Etsy?
Etsy’s selling policies don’t need sellers to hold an official business license to sell their products on the platform. However, the debate remains unanswered. Sellers of goods on Etsy may need approval or even a permit from municipal, local or state authorities that oversee businesses.
Your Etsy shop may be a hobby or an enterprise. If you’re an enterprise requires an official business license. If you’re engaged in a pastime, there is no need for an official license.
The first thing to determine is whether your Etsy company is an enterprise or a hobby.
Do You Have A Business?
The IRS gives nine aspects to consider when determining whether your business is regarded as a business or hobby. In particular, they look at the amount of time and effort you invest in the project. They also examine whether you can run the business as a company and rely on earnings to support your lifestyle.
The IRS considers you an enterprise if you’ve made profits through your business during the past three of the five tax years. You’ve been considered an enterprise if you plan to launch a successful and profitable business.
The benefit of having a business is that you can deduct the expenses associated with running a business from your Etsy profits. However, the downside is that you must be granted a business license.
Do You Have A Hobby?
Suppose you believe that your Etsy activity is a hobby. In that case, you can only take deductions directly related to the income you earn through your business. If, for instance, you’ve paid $200 for a product and later sold it for $150, you can’t take your loss as a deduction.
If you’re engaging in a passion, it’s optional for the necessary business license.
However, regardless of your tax classification, you must be tax-paying on all earnings. Therefore, any money earned through the operation of an Etsy business is tax-deductible.
How To Apply For A Business License
Business licenses vary according to the state where you reside for home-based or online businesses. To obtain a business license, It is necessary to submit an application for a commercial license and then pay an amount. Then, you’ll be legally required to pay to renew your license each year.
At the start, you need to choose the name of your company and your organization’s structure.
Business Name
Select a name that describes the business you are running. Please select the name you want to use for your business, but be mindful that it will be the company’s name. You can use a part of your name or your company’s name for the product you offer in the name you use for your company.
When thinking of the name you’d like select, try to find something memorable, easy to pronounce and spell. Particularly, if you’re selling on the internet, You’ll want your business to stand out among your rivals.
Trademark Search
Once you’ve settled on a domain name, ensure that no other person has registered the name. To confirm this, you must look through the secretary of state databases and the USPTO’s trademark database for prior registrations. If you discover a name already registered, don’t apply the name.
Corporate Name Registration
If your company is available, it’s essential to have it on hand to promote your business.
If you’re a sole proprietor, you need to be registered by applying for a fake name and the designation of DBA (doing the business) at the local authority level.
If you’re creating a corporation, you’ll need to create a name registration when you file the papers for incorporation at the Office of the Secretary of State.
Business Structure
On a form for a business license in a business license application, it is necessary to indicate your company’s status. It can be a sole proprietorship, corporation, Limited Liability Company (LLC) or any other business entity.
Sole Proprietorship
As a single-person Etsy retailer, you are operating as the sole proprietor. This means you need to track how much Etsy income (or losses higher than the Etsy earnings) is in the tax return you use for private purposes.
One of the benefits of a sole proprietorship is that there isn’t much paperwork. Therefore the single Etsy shop will likely be a sole proprietorship.
Corporation As Well As Limited Liability Company (LLC)
However, a formal organization such as a corporation (LLC) or limited liability corporation (LLC) has other benefits when selling using Etsy: Etsy seller:
- Protection from the risk of liability. A corporation or LLC is an entity that separates your company’s operation from personal matters. Thus, any lawsuits or debts from your business will not affect your assets. Imagine if a consumer is suing your business for an unsatisfactory product or a personal injury that results from your product. In this scenario, the buyer can only pursue the company’s assets. In the majority of cases the event of a dispute, there is a slight chance of legal action being taken on behalf of Etsy sellers. Suppose you’re selling products that are not safe or may cause harm to others. In that case, you must establish an official corporate organization.
- Tax advantages. There are tax advantages to having an S corporation and a limited liability corporation. An S Corporation is an IRS designation that allows corporate profits or losses to be credited to your tax returns. An LLC also can enjoy similar tax advantages. Because it’s a legal entity that is legally formal, you can claim deductions for any expenses related to your Etsy business, regardless of the amount higher than the earnings you earn.
- Other advantages. There are numerous advantages to the creation of an LLC or a corporation. You can, for instance, create a professional appearance, and you’ll be able to access a more secure commercial line of credit and even loans for your business. You may have attracted investors and workers when you choose to increase the size of your Etsy business and would like to expand. It is recommended to discuss the best way to structure your business and the specific type of Etsy company with a local attorney who is a business lawyer.
Other Permits and Licenses
Alongside a permit for business, Businesses must be granted additional permits or licenses for running their company.
Employment Identification Number (EIN)
If you’re a business company, you must apply to the IRS to obtain the Employer Identification Number (EIN). The IRS gives your company an EIN, which allows you to identify your business as separate from your personal. Use the number to set up an account with a bank for business and apply for a line credit or file your business tax returns.
If you’re solely a proprietor, you’ll be using Social Security numbers as yours. It’s not required to have an EIN, But there are some reasons to obtain an additional number from your company. Mainly, you will lower the risk of identity theft.
Sales License
A seller’s license may be referred to as a “sales and use” license or a “sales tax identification.” The seller’s permit is a state license that allows the seller to sell their products to people in the state where they reside.
The Supreme Court clarified the rule of sales tax online in the ruling in South Dakota v. Wayfair. The court decided that the online seller, even though they are physically absent from the state, must be capable of collecting and paying sales tax in states requiring it.
In certain jurisdictions, obtaining authorization for your company is required when online sales exceed a specific amount in dollars or transactions—for instance, sellers selling more than 100,000 or greater than 200 transactions annually.
However, Etsy may handle the tax obligations on your behalf. According to Etsy’s Fees and Payment Policy, “In certain States, Etsy can collect sales tax from the purchaser and pay this amount to Tax authorities.” To find out if Etsy has an established sales tax collection policy in the state you sell products in, refer to Etsy’s location. Etsy collects and pays the state sales tax guide.
It is essential to ensure that Etsy collects and pays sales taxes in your state.
Home Occupancy Permits
Most likely, you manage your Etsy business from home. There are specific rules for companies that are based at home. You should know the regulations you must satisfy to operate a business from home in your state and area.
HOA Approval
In addition, your homeowner’s association may have rules applicable to businesses operating from your house. Make sure you follow the HOA guidelines for operating inside your home.
If You Require Permits To Sell on Etsy, you must have a permit.
An Etsy seller must have an official business license when the Etsy company is considered a commercial enterprise. If it’s just a hobby, it’s not required to possess a license. It’s a challenge to follow IRS guidelines to determine the legality of your company or are just operating as an activity for pleasure. This is why you can talk to a small business lawyer who can guide you in the right direction.
If you’re seeking an official business license, follow this simple DIY process to form your business to ensure that you comply with the legal regulations of your state.
Is it Legal to Sell products on Etsy Without a Business License?
It’s merely an issue of operating this as a hobby, not a commercial venture. However, many large sellers offer their products on Etsy without the proper licenses for business or tax. They are at risk of being taken over by the IRS and are subject to penalties from state or local authorities. It is highly recommended to ensure that you’re licensed if you’re looking to develop your Etsy shop into a thriving enterprise because most of whom the IRS has slapped could be safer.
If your business operates on Etsy, is an honest company, and doesn’t turn an income, you don’t need to worry about getting an official commercial license. In other words, hobbyists, artists, and other not professional Etsy customers (which comprise most sellers) are not required to have a formal business license.
Suppose you’re planning on operating an Etsy shop as a legitimate and profitable business. In that case, recording your profits and getting business licenses is necessary. Suppose you’re just beginning your business and are still determining whether it’s profitable. In that case, you can apply for the five-year exemption to avoid making the decision.
Classification Of Hobby And Business
If you operate your own Etsy company, you’ll likely be required to keep your company considered an interest. This may decrease the requirement for licensing and reports; it can also limit how much tax-deductible you can take.
If you are serious about making a profit on Etsy, running a profitable business (that is licensed for business) is essential. Furthermore, “hobby businesses” do not qualify to enjoy the tax benefits of established business models; however, they must be profitable to be considered an enterprise based on a hobby. To legally start your Etsy business, you must ensure that it is run as a “for-profit” business by ensuring that you have complete documentation and obtain the proper license.
Suppose you’re running an Etsy company intending to make money. In that case, you can opt for a “for-profit presumption” granted after five years of operation instead of immediately. This means you can run an enterprise for the first five years without the IRS deciding whether your business is profitable. This can be accomplished by filling out form 5213 to the IRS. If your company’s performance is good over three of the five years, your business is considered an income-producing business. You’ll be required to pay taxes on your earnings during the duration.
The form must be completed within three years from the start of your year of operating your online store. This provides you with an extended testing period for your online business. If you can’t make the profit you expect, your company isn’t considered (or taxpayers aren’t) an enterprise for profit. This doesn’t just allow the business to remain tax-free and avoid filing taxes for business in the first year; however, you’ll also be able to take advantage of deductions on all small business expenses, which means you’ll save money. If you’re categorized as a hobby-based company within five years, you won’t be taxed as a business. However, you will not be eligible for the tax credit on purchases to expand your business.
Local Business Licence Requirement
By specific local law and sector you’re in; you could be required to obtain permits for business even if you’re legally required to record your company with the IRS.
In most instances, Etsy sellers won’t need to get permits to operate in the local area unless registered with the IRS–most local-based permits for business are only available to professionals such as A.C. repair professionals, electricians, cosmetologists, and electricians. It is, however, recommended to inquire with your local permit office to see whether you need authorization. It is usually possible to find out through a simple phone call to the local Small Business Association (SBA) or by looking at their licensing website.
In Conclusion
Suppose you want to ensure that you’re following all regulations. In that case, seeking a small business lawyer or online legal services is best. They’ll provide the most accurate information regarding your company’s taxation and permits and can assist you in sleeping a little more peacefully at night.
