Should You Get an LLC to Sell on Etsy or Sole Proprietorship?
Do you need an LLC to sell on Etsy? If you’re a small manufacturer of handmade goods, you may find yourself asking this question.
However, you should already know that Etsy is the most crucial market to participate in.
What you might not be aware of, however, is whether a sole proprietorship or an LLC is necessary to open an Etsy business.
A simple no is the response. To sell on Etsy, you are not required to be an LLC.
Even though it’s not required, some of the biggest platform sellers nevertheless choose to create an LLC for tax reasons and to safeguard personal assets in the event that you’re sued.
In this article, we outline the differences between an LLC and a sole proprietorship for your Etsy account. Here is all the information you require to make a wise choice.
Do You Need a Business License to Sell on Etsy?
To better grasp the procedure and how selling on Etsy works, we’ll need to break down what Etsy is and the restrictions surrounding this online marketplace before we can explain why you don’t need a business license to sell on Etsy.
What is Etsy?
Etsy is a website where artists can market and sell their wares. Etsy refers to business owners who manufacture their own things as artists.
These could include handcrafted mementos, trinkets, toys, artwork, jewelry, antique furniture, clothes, and household items.
On Etsy, you may also sell artwork, posters, crafts, and art supplies. For Etsy, there are restrictions on what you may sell.
In their online marketplace, harmful products like hazardous materials, alcoholic beverages, illegal substances, tobacco, drug paraphernalia, and the like are not permitted.
What are the Requirements for Opening an Etsy Shop?
In Etsy, creating an account is not too difficult. Other than your name and email address, there are no other significant prerequisites.
All you need to do is register on their website, which is free to do. You can sell items on your account and purchase items from other accounts as well.
To conveniently transfer your customers’ payments to your account if you sell on Etsy, you must link your bank account to your business.
Do You Need a Business License to Sell on Etsy?
You don’t need a company license or registration to sell on Etsy, as stated on their website.
Should You Get a Business License?
Now, this is where things could become a little unclear. You don’t need to have a business license to use Etsy.
You should be aware that it’s crucial for you to distinguish the reasons behind why you’re creating an Etsy account in the first place.
Also, you don’t need to obtain a business license if you’re registering on Etsy to sell things because the artwork you’re doing is a hobby.
Obtaining a Business License
However, you must establish your business and obtain a business license if you intend to use your Etsy account to sell your artwork for profit.
Why? This is due to the fact that if you rely on the money you make from selling your goods to sustain your lifestyle, the IRS will view this as a business and you will be responsible for registering it and filing your taxes accordingly.
So, to sum up, deciding whether you’ll register an Etsy account to sell goods as a hobby or as a business will determine whether you need a business license.
LLC for Etsy
Consider that you have made the decision to launch a business on Etsy, which requires you to obtain a license.
What kind of business structure will you be registering your firm as would be the following query?
They list the four business structures that are frequently employed while registering a business below:
Sole Proprietorship: A business arrangement with just one owner is known as a single proprietorship.
The owner files taxes using his or her personal income tax. The minimum paperwork required for registration does not provide limited liability protection.
Partnership: There are at least two owners in this corporate structure.
The annual information return is filed with the IRS detailing the business’s profits, losses, and deductions. Additionally, there is no limited responsibility defense.
Two Important Business Structures
Corporation: The proprietors of a corporation are known as shareholders.
Due to the double taxation of this business structure, taxes are first filed at the corporate level and then again after the profits are distributed to the shareholders.
Limited liability protection is available to corporations.
LLC (Limited Liability Company): An LLC is a hybrid of a corporation, partnership, and single proprietorship.
Due to the restricted liability protection provided by an LLC, the owner’s assets are protected in the event that the company faces legal issues.
You might be leaning towards choosing an LLC for your company out of all of these possibilities due to its limited liability protection. You may comment on the following two things:
Single Member LLC for Etsy
You will be taxed as a sole proprietorship if you choose to open a shop on Etsy as your sole business.
Additionally, as was already noted, this exempts the company from paying taxes. You, the owner, should file this through your personal income tax instead.
Don’t be alarmed even though a sole proprietorship’s regulations come next. The advantages of an LLC for protection are still available.
Multiple Members LLC for Etsy
For Etsy, a multiple-member LLC denotes that there will be two or more owners managing the store.
Owners will also benefit from an LLC’s protective features while adhering to tax regulations for partnerships.
Sole Proprietorship for Etsy
As already mentioned, the sole proprietorship has just one owner managing the company. And when people sign up for their shop on Etsy, that is typically the case.
Keep in mind that the majority of the things offered on Etsy are handcrafted. An individual typically handles this task as well.
A sole proprietorship is therefore the best option if you register your business.
It is entirely up to you whether to register your company as an LLC. No option is right or wrong in this situation.
Instead, consider the advantages and disadvantages of both a sole proprietorship and a single-member LLC to choose which is best for you.
Corporation for Etsy
Additionally, you have the option to register your company as a corporation. You can use this to attract investors to support the expansion of your company.
They safeguard businesses that have been incorporated. This means that personal assets are not the target of any lawsuits or business issues the corporation may encounter.
More so, businesses that are incorporated as corporations further increase the legitimacy of the business name.
Customers will trust you and your products more as a result.
However, compared to registering for other business structures, there will be a lot of paperwork, so be ready for that.
What Type of Business is an Etsy Shop Considered?
People can sell their handcrafted goods on Etsy. These can include crafts, trinkets, party favors, and other mementos.
Typically, Etsy sellers fall under the category of single proprietorship because they are the only owners of their enterprises.
Etsy does not mandate that its sellers possess a business license, and not all of its merchants have their companies registered.
The good news is that you can run your Etsy shop as a sole proprietorship, partnership, corporation, or limited liability company. Everything is dependent on how your business is run.
You cannot refer to your company as a single member or sole proprietorship.
Taking a Pause to Reconsider
For instance, if you share profits with someone you consider a partner and who works alongside you. Already a partnership exists.
It’s best to sit down and go over how your firm will operate if you’re still unsure about whether to register your business and obtain a license.
Will it merely be a pastime? You will need to register it. Will you conduct business elsewhere except Etsy?
If the answer is affirmative, you must register it immediately in order to provide customers with valid receipts.
Can My Etsy Shop Have a Different Name than My LLC?
Consider this scenario: you already run a business and want to use a different name to sell on Etsy. It occurs.
There are occasions when the look has changed and it just doesn’t work for your new company.
Can one, therefore, choose a different business name? It is! But there’s something crucial you need to be aware of.
With your local state, you must file a DBA or Doing Business As registration.
This is for the benefit of the customers who purchase your goods, letting them know that the company they are dealing with has a different registered name.
State per state has different requirements for submitting a DBA. In some states, you must visit your county offices to register for a DBA.
After that, you’ll pay a registration charge. Costs might be between $10 and $100.
You could also need a fictitious name certificate to conduct business with certain businesses, such as banks.
In order to be ready when you apply for a DBA, it is still advised that you examine your local state legislation for any restrictions and requirements as well as obtain the necessary fee information.
Do I Need an EIN to Sell on Etsy?
You might also be asking whether you require an Employer Identification Number if you plan to sell items on Etsy.
For individuals who own a business, an Employer Identification Number, or EIN, is a mechanism to report their taxes to the IRS.
However, not all business owners require an EIN. For instance, since you will be submitting your taxes on your personal tax returns if you are the sole proprietor, you do not need to obtain an EIN.
Do You Really Need an EIN?
However, you must obtain an EIN if you are a company, an LLC, or a partnership.
So, is an EIN required to sell on Etsy? The answer is no if you’re operating the business alone because that falls under the category of a sole proprietorship.
Additionally, since the majority of Etsy users run their businesses as sole proprietorships, many may not even have EINs.
Can an LLC Help With My Taxes?
Although an LLC may offer the advantages of limited liability protection, do they also offer any tax advantages? I’d say there is.
Keep in mind that an LLC can be a corporation, a partnership, or a single proprietorship. Additionally, partnerships and sole proprietorships are not subject to double taxes.
You, therefore, profit from avoiding paying two taxes if you form your LLC as one of those two.
However, you will be subject to double taxation if you decide to register as a corporation.
How to Form an LLC for Etsy
We recognize that at this point, you’ve undoubtedly made the decision to submit an LLC application.
It’s still important for you to have an LLC since it gives your company credibility and shields you from legal trouble, whether that’s for Etsy or outside of Etsy.
Simply follow these steps to submit an LLC application:
Check your state laws: It is a good idea to register your firm in the state where you will conduct most of your operations. Therefore, as they differ by state, check your state’s legislation to learn what the requirements and costs are.
Choose your LLC name: Your company name must be distinctive. You can abide by the business name regulations set forth by your state’s legislation.
Pick a Registered Agent: Many states demand that you employ a registered agent to handle your company’s legal correspondence, including sending, receiving, and processing it. You avoid any scams, make sure you pick a reliable and professional one.
More Steps to Consider
Start filing LLC Articles for the Organization: You should submit your formation paperwork to the Secretary of State.
These can be submitted online or by mail. You should check with your local state to see if there are filing costs associated with this.
Draft your LLC Operating Agreement: An LLC Operating Agreement provides a summary of your LLC’s member roles and business ownership structure.
Apply for your EIN: As previously stated, if you registered for an LLC as a company, you must have an EIN.
But when you conduct business, for example, when you bank or hire staff—you can be asked for your EIN.
Etsy is a crucial marketplace for selling your handmade goods and launching a new business.
Therefore, it’s advised to register your firm, whether it’s a single-member or multiple-member LLC, to boost credibility and for tax benefits if you’re serious about it rather than choosing to utilize Etsy as a hobby.