Are you hoping to sell your homemade, handcrafted items in your very own Etsy shop? It could be an excellent way to pursue your passion and make money doing so. Etsy is the online shopping center for a vast array of homemade clothes, trinkets, accessories and more: from candles to cups to cat pajamas.
Of course, Etsy is also a powerful business platform. Even if your shop is small, there are legal and tax questions to consider. Many US producers are unsure if they need to create a limited liability company, or LLC, to conduct business on Etsy.
The short answer is no. An LLC is not necessary for artisans, craftspeople, and other producers looking to sell goods on Etsy. Having said that, starting an LLC may be a wise move that maximizes your income and minimizes your liability.
This handy guide details the various factors at play and the steps involved in structuring your Etsy business as an LLC.
Are You Running a Business or Just Doing a Hobby?
The first question you need to ask yourself is whether or not you are selling your items on the Etsy platform as a business or a hobby. In the eyes of the IRS, there are different tax consequences for each classification, regardless of your business structure. The IRS offers a guide with nine considerations to help taxpayers determine whether they’re running a business, including the amount of time spent, the extent of bookkeeping, and dependence on relevant income.
If your Etsy sales qualify as a business you’ll be able to deduct a variety of business-related expenses, such as travel, marketing, and rent, for tax return purposes. A hobby, on the other hand, is more recreational and would mean you can only deduct the cost of goods sold.
Your intentions and your sales history are of crucial importance. If you intend to make a profit with your Etsy sales, whether you’re currently making a profit or not, then you are effectively operating as a business. And if your Etsy shop is structured as a partnership or LLC then you are already operating as a business in the eyes of the IRS.
In general, if you intend to operate your Etsy shop like a business, then taking the extra time and effort to form an LLC may be a good idea.
Should You Structure Your Etsy Shop as an LLC or Sole Proprietorship?
Most Etsy sellers operate as sole proprietorships. This is due to its simplicity as a business entity. A sole proprietorship fulfills the needs of most small good sellers, whether they are operating their shops as a business or hobby.
Simple and inexpensive to form and maintain, a sole proprietorship is an unincorporated entity with a single owner under which taxes are paid entirely on the owner’s personal tax return. They also have the advantage of being easy to dismantle or shift their formation into something like an LLC, as needed.
Many sole proprietorship businesses – whether on Etsy or elsewhere – eventually get turned into LLCs when operations expand. As another kind of pass-through entity (in which revenues pass through the business before being taxed on the owner’s personal returns), the LLC provides the small business owner with the advantage of limited liability.
Operating as a sole proprietorship, if you are sued, for instance for defective products, then your personal assets, as well as your business, could be at risk. Under a sole proprietorship (or general partnership) you have unlimited exposure to the debts and legal liabilities that your business activity generates. While not required to sell on Etsy, a limited liability company (as its name clearly indicates) can help you protect your personal assets from future legal complications.
For many Etsy sellers, legal problems may never be an issue due to the business’ small scale or the type of products sold. However, the more you scale your business, the more important a legal shield between the company and your personal estate becomes. The more your business expands, the more it might have to deal with suppliers or other intermediaries, and thus the more prudent for you to alter your business structure to reduce liability.
LLCs also give sole owners the chance to bring in other business partners as “members” and can raise capital more easily. In general, an LLC designation will provide your Etsy shop with a more professional look to both customers and potential investors.
The primary disadvantage to forming an LLC comes with the additional fees and compliance requirements, such as keeping certain documentation like the “Articles of Incorporation” and “Operating Agreement.” LLC formation expenses and requirements differ state by state, so additional research may be required to find out the details for your circumstance.
As a business owner, however, these are simply the costs of doing real business. And the bigger your Etsy shop grows, the more you are likely to appreciate the structure in your recordkeeping and more formal reporting measures. Forming an LLC nowadays is a rather straightforward process.
To register an LLC for your Etsy shop, you will need to choose a name and file important documentation with the governmental entity of the state you operate in. You can visit the federal Small Business Administration website for more details on how to register your LLC. Read through our How to Start an LLC guide and others in our business tips section for more on how to start businesses in different U.S. states.
LLCs Are Not Required On Etsy, But May Be Wise
Ultimately, operating your Etsy shop as an LLC could be a wise decision to make in order to protect you and your business partners from potential liabilities. LLCs will allow you to better scale your business while creating new avenues to raise capital, transfer equity, and still operate as a pass-through entity for tax purposes.
The decision for whether to operate as a sole proprietorship or LLC or another business entity will be up to you and your circumstances. We hope this guide has helped illuminate your final choice.