Congratulations! You have decided to take a step towards financial freedom and open an Etsy shop. Good for you. But now you are trying to figure out what to do to make that dream come true. One of the first questions you might ask yourself is, “Do I need a business license to sell on Etsy?”
From the outside, the question seems simple. A simple yes or no would suffice.
The problem is that the question is a lot more complex than it seems at first glance.
And here on this website we are not legal or tax professionals. We recommend that you always check with your accountant and local laws to determine what you will need. You may be able to call your state tax office in the United States for more information about your particular situation.
Does Etsy need a business license?
Let’s start with what Etsy says.
Etsy has a. created Beginner’s Guide to Selling on Etsy. The document has a small subsection that is headed, “Do I need a business license to sell on Etsy?”
This subsection consists of exactly three sentences. It says:
“Etsy does not require sellers to have a business license to sell on Etsy. However, when selling on Etsy, you must obey all laws that apply to you as a small business selling online. If you have any questions about which laws apply to you, do not hesitate to contact a qualified professional. “
That’s it. There is no longer any question of a trade license.
Wait. So do I need a business license to sell on Etsy?
What these three sentences mean is that Etsy doesn’t ask you for a business license. But – and that’s a big but – Etsy isn’t responsible if your local or state government officials knock on your door wanting to know why you’re running an unlicensed business.
In other words, Etsy won’t stop you from selling on their website if you don’t have a business license. However, Etsy will not protect you if you are caught operating without a license.
That means you have to do your own research. Whether or not you need a business license depends on where you do business. You will need to look at the laws of your city, county, and state to determine if you need a business license and, if so, what type of business license you need.
Why do I need a trade license?
Most states require a business license for two reasons.
First, the business license allows your local government to hold your company accountable. Depending on the type of business or service you run, local government agencies have regulations. Certain industries require certifications, insurance, etc.
Your local government wants to make sure that you are complying with regulations for your industry. A business license tells the state what type of business you are doing so they can check whether or not you are doing business within local regulations.
Even if your city, county, or state government does not require a business license, you will likely be asked for a business tax certificate or a seller’s license. The whole point of these permits is that this state can impose taxes on your sales.
Again, the best way to decide whether you need a business license, business tax certificate, or something else is to visit your city’s website. If you do not live in a city, visit the website of the foreign minister for your county or state.
You can also contact your local Small Business Administration (SBA) office for assistance.
Do I need a business license if I run my business from home?
Some Etsy sellers say I don’t have a business location; I only sell out of my house. They think that this is enough to exempt them from the trade license or trade tax certificate requirement. It is not.
Most states don’t care where you’re selling from, just that you are selling.
Take the state of California, for example, which says, “The requirements of the sales and use tax law for running a home-based business are generally the same as for running a physical store.”
Similar requirements apply in the state of Georgia. According to NOLO.com, “The state of Georgia does not require a general business license. As soon as you have received a valid business tax certificate, your company can legally operate throughout Georgia. “
In other words, states may not require a business license, but they almost always require you to pay your sales tax.
Do I need a business license if selling on Etsy is my hobby?
Because states don’t give in to tax collection, they don’t care if selling on Etsy is your full-time job, a sideline, or just a hobby.
No matter what you call your Etsy business, your state wants some of the profits, and so do all of the states you do business in.
For some states, this may only apply to handcrafted sellers, but in other states, this may also apply to digital product sellers.
Doesn’t Etsy levy sales tax?
To make sure they get it, many states have passed sales tax on marketplace facilitators. In this case, the state holds the marketplace intermediary, in this case Etsy, responsible for paying sales tax on all items purchased by buyers in their state.
According to the TaxJar website, “several states have passed laws requiring market intermediaries to collect and pay sales tax on behalf of their third-party sellers’ transactions. These laws benefit the states as they can collect more sales tax from fewer companies, making it easier for states to comply. The advantage for sellers is that sales tax is charged for certain transactions that are processed by the agent. “
By 2021, Etsy has introduced the Marketplace Facilitators Sales Tax for 45 states, Puerto Rico, and the District of Columbia. This means that Etsy will collect sales tax on every sale in these states.
Etsy does not collect sales tax for Alaska, Delaware, Missouri, Montana, and New Hampshire. In most of these states, Etsy does not collect sales taxes, as there is no sales tax in those states.
Even if your state doesn’t have sales tax, check with your local government office to see if you owe sales tax. For example, in Alaska, some municipalities collect sales tax when the state does not.
Delaware has a gross income tax, which means that you are billed a percentage of the “… total corporate revenue from goods sold and services provided in the state. There are no deductions for the cost of goods or real estate sold, labor costs, interest paid, discounts paid, shipping costs, state or federal taxes, or other allowable expenses.
The downside of sales tax for marketplace facilitators
While it’s nice that Etsy collects sales tax on marketplace facilitators in most states, it’s not as beneficial for sellers as you might think.
For one, only the sales you make on Etsy are managed. So if you sell on another platform like Shopify or through your own online marketplace, you’ll have to calculate these sales taxes separately. You also have to pay for them separately.
Second, even though Etsy has a sales tax collection program for Marketplace Facilitators, you are still responsible for obtaining any business licenses or seller permits required in your state, city, and county. Marketplace Facilitators sales tax does not replace any permits you may need.
What type of business should I apply for a trade license?
If it turns out that you need to apply for a trade license or trade tax certificate, the first question you will be asked is what type of business you are doing.
There are three main options to choose from:
one-man business – This is the case when you are a single person selling on Etsy. A sole proprietorship is the easiest to start and has the lowest fees.
partnership – A partnership is similar to a sole proprietorship except that it has more than one owner.
LLC or Corporation – Although they are two different entities, the structures are similar. According to Etsy, if your business is larger or at higher risk your business will form a Limited Liability Corporation (LLC) or a business.
When entering corporate space, it is a good idea to speak to an attorney or financial advisor before you begin.
The choice of how you organize your business is entirely up to you, but if you need help, Etsy has provided information here.
Do I need other licenses for my Etsy business?
Aside from a commercial license, you may need other licenses for your business, including a sales tax license, health and safety permits, and even a professional license if you are providing professional services.
To find out what other licenses your Etsy business may need, read this article from Investopedia.
Disclaimer of liability
All of the information contained in this article is intended as general advice and may or may not apply to your particular situation or business. If you need help with your business, there are several free resources available to you. Please check your local government website, your state’s foreign minister website, or visit the Small Business Administration (SBA) for advice that is more appropriate for your situation.
You should also seek advice from a financial advisor or attorney if you are planning to run a business that deals with groceries or health and beauty products.
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