Do You Need an LLC to Sell on Etsy?

Last updated on March 16, 2023

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Etsy is the perfect place to promote and sell your crafty creations since they take care of a lot of the details for you. Whether you are planning to sell your crafts as a hobby or are creating a new business, you need to know all of the legal requirements that may be required.

The real answer depends entirely on what you are trying to accomplish and what your overall goals are. Read on to learn more about whether you need an LLC to sell your crafts on Etsy.

What is an LLC?

An LLC, or Limited Liability Company, is a business entity that people in the United States can apply for when forming their own company. This business structure is known for protecting individuals from personal liability if something goes wrong with their business.

It is important to keep in mind that an LLC does have some similarities to a corporation but also has characteristics of sole proprietorships and partnerships. However, when it comes to taxes, an LLC does not pay taxes through the company but rather through the owner’s taxes.

While LLCs regulations can vary from state to state, several similarities are common. Some of the differences include the types of businesses that can form an LLC and the fees it takes to file for the business structure.

Does it Cost to Get an LLC?

A business that forms an LLC is required to file an article of organization within the state where it will do business. This document gives powers that be the pertinent information needed on the way the business will function.

In addition to filing the articles of organization with the state, businesses will also need to pay a specific filing fee to the state. The LLC also requires a registered agent to be included in the documentation that will represent the owners during legal proceedings.

It is important to note that while there are filing fees that are required when filing to form an LLC, the cost can vary depending on the state you live in. This mostly depends on the various regulations and tax implications that exist in the state.

Does Etsy Require You to Have an LLC to Sell on the Website?

When it comes to Etsy seller policies, there is no set regulation for individuals to have an LLC or any other type of business license. As you are reading through the information on setting up a shop, there is not much information about forming a business.

Once you dig into the seller policies, however, they do advise that you choose the correct business entity when you set up your shop. Several articles exist that suggest forming a business entity of some kind before setting up your shop and selling products.

The bottom line is that while Etsy does not require a business license to set up a shop, it is highly recommended to do so. In fact, in most states, it is a requirement that you file for a business license if you plan to sell products either in person or online.

Do You Need an LLC to Sell on Etsy?

When it comes to selling products on your Etsy shop, you must check with your state and local government to ensure that you are following regulations. This is mostly because if you are planning to set up a shop, you will need the proper permits and licenses.

The type of entity you form, however, is up to the individual to decide since there may be several things to consider. If you are going into business for yourself, you may want to consider forming a sole proprietorship, while on the other hand if you have more than one person, you will need to file for a general partnership.

This means that you necessarily have a choice of whether you want to form an LLC or keep your business a sole proprietorship or general partnership.

Should You Form an LLC for Selling on Etsy?

Keep in mind that you have the option to either form an LLC or not and the decision boils down to what type of business you are forming. If you feel that you will be selling something that could end up being a liability, then it may be in your best interest to form an LLC so you are protected.

The first thing that needs to be determined is if you have a business or a hobby based on the factors set by the IRS. The basic rule of thumb is that if you have a business then you will be required to have a business license but if you have a hobby, you are not.

To learn more about the differences between a business and a hobby, keep reading.

Is What You are Doing a Hobby?

The biggest difference between a hobby and a business is that with a hobby, you are not allowed to claim any deductions on your taxes for work expenses. This means that if you end up losing money on a transaction, you cannot claim the loss as a deduction.

If you are opening an Etsy shop to sell goods that you consider to be a hobby, then you do not need to file for a business license.

Is it a Business?

When you are trying to determine whether or not you have a business instead of a hobby, the IRS has specific questions that will help you. These questions are based on the amount of time and effort that you put into the business as a whole.

The bottom line is that if you are currently or are planning to profit from the venture in the future, you have a business and must file for a business license.

Advantages of Forming an LLC

One of the most well-known advantages of forming an LLC for your Etsy shop business is that if something goes wrong with a product you sell, or you have outstanding debts, you cannot be personally liable to pay them back. This is because the business is covered under a limited liability which means that only the business is responsible for paying debts and settling disputes.

Another advantage of forming an LLC for your Etsy business is that most people who start as sole proprietors tend to change this down the road when they are making more money. You can save quite a bit of time and money if you do this from the beginning.

Disadvantages of Forming an LLC

Most people who choose not to form an LLC for their Etsy business choose not to because of the cost that their state charges. This can be a huge deterrent for anyone that is just starting in the business world.

Other disadvantages include the time it takes to form the LLC which keeps individuals from setting up their shop and selling as quickly as they would like.

How to Form an LLC for Selling on Etsy

When you decide that you want to form an LLC for selling on the Etsy platform, there are certain steps that you need to take. Following these steps can make the difference between getting set up quickly and correctly or not.

To form your LLC for selling on Etsy, follow these steps:

1. Choose a business name
2. Check to see if the business name is available through various sites
3. Decide whether you want to file yourself or use a legal site
4. File the articles of the organization
5. Pay fees
6. Get an EIN
7. Start selling!

Depending on the state you live in, there may be more or fewer regulations and requirements for you to form your LLC. Just like the fees that can vary, the rules can also be somewhat different in your state so it is advisable to go through a legal website that is set up to form business entities.

Other Permits and Licenses Needed to Sell on Etsy

While the most important legal license you need to take care of to sell your products on the Etsy platform is the business structure, like the LLC, there may be other requirements depending on where you live. These additional requirements may include a seller's license to charge sales tax or an EIN.

Depending on the state of your business, you may be required to also have a seller’s license to permit you to charge sales tax. To determine if this is required, you should check with your state business licensing departments for further information.

An EIN or Employment Identification Number provides you with an identification number that is different from your information. This number can be used when you open various accounts such as bank accounts and other lines of credit.

Final Thoughts on Do You Need an LLC to Sell on Etsy

At the end of the day, you need to keep in mind that if you are planning to sell your handmade items on the Etsy platform, you will need to decide whether you need an LLC or not. For the most part, while you have to identify yourself as either a business or a hobby, you may be able to set up your shop with only a sole proprietorship or a partnership.

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