Do You Need An LLC To Sell On Etsy? Free Guide 2023
An Etsy shop is an online marketplace used for selling products on the Etsy platform. Many Etsy sellers are individuals or businesses selling handmade goods or vintage items, as well as craft supplies. You need an Etsy account and may choose to form an LLC, which is a type of pass through entity to save money on taxes, but sole owners may also choose the legal paperwork of a sole proprietor. To form an LLC offers limited liability protection to the owners. Etsy shops can be profitable if you have unique and high-quality products, effective marketing, good customer service, and a strong understanding of your target audience and competition. So, do you need an LLC to sell on Etsy? Let’s Find out.
Should You Start an LLC To Sell on Etsy?
An LLC, or limited liability company, is a type of business structure that offers personal asset protection and flexibility in management, taxation, and ownership structure. Forming an LLC for an Etsy shop can provide liability protection for the owner’s personal assets and lend credibility to the business, but it’s not always necessary. Whether or not to form an LLC depends on factors such as the size and scope of the business and the owner’s individual risk tolerance.
LLC Benefits for an Etsy Business
The main benefits of forming an LLC for an Etsy shop instead of a sole proprietorship include personal asset protection, credibility, and flexibility. An LLC separates personal and business assets, protecting the owner’s personal assets from business debts and liabilities. Operating as an LLC can enhance the professionalism and credibility of the business, making it more attractive to customers and potential partners. To form an LLC offers flexibility in terms of management, taxation, and ownership structure.
There are several things you’ll need for your business entity to sell on Etsy:
- Business bank account: It’s important to keep your personal and business finances separate, so opening a business bank account is essential. Use your business name for this. This account will allow you to manage the finances for either a business or non-profit, including deposits, withdrawals, and sales transactions.
- Accounting software: Consider using accounting software, such as QuickBooks or Xero, to manage your LLC’s finances. This software can help you track expenses, create invoices, and manage cash flow.
- Tax accounts: You may need to set up tax accounts with both the state and federal government, such as a state tax account or a sales tax account, depending on your business and location. Check with your state’s taxing authority to determine which tax accounts you need to set up.
- PayPal or other payment processor account: If you plan to sell products online, you may need to set up an account with a payment processor like PayPal. This will allow you to accept credit card payments and manage online transactions.
- Business license: A business license is a permit or registration required by a local or state government to operate a business within a specific area or jurisdiction. You may need a business license to sell on Etsy. Check with your Secretary of State’s office and local government body to determine if you, as the business owner, need a business license.
LLC Tax Benefits & Options for Etsy Businesses
The tax implications of an LLC for an Etsy shop include:
- Pass-through taxation: The LLC business entity is taxed as pass-through entities, meaning the business profits and losses are reported on the owners’ personal tax returns, potentially lowering overall tax liability.
- Self-employment tax savings: Etsy sellers and LLC owners can reduce their self-employment tax burden by electing to be taxed as an S corporation, which allows them to pay themselves a reasonable salary and take additional profits as distributions.
- Deductions: LLC owners can deduct business expenses, such as materials, supplies, and home office expenses, from their taxable income.
- State-specific tax benefits: Some states offer tax incentives and exemptions for LLCs, such as reduced filing fees or tax breaks for businesses that create jobs in certain areas.
It’s important to note that tax laws vary by state and situation, so it’s best to consult with a tax professional for specific advice before you begin to sell on Etsy.
Other Types of Business Structures for Etsy Shop
Besides an LLC or sole proprietorship, there are several business structures to consider for your Etsy shop for tax purposes. Here’s how these structures break down:
A corporation is a separate legal entity from its owners, offering the most liability protection for assets. However, corporations are more complex and expensive to set up and maintain than LLCs or sole proprietorships. An S Corporation is a type of corporation that’s taxed like a partnership, with profits and losses passing through to the owners’ personal tax returns. S Corporations offer the same liability protection as regular corporations but with more tax advantages.
If you have a business partner for your Etsy shop, a partnership might be a suitable structure. A partnership is similar to a sole proprietorship, but with two or more owners who share profits and losses.
A sole proprietorship is the simplest and most common structure, where the owner and the business are the same entity. However, there’s no legal separation between the owner’s personal and business assets, and the owner is personally liable for any debts or liabilities incurred by the business when operating through a sole proprietorship.
5 Basic Steps to Start an LLC for Etsy 2023
Here are five steps to take when setting up the limited liability company business structure for your Etsy shop:
Choose a Name for Your LLC
When choosing a business name, consider its availability, uniqueness, and relevance to your business, while ensuring it complies with your state’s naming rules.
Choose Your Registered Agent
Choose a registered agent for your LLC who is reliable, trustworthy, and meets your state’s requirements for availability, location, and service of process. Our top 2 choices are below.
Read More: Best Registered Agent Services 2023
Prepare an LLC Operating Agreement
To prepare an LLC operating agreement, outline company ownership, management and business structure, and financial structures, including member contributions, profits and losses, and dispute resolution mechanisms.
File Organizational Paperwork With The State
To file paperwork with your state for your LLC, research your state’s requirements; these will be available on your state’s Secretary of State website. Next, gather necessary documents, and submit the application with the appropriate fees. At this time, Etsy sellers will pay for the business license for their business entity.
Obtaining an EIN
An EIN, or Employer Identification Number, is used to identify your business for tax rules. It doesn’t affect how much self employment taxes are owed, but a sales tax id is required when filing tax returns and when you pay income tax, and is often used to open bank accounts or apply for business credit. Without this you may face tax consequences. To obtain an EIN for your LLC, apply online with the IRS, providing your business information and the reason for your EIN application.
The Top 2 LLC Services
|ZenBusiness||Northwest Registered Agent|
|Award||Best Overall||Most Affordable|
|Price||Starting at $49/year||Starting at $39/year|
|Detail||Read Review||Read Review|
Through ZenBusiness you can search for available trade name, business name, DBA names, create articles of incorporation, find out the needed documentation for your state and federal filings and registrations, obtain an EIN, build the business web presence through domain names, email, and domain privacy protection.
ZenBusiness offers three tiers for members ranging from $49/year to $299/year. For each tier there are additional charges which will not be included; these include an EIN filing charge (one time, $70), a worry free guarantee service ($129 per year), and a 25% discount on agent services, any state filing fees.
Northwest Registered Agent
Northwest Registered Agent is primarily a Registered Agent Service but their suite of tools does offer additional business services at a reasonable price. The initial cost is $39 to file the LLC paperwork; all other charges are due as per your state’s regulations. There is a separate option, called Pay In Full. With this option, which costs $225, Northwest will file the LLC, and provide agent services for one year, however, all other charges from state fees, etc., will still apply.
Northwest will scan up to five regular documents each year for free; after the initial five there is a charge for additional services. This is also different from other providers as many will only scan and send legal documents.
Both services can help file paperwork for LLC, sole proprietor, and other structures needed to operate a business.
Read More: Best LLC Services 2023
In conclusion, business operations of an LLC or sole proprietorship for your Etsy business can provide personal asset protection, credibility, flexibility, and tax implications. You should carefully choose your business registration name, check with your state and local government so that all legal requirements – including pay taxes – are covered. Most Etsy sellers and small business owners also need a business license to sell on Etsy, will be responsible for home based business related expenses, business formation paperwork, collect sales tax on business transactions, and keep your business and personal finances separated. It’s important to carefully consider your options and seek professional advice to make the best decision about the sole proprietor or limited liability structure for your business because this will determine your personal liability in regards to legal situations. With the right structure in place, you can help ensure the success of your Etsy business name for years to come.
Frequently Asked Questions (FAQs)
No, you don’t have to have an LLC for an Etsy shop. You can conduct business for an Etsy store as a sole proprietorship or partnership. The right business structure, such as forming an LLC for Etsy sales and transaction fees can offer additional limited liability protection and other benefits depending on the size and goals of your business. You will need an employment identification number (EIN) whether set up as sole proprietors, LLCs or another new business structure.
The seller’s license and fees required for an Etsy seller account can vary depending on your location and the products you sell. Here are some common seller’s license and fees to consider:
– Business license: Depending on your state and local regulations, you may need a business license to operate your Etsy shop. This license can come with a fee, which varies depending on your location.
– Sales tax: If you sell taxable goods on Etsy, you may need to collect and remit sales tax to your state. You may also need to apply for a sales tax permit, which can come with a fee.
– Income tax: As an Etsy seller, you’re responsible for reporting your income and paying income taxes on your profits. Make sure to keep accurate records of your income and expenses throughout the year.
– Etsy fees: Etsy charges fees for listing items, selling items, and payment processing. These fees can vary based on the price of your items and your sales volume.
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+ 5 sources
Etsy. Etsy – Shop for handmade, vintage, custom, and Unique Gifts for Everyone. Etsy. Published 2019. Accessed May 6, 2023. https://www.etsy.com/
Employer ID Numbers | Internal Revenue Service. Irs.gov. Published 2012. Accessed May 6, 2023. https://www.irs.gov/businesses/small-businesses-self-employed/employer-id-numbers
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Apply for licenses and permits. Apply for licenses and permits. Published 2020. Accessed May 6, 2023. https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits
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