Starting an Etsy shop as a new business or as a hobby may require you to acquire certain types of business registration credentials or a new license in some cases.
First, let’s define what “business license” means in the context of doing business in the United States. Business licenses do not include:
- DBAs (Doing Business As) and fictitious name registrations for businesses.
- Business entities such as sole proprietorships, partnerships, LLCs, S corps, or C corps.
- Tax identification numbers for companies such as EINs (employer identification number) or for individuals such as SSNs (social security number).
- Contracts with other businesses.
A business license has a very specific definition: Local, state, and federal governments will require certain businesses and entrepreneurs to apply for a business license in regulated areas of commerce such as accounting (CPA), financial planning (CFP), insurance brokerage, stock brokerage, firearms and explosives, medical fields, and more.
Related: Guide to starting an Etsy store
Do Etsy Sellers Need a Business License?
To answer the question at hand: No, a new entrepreneur on Etsy does not need a business license per se.
However, an astute entrepreneur operating as a sole proprietor may want to register a DBA name for their business or incorporate it under a more official structure depending on their future growth plans for the business.
How to Register Your Business for Etsy
As stated previously, new entrepreneurs do not need to register a particular business entity or DBA name to start a business on Etsy. For a new business owner who plans to sell handcrafted goods from their own home and operate under their own name rather than a business name, a sole proprietorship may offer the easiest and most straightforward means by which to launch the enterprise.
However, for business owners who plan to operate in a reseller capacity or otherwise white-label goods, forming an official business entity such as an LLC may prove necessary in order to enter into contracts with other companies. Additionally, most retailers should consider acquiring an EIN and sales tax registration.
Related: How to register for a sales tax permit?
Consider consulting both an attorney and accountant for a more complex Etsy business, such as one in which you plan to hire employees, operate across several tax jurisdictions, or achieve a high amount of gross revenue.
Federal Employer Identification Number
A federal tax identification number (also officially referred to as a FEIN, Employer Identification Number, or EIN – and unofficially referred to as a tax ID number) is a unique number assigned by the Internal Revenue Service to identify a business.
For sole proprietors who choose to keep their business and personal income and assets in the same bucket and who do not plan to hire any employees, an EIN exists as an optional requirement. However, if you plan to create an LLC or corporation, an EIN becomes a mandatory requirement.
Related: How to register for an EIN
DBAs and Fictitious Names
For sole proprietors planning to operate their Etsy businesses under their own names, no additional name registration requirements exist. However, if you plan to operate a name different from your own, regardless of your incorporation status, you should acquire a DBA registration for your chosen name.
Some laws prohibit entrepreneurs from operating under a different name without proper registration, and some entrepreneurs may wish to register the appropriate trademarks and copyrights for their business names, wordmarks, and logos. Consider consulting an attorney for help with this process.
Additional Documentation
Other relevant documentation for Etsy business owners might include:
- Home Occupancy Permit: Required in some communities, a home occupation permit allows you to operate a business from your own home legally. A visit to city hall or the Small Business Administration office should provide clarity on whether this permit acts as a legal requirement in your region.
- Tax Return: Etsy business owners should file a tax return regardless of their incorporation status. An accountant can help you determine how to manage your taxes for your business, including if you should file estimated taxes.
An attorney or other legal advisor can help you determine if you need other forms of documentation to legally operate your Etsy business, particularly in strict municipalities that have numerous requirements or zoning codes that may conflict with your business.
Related: How To Set Up Your Etsy Shop Policies
What Types of Businesses Operate on Etsy?
Businesses of all types operate on Etsy. However, the marketplace definitely caters to shop owners looking to sell hand-made crafts at low volumes. Hence, you should expect to encounter more sole proprietors and partnerships rather than incorporated entities such as LLCs, S corporations, and C corporations. Also, consider reading our guide on the differences between LLCs and sole proprietorships.
Related: How to start selling on Etsy
Sole Proprietorships
Many Etsy storefronts begin business as sole proprietorships. Under a sole proprietorship, business owners will not need to acquire any additional documentation. Instead, the local, state, and federal government will treat all earnings of the sole proprietorship as pass-through income at the personal level for the business owner.
Advantages
- Minimal paperwork requirements and bureaucratic hurdles.
- Simple taxation. Sole proprietors pay taxes on all earnings from the business.
- No specific fee is paid to the local, state, or federal government.
Disadvantages
- No liability protection or separation between the sole proprietor and the business.
- Potential difficulties in acquiring financing or transferring ownership of the business to another party.
Partnerships
Like sole proprietorships, partnerships require no additional documentation or upfront costs. They share many of the same advantages and disadvantages of sole proprietorships, particularly in the context of operating an Etsy business.
Advantages
- Same as sole proprietorships – few paperwork requirements or other legal hurdles to surmount to begin operations.
- Taxation operates similarly to sole proprietorships.
- No additional fees are paid to local, state, or federal government agencies.
Disadvantages
- Unlimited liability for the partners.
- Possible personality clashes arise between the partners.
Limited Liability Companies (LLCs)
A type of business entity with few bureaucratic challenges and simple taxation, the limited liability company has a strong showing across all types of online businesses, including Etsy shops. The key advantages of an LLC over unincorporated entity types (sole proprietorships and partnerships) include its liability protection and simple taxation.
Related: How to form an LLC without an attorney
Advantages
- Managers and members have substantially reduced liability issues in some circumstances.
- Flow-through taxation. All earnings flow through to the owners as personal income, simplifying the tax filing process.
- In some states like Wyoming, LLCs offer superior privacy protections for owners.
Disadvantages
- Entrepreneurs must pay fees to the state to create an LLC entity.
- Transferring ownership of the LLC poses difficulties, particularly when selling to other businesses.
S Corporations
The S corporation represents a step up in the complexity and filing requirements from the LLC entity type, albeit far less than that incurred in forming a C corporation. S corporations may have more credibility in certain cases than LLCs.
Advantages
- Easier transfer of ownership when compared to an LLC.
- As with an LLC, pass-through taxation on the earnings of the business.
- Protection of the personal assets of the shareholders.
Disadvantages
- High formation and ongoing expenses.
- Reduced flexibility in some financial matters.
Corporations
Similar to an LLC, a corporation provides liability protection, however there are more administrative requirements to follow. Corporations are typically better suited to businesses raising significant investment.
Related: LLC vs. corporation – What’s right for you?
Advantages
- Complete separation between ownership and management.
- Strong legal protections and easily transferable ownership in the form of common stock.
Disadvantages
- Cost of formation and ongoing complexity in operations. Many Etsy store owners will want to consider forming other types of entities.
More Advice for Etsy Business Owners
Establishing an Etsy store offers a fantastic platform for entrepreneurs to sell crafts and vintage items to a large and affluent buyer base.
We recommend that Etsy business owners consider a gradual ramp-up in the complexity of their operations. Starting as a sole proprietor offers an easy and cheap way to test the waters on Etsy to validate if there exists consumer demand for your product.
After establishing a degree of success on Etsy, we would then suggest that prospective Etsy entrepreneurs consider forming a more organized entity, such as an LLC, as well as register the appropriate trademarks.
As always, consider consulting with a lawyer about your area’s local laws. The local government will also have guidance on how to operate a business in your region. Choosing the right business structure and determining business license requirements should involve an expert’s advice.
