Etsy is a popular online marketplace for homemade crafts and other goods. With over 2.1 million registered sellers, it's one of the largest online marketplaces. However, many Etsy sellers are left wondering "Do I need a business license to sell on Etsy?" Etsy's own policies page doesn't offer any help with this question at all, and the answers available elsewhere are murky at best. Fortunately, we're here to help. We've put together the ultimate guide to whether you need a business license to sell on Etsy.
Do Etsy sellers need a business license?
Whether or not you need a business license to sell on Etsy depends primarily on whether you're treating your Etsy store as a legitimate business or just a hobby. To help you decide whether you need a business license, ask yourself the following questions. If you answer "yes" to any of the questions below, you'll likely need a business license in order to operate legally.
Cheat sheet: Do you need a business license to sell on Etsy?
- Are you making a profit on Etsy? If you're buying and selling on Etsy without making a profit, you probably don't need a business license. However, as soon as you start making profits, you're required to report your profits to the IRS. Many sellers ignore this rule and don't file income on their profits. If caught, these sellers could face fines or be required to pay back taxes.
- Are you operating your Etsy store as a business or a hobby? While the IRS gives vague guidelines on how to judge whether your store is a hobby or for-profit, here's the summarized version: If you're doing it for profit, it's a business, not a hobby. Businesses will be required to get the appropriate business licenses in order to operate legally.
- Is your company a partnership or LLC? If you've formed your Etsy store as a partnership or LLC, you'll be required to get an EIN for your business, as well as the requisite busines licenses.
What business licenses do I need to sell on Etsy?
If you are operating your Etsy store as a business and turning a profit, you'll be required to play by the same rules as any other online seller. Just because you're selling on Etsy instead of your own website does not exempt you from getting the appropriate licenses. We've put together a quick list of the most commonly-needed licenses for Etsy merchants below:
The 3 most commonly-needed business licenses for Etsy sellers:
- A basic business operation license. This is a permit that allows you to operate your business within the local government's geographical jurisdiction. The license requirements for operating a business vary by state and by city, so your best bet is to contact your local Small Business Administration office to ask what permits are required in your city. For ecommerce merchants, the licensing requirements are usually minimal, and the application costs are usually between $50 and $100 (although this varies by city and state).
- An Employer Identification Number (EIN). An Employer Identification Number is how you'll report taxes to the IRS. If you've registered your business as a sole proprietorship, which is very common for Etsy sellers, you aren't required to get an EIN since you'll report taxes on your personal tax returns. If you've formed a partnership or LLC, you'll need an EIN.
- Home Occupation Permits. If you're operating your business out of your home, you may be required to get a Home Occupation Permit. For most online merchants, this isn't much of an issue, but if you're making your products out of your home (as many Etsy merchants do), you might need this permit. Check with your city's local SBA or city hall to see the local requirements.
Since the requirements for business licenses and permits vary quite a bit by state and by city, we highly recommend that you contact your local SBA to get a complete list of your local permit requirements - most places have an office dedicated to helping small businesses get started, and they'll be able to walk you through the paperwork and help you do everything correctly. For a list of more licenses you might need, check out our guide to ecommerce business licenses.
Is it safe to sell on Etsy without a business license?
Sometimes. While many large sellers continue to sell on Etsy without the appropriate business or tax licenses, they're risking being caught by the IRS. As long as you're not operating your Etsy store as a legitimate business and aren't making profits, you don't have to worry about getting a business license. In other words, hobbyists, crafters, and other casual Etsy users (which comprise most of their sellers) don't need a business license. If you're attempting to run your Etsy store as a legitimate, profitable business, you will need to report your income and get business licenses. If you're just starting your business and aren't sure if it's profitable yet, you can use the five-year exemption to postpone having to decide.
Pro Tip: The Five-Year Exemption
Even if you're operating your Etsy business for profit, you can elect to have the 'for-profit presumption' made after 5 years of operations. What this means is that you can operate your business without the IRS deciding whether your business is for-profit or not by filing form 5213 with the IRS. If your business is profitable 3 out of those 5 years, your business will be ruled for-profit and you'll be required to pay back taxes on your income for that period. You can submit form 5213 within 3 years of your first year of operating the store. This will give you a fairly significant testing period for your online business - if you give it a shot but aren't able to turn a profit, your business won't be considered a for-profit business. Not only will this allow you to operate without filing business taxes, but you can also deduct your expenditures.
Local business license requirements
Depending on your local regulations and what industry you're in, you may need to file for business permits even if you're not required to register your business with the IRS. For the most part, Etsy sellers won't need to get local business licenses in order to operate unless they're also registering their business with the IRS - most local business licenses are for professionals such as AC repairmen, cosmetologists, and electricians. However, check with your local permit offices to see if you need a permit. You can usually figure this out with a quick phone call to your local Small Business Association (SBA) or a quick skim of their licensing website. If you're really wanting to make sure you're following all of the rules to the letter, you may want to contact a small business lawyer or an online legal service such as Rocket Lawyer. They'll be able to give you expert advice regarding business licenses and taxes, and can help you sleep a little better at night.
Have questions about whether you need a business license to sell on Etsy? Ask us in the comments below!
The information provided on this website does not, and is not intended to, constitute legal advice. Readers are encouraged to contact an attorney to obtain up-to-date legal advice.