What happens if you sell on Etsy without a business license?
What happens if you sell on Etsy without a business license?
How to Use Etsy to Start a Small Business
Etsy has given artists, crafters, and collectors a highly visible online marketplace where they can sell their own arts and crafts, vintage items, and crafting supplies. Are you a skilled, hands-on person who wants to sell your creations to people all over the United States or even the world? Then you've probably wondered how to start a small business on Etsy.
What happens if you sell on Etsy without a business license?
Since 2012, when there were 9 million active buyers on Etsy, that number has steadily grown to over 47.3 million in 2019. Etsy has also seen a rise in the number of sellers, from 850,000 in 2013 to nearly 2.7 million in 2019. Many Etsy sellers use the site to turn their creative work from a "hobby" into a "real business," and 95 percent of Etsy sellers run their businesses from home.
On Etsy.com, you can find more information about how to set up a shop. In this article, I'll talk about the most important legal and business steps you need to take to start a small business on Etsy. I hope to give you an idea of what you might have to do as you look into the chance. But if you need help with legal issues, taxes, or accounting, you should talk to trusted legal and financial professionals. They can look at your situation and give you advice from experts.
1. Figure out if your business idea for a product will make money.
No business owner, no matter what they do, can be sure that they will be successful. Setting up an Etsy store to sell your goods also doesn't guarantee anything.
But you can give yourself a better chance of success if you do some research to learn about your target market and your competition on Etsy. If you do this before you open your Etsy store, you can make sure that the things you sell are unique and will draw buyers.
Pricing is, of course, also very important. It's important to know what your direct and indirect costs are so you can set the right prices for your products and run a business that makes money.
What happens if you sell on Etsy without a business license?
Here are some examples of direct costs:
The cost of the materials you use to make your products or the price of the items you buy to sell on Etsy.
Packaging costs
Shipping costs
Direct labor costs are the costs of labor that come straight from making your products. Even if you're not paying yourself for this work, it's still important to think about 1) how much time each unit takes and 2) how much money that time is worth.
Here are some examples of indirect costs:
rent out your studio, place of work, or storage space.
Taxes
Etsy fees
Indirect labor costs: Think about how much time you spend on business tasks that have nothing to do with making the product. For instance, running your Etsy shop, posting on social media, answering emails, etc.
What happens if you sell on Etsy without a business license?
Professional fees, such as those you pay to your lawyer and tax advisor, are not deductible.
Compliance costs for a business are things like licenses, permits, and state fees for things like business registration, filing a fictitious name, filing an annual report, etc.
Etsy has a number of fees that sellers have to pay. I've put a star by a few of them below.
Listing fee: Sellers pay $0.20 per listing when they add an item to their Etsy store. This is paid by sellers whether or not they make a sale.
Multiple quantity fee: A fee of $0.20 per additional item charged to sellers who sell more than one of the same item in a single transaction.
The fee for listing one item covers it. This fee only applies to any extra items that were sold during the transaction.
When a seller makes a sale, they have to pay transaction fees. These fees are equal to 5% of the total cost of the sale, which includes the price of the item, shipping, delivery, and gift wrapping.
What happens if you sell on Etsy without a business license?
In the US, the payment processing fee is 3% of the total sale plus $0.25 per order.
Etsy's online Help Center has a full list of all of its fees.
2. Figure out what kind of business entity suits you best.
The business structure you choose for your Etsy shop will affect your tax obligations, how responsible you are for your business's debts, and the paperwork you have to do to keep your shop legal. I think you should talk to tax and legal experts before making this important choice.
Most shops on Etsy are run by a single person. But sellers may find it helpful to set up an LLC or incorporate their Etsy business. Here is a summary of the most common types of business structures:
Sole Proprietor (or Partnership if there is more than one owner): As a sole proprietor, which is an unincorporated business structure, you don't have to file any formation paperwork with the state (except maybe to register a DBA, but more on that later!). From a business compliance point of view, it is the easiest choice. A disadvantage of a sole proprietorship could be that there is no legal or financial separation between the business and the owner's personal assets. This means that business owners are responsible for all of the company's debts and lawsuits. On their personal tax returns, business owners report and pay taxes on business activities. Profits from a business are taxed by the federal government and by Social Security and Medicare because the business owner is also self-employed. Most of the time, a sole proprietor pays himself or herself from the business using owner draws, which are not tax-deductible.
What happens if you sell on Etsy without a business license?
Limited Liability Company (LLC): A limited liability company is similar to a sole proprietorship in that it is easy to run, but it also gives the business and its owners a legal shield (called "members"). Members of an LLC and the LLC itself are treated as different legal entities. So, in general, the owners' personal assets are safe if someone sues the LLC or if the LLC can't pay its debts. When it comes to taxes, an LLC is treated the same as each of its members. All tax obligations of a business show up on the tax returns of the business owners. Instead of using payroll, LLC members pay themselves with owner draws from the business, which are not tax-deductible. As with a sole proprietorship, self-employment taxes apply to all company profits.
What happens if you sell on Etsy without a business license?
C Corporation (C Corp): A C Corporation is a legal entity that is separate from its owners and pays taxes on its own (called "shareholders"). This structure gives business owners the most protection from being sued. Corporations fill out their own tax returns and pay income tax (at the rate for corporations) at the end of the year. Instead of getting owner draws, business owners who work in the business get paid through the company's payroll. You may have heard the phrase "double taxation" used to talk about how C corporations are taxed. Some corporate profits are taxed twice: once when the business reports profits and again when profits are given to shareholders as dividend income.
The S Corporation is not a type of business entity. Instead, it is a special tax choice that LLCs and corporations can make (if they meet the IRS's requirements). When a business is set up as a S corporation, its profits and losses show up on the tax returns of its owners. When an LLC decides to be taxed as a S Corp, it's usually to lower the self-employment taxes of its owners. When a S Corp owner works in the business, he or she is paid through the company's payroll, not through an owner draw. Instead of paying Social Security and Medicare taxes on all of their business's profits, business owners only pay those taxes on the wages and salaries they get from the business. Distributions of profits to shareholders are not taxed in this way. When a corporation chooses to be treated as a S Corp, it usually does so to avoid being taxed twice (since profits flow through to the tax returns of the owners).
Etsy business owners can't all be right for the same type of business. Carefully look into the pros and cons and maybe talk to an attorney or accountant before making a decision.
3. Pick a name for your business
It's important to choose a good name for your business because it will be a big part of your brand and marketing.
Check to see if another business on Etsy has already taken the name you want to use for your business. Doing a corporate name search to make sure the name is available in your state is also a good idea. Also, you might want to do a trademark search to see if the business name is available in all 50 states. If your business will be registered in more than one state, this is important.
Etsy gives sellers some ideas to help them choose a name for their shop. As you choose the legal name for your business, keep in mind that Etsy only lets shop names have 4 to 20 characters. If an Etsy store owner has a shop name that isn't the same as their legal name, they may need to file a DBA (fictitious name registration) with the state to be able to sell under that name. A lawyer will be able to help you figure this out.
4. Choose a "registered agent."
A business on Etsy that is set up as an LLC, S Corp, or C Corp must name a registered agent in the state where it is registered. A registered agent's job is to accept important government, legal, and tax notices on behalf of the business. This is called "service of process." For the state to allow the registered agent to do their job, they must meet certain requirements, such as keeping certain office hours from Monday to Friday. Some businesses, like CorpNet, are allowed to provide registered agent services in all 50 states.
What happens if you sell on Etsy without a business license?
5. Give the State a Business Registration Form.
To make a business official with the state, registration paperwork must be filled out. Articles of Organization must be filed by an LLC, and Articles of Incorporation must be filed by a C Corporation. (Some states call the paperwork by a different name, but they all need the same information.)
For federal income tax purposes, if a qualifying LLC or C corporation wants to be treated as a S Corporation, it must file IRS Form 2553 along with its formation documents.
Most of the time, a sole proprietor business doesn't have to file official registration paperwork with the state. But if they want to do business under a name that is not their real name, they need to file a DBA. So, if they are selling products under a name that doesn't include the first and last names of the owner(s), the DBA filing will tell the state and the public who runs the business. For example, Maura Longo would need to file a DBA if she wanted to run her Etsy business under the name "Maura's Magical Masks" instead of "Maura Longo's Masks.""
Also, a registered business may need to file a DBA if they want to use a name other than their legal business name as their Etsy shop name (remember, Etsy only allows shop names to be 4 to 20 characters long).
Depending on the type of business entity and the state, the paperwork to start a business can get a little complicated. Business owners can choose to prepare and file the paperwork themselves, hire an attorney to do it, or use an online service like CorpNet to save money and make sure it's done right.
6. Go to the IRS and ask for an EIN.
To open a business bank account at most banks, you need an EIN (Employer Identification Number). An EIN is a unique nine-digit number that the federal government uses to identify a business as a tax-paying entity. It is also called a Federal Tax ID Number. EINs are used when filing taxes and sometimes when filing other reports and paperwork. They are free from the IRS. Business owners can apply for an EIN on the IRS website or ask CorpNet to fill out and send the EIN application for them. What happens if you sell on Etsy without a business license?
7. Open a bank account for your business
Having a business bank account is helpful because it lets you keep your personal and business finances separate. It is important for both LLCs and corporations to have this separation. When the owners of registered business entities mix their own money with business money, they risk losing their protection from personal liability. If someone sues the company, a court may decide that not enough was done to protect the "corporate veil," which keeps the owner's personal assets separate from the company's debts. Having a separate bank account for the business and credit cards in the name of the company (and only using them for business transactions) will help separate business money from personal money.
8. Get licenses and permits for your business
Etsy does not require sellers to have a business license in order to sell items on its site. But the state, county, and city where your business is based may require you to have licenses and permits to run it legally.
Depending on where your customers live when they order your products, you may also need to apply for a sales tax permit in the states or cities where they live.
What happens if you sell on Etsy without a business license?
Etsy calculates, collects, and sends sales tax on orders shipped to states with Marketplace Facilitator laws. On the Etsy website, you can find an up-to-date list of the states for which Etsy collects and sends sales tax.
So, what about sales tax on orders that are sent to states without Marketplace Facilitator laws?
In these states, it may be up to the Etsy seller to sign up with the state or local tax office and figure out, collect, and send back sales tax. Most of the time, a seller has to register for sales tax if they have either an economic tie to the state or a physical presence there.
When a seller reaches a certain level of sales revenue or sales transactions in a state, this is called a "economic nexus." The economic nexus thresholds for each state are different. For instance, California's economic nexus threshold is met when a remote seller's total sales in a 12-month period are more than $500,000. Arkansas, on the other hand, has set its limit at more than $100,000 in taxable sales or 200 separate sales.
What happens if you sell on Etsy without a business license?
If a buyer buys a taxable item from a seller outside of the buyer's taxing jurisdiction and the seller did not collect sales tax, the buyer must report and pay a use tax on the item before storing, using, or eating it.
Remember that the rules about sales tax have changed a lot over the past few years. Getting professional tax and legal advice will help you know what you need to do for your Etsy business to follow the law and meet any sales tax permit requirements.
9. Sign up for a shop on Etsy.
If you already have an Etsy account, you can sign in.
Your Etsy shop will be run by your account.
To give your brand a face and help others in the Etsy community get to know you, upload a high-quality profile picture and write an interesting bio.
Etsy needs profile pictures to be
at least 400 x 400 pixels in size.
not more than 10MB
in.jpg,.png, or.gif file formats
Etsy has a list of dos and don'ts for writing a bio that you should look over before writing your own.
10. Open a shop on Etsy
You'll need to set up and open your Etsy shop before you can start selling on the site. To do this, use a desktop web browser to go to the Etsy site.
Click on "Sell on Etsy" (at the top right of the Etsy website, and then select "Open Your Etsy Shop").
Choose how you want to shop (including the language, country, and currency).
Type the name of your store.
After you set up your shop, you can use the Sell on Etsy mobile app to make changes and keep track of it.
11. Fill your shop with items for sale
Go to your Etsy account and click "Shop Manager" to add the items you want to sell. Then, if you are a first-time seller, click "Your Shop." If you already have items in your shop, you can add more listings by clicking "Listings."
When making a listing, there are different parts and pieces of information to add:
What happens if you sell on Etsy without a business license?
Etsy suggests using at least five photos of each item so that shoppers can see it from different angles and feel more sure about their decision to buy. Images should have at least 2,000 pixels on the widest side (height may vary). The bigger the image, the easier it will be for buyers to zoom in and get a good look at your product. As you upload photos, think about which one you want to be the thumbnail. That's the one buyers will see on the home page of your shop, in search results, and in other places on Etsy.
Videos: You don't have to add product videos, but doing so can help your listing stand out. Videos must last between 5 and 15 seconds (ideal resolution is at least 1,080 pixels). Note that there is no sound in listing videos. If you recorded your video with sound, the sound will be taken out when you upload it.
Listing details: This information will affect how your listing is categorized on Etsy and how easy it is to find in Etsy search. Give your listing a title that tells what it is (up to 140 characters). Also, fill out the "About this listing" section to tell customers what the item is, who made it, when it was made, and if it is handmade, vintage, or a craft supply. Then, on Etsy's Categories page, choose the category where you want your item to show up. You can also add more details to your listing by setting other attributes.
How you describe your product in your listing will affect how customers see you and how easy it will be to find your item in an Etsy search. Use titles and tags in your listing description to help people find your product when they are looking for things like the ones you make. Also, make sure to include keywords that shoppers will likely use to find products like yours. You don't have to be an SEO expert to make your shop more visible in Etsy search, but it can help to learn the basics of SEO for Etsy.
What happens if you sell on Etsy without a business license?
Pricing and stock: You can set the price of your items and show how many you have in stock. You can also add SKU (Stock Keeping Unit) numbers to keep track of your stock.
Shipping: Once you've set up shipping profiles for your shop, you can choose the shipping option you want for each listing.
12. Figure out how people can pay
Etsy requires sellers in the U.S. and other countries to use its Etsy Payments platform to get paid by buyers. Payments can be made to sellers in other countries through PayPal, checks, money orders, or any other method the seller requests, as long as Etsy agrees to it.
13. Open your shop on Etsy
After you've set up your shop, added listings, and set up how customers can pay, there's one more thing to do before your Etsy store is ready for customers. Click "Open Your Shop" to start having fun and making money.
What happens if you sell on Etsy without a business license?
When you tell people about the website for your Etsy shop, replace "yourshopname" with the actual name of your shop.
After you open your shop, you can make changes to it.
14. Market your shop
Think about how you'll get people to visit your Etsy shop. No matter how great your products are, you will need to spend some time and effort getting the word out about your business.
What happens if you sell on Etsy without a business license?
Social media: Facebook, Instagram, and Pinterest are all great ways to get people to know about your Etsy store and show off your products. Make posts on social media to let your followers know when you add new items to your shop.
Also, think about taking your Etsy shop offline by showing off your creations in person at events like art and craft fairs. These kinds of chances can help you make more money and bring new people to your Etsy store.
Etsy Ads are another way to get people interested in your shop and products. You can set a daily budget for your Etsy ad campaigns, which can help you keep track of your costs. There are ads for Etsy all over the website and app, including in Etsy Search, on Category Pages, and on Market Pages.
15. Make sure your business is in compliance.
In addition to running your Etsy business according to Etsy's seller policies, your company will have other legal and tax obligations to meet every year or on a different schedule. The rules will depend on how your business is set up, what you sell, state and local laws, and other things.
Several examples include:
Filing and paying taxes
Keeping a registered agent on file
Licenses and permits need to be renewed
How to Renew a DBA
Holding member or shareholder meetings
Putting in yearly reports
You might want to talk to your lawyer and accountant about your responsibilities and make sure you don't miss any deadlines. If you don't follow the rules, the government could fine you, give you penalties, or even shut down or dissolve your business.
What happens if you sell on Etsy without a business license?