Congratulations! You’ve decided to take a step toward financial freedom and open up an Etsy shop. Good for you. But now, you’re trying to figure out what you need to do to make that dream happened. One of the first questions you’re probably asking yourself is, “Do I need a business license to sell on Etsy?”
On the outside, the question seems like an easy one. A simple yes or no would suffice.
The trouble is, the question is a lot more complex than it first seems.
And here on this website, we are not legal or tax professionals. We recommend always checking with your accountant and local laws to determine what you need. You may be able to call your state’s revenue department in the US for more information on your specific situation.
Does Etsy Require A Business License?
Let’s start with what Etsy says.
Etsy has created a Beginner’s Guide to Selling on Etsy. The document includes a small subsection titled, “Do I need a business license to sell on Etsy?”.
That subsection consists of exactly three sentences. It says:
“Etsy doesn’t require sellers to have a business license to sell on Etsy. However, when selling on Etsy, you’re required to follow any laws that apply to you as a small business selling online. If you have any questions regarding which laws apply to you, don’t hesitate to get in touch with a qualified professional.”
That’s it. There is no more talk of a business license.
Wait. So, Do I Need A Business License To Sell On Etsy?
What those three sentences mean is Etsy won’t ask you for a business license. But—and this is a big but—Etsy won’t be responsible if your local or state government officials knock on your door and demand to know why you’re operating a business without a license.
In other words, Etsy won’t stop you from selling on its website if you don’t have a business license. However, Etsy also won’t protect you if you get caught operating without a license.
That means you have to do the research yourself. Whether you need a business license or not will depend on where you’re doing business. You will need to look into your city, county, and state laws to determine whether you need a business license and, if so, what kind of business license you need.
Why Would I Need A Business License?
Most states require a business license for two reasons.
First, the business license allows your local government to hold your business accountable. Local government agencies have regulations in place depending on the type of business or service you operate. Certain industries require certifications, insurance, etc.
Your local government wants to make sure you’re operating within its regulations for your industry. A business license tells the state what kind of business you’re running so that it can look at whether or not you’re operating within local regulations.
Even if your city, county, or state government does not require you to have a business license, it will likely ask you to have a business tax certificate or seller’s permit. The whole point of these permits is that that state can collect taxes on your sales.
Again, the best way to decide if you need a business license, a business tax certificate, or something else is to visit your city’s website. If you don’t live in a city, check out your county or state’s Secretary of State website.
You can also contact your local Small Business Administration (SBA) office for guidance.
Do I Need A Business License If I Run My Business Out Of My Home?
Some Etsy sellers say, but I don’t have a business location; I’m just selling out of my home. They think that’s enough to get them out of the business license or business tax certificate requirement. It’s not.
Most states don’t care where you’re selling from, just that you’re selling.
Take the State of California, for example, which says, “The requirements under the sales and use tax law for running a home-based business are generally the same as running a storefront business.”
There are similar requirements in the State of Georgia. According to NOLO.com, “The state of Georgia does not require a general business license. Once you have obtained a valid business tax certificate, your business may legally operate throughout all of Georgia.”
In other words, states may not require a business license, but they will almost always require you to pay your sales taxes.
Do I Need A Business License If Selling On Etsy Is My Hobby?
Since states don’t budge on tax collection, you’ll find that they don’t care if selling on Etsy is your full-time job, a side hustle, or simply a hobby.
No matter what you call your Etsy business, your state wants a piece of the profit, and so do all the states you do business in.
For some states, this may only apply to handmade sellers but for other states, it may also apply to digital product sellers too.
Doesn’t Etsy Collect Sales Tax?
To ensure that they get it, many states have enacted a Marketplace Facilitators Sales Tax. That’s when the state holds the marketplace facilitator, in this case, Etsy, responsible for paying the sales tax of all items purchased by shoppers in its state.
According to the site TaxJar, “Several states have created legislation that requires marketplace facilitators to collect and remit sales tax on behalf of their third-party sellers’ transactions. These laws benefit the states because they can collect more sales tax from fewer entities, which results in simpler compliance for the states. For sellers, the benefit lies in having sales tax for certain transactions handled by the facilitator.”
By 2021, Etsy has implemented the Marketplace Facilitators Sales Tax for 45 states, Puerto Rico, and the District of Columbia. That means Etsy collects sales tax for any sale made to those states.
Etsy does not collect sales tax for Alaska, Delaware, Missouri, Montana, and New Hampshire. For most of these states, Etsy does not collect sales taxes because the states do not have a sales tax.
Even if your state doesn’t have a sales tax, you should still check with your local government to see if you owe sales tax. In Alaska, for example, some municipalities have a sales tax even though the state does not impose one.
While in Delaware, there’s a gross receipts tax, meaning you’re charged a percentage of the “…total receipts of a business received from goods sold and services rendered in the State. There are no deductions for the cost of goods or property sold, labor costs, interest expense, discount paid, delivery costs, state or federal taxes, or any other expenses allowed.”
The Downside of the Marketplace Facilitators Sales Tax
While it’s nice that Etsy collects the Marketplace Facilitators Sales Tax in a majority of the states, it’s not as beneficial to sellers as you would think.
For one thing, it only manages the sales that you make on Etsy. So, if you’re selling on another platform like Shopify or through your own online market, then you’ll need to calculate those sales taxes separately. You’ll also have to pay them separately.
For another thing, even though Etsy has a Marketplace Facilitators Sales Tax collection program in place, you are still responsible for getting whatever business licenses or seller’s permits are required within your state, city, and county. The Marketplace Facilitators Sales Tax does not take the place of any permits you might need.
What Kind of Business Should I Have to Apply for a Business License?
If it turns out that you do need to apply for a business license or business tax certificate, one of the first questions you’re going to be asked is what kind of business you’re running.
There are three main options to choose from:
Sole Proprietorship – This is when you’re a single person selling on Etsy. A sole proprietorship is the easiest business to create, and it comes with the lowest fees.
Partnership – A partnership is similar to a sole proprietorship, except more than one owner is involved.
LLC or Corporation – While these are two different entities, the structures are similar. According to Etsy, you set up an LLC (Limited Liability Corporation) or a corporation when your business is larger or a higher risk is associated with your business.
If you’re entering into corporation territory, it would be a good idea to talk to a lawyer or financial adviser before you get started.
Choosing which business structure your business will operate under is entirely up to you, but if you need some guidance, Etsy has provided information here.
Do I Need Other Licenses for My Etsy Business?
Aside from a business license, there may be other licenses that you need for your business, including a sales tax license, health and safety permits, and even a professional license if you’re providing professional services.
To find out some of the other licenses your Etsy business might need, check out this article from Investopedia.
Disclaimer
All of the information provided within this article is general advice and may or may not apply to your specific situation or business. If you need help with your business, there are a variety of free resources at your disposal. Please check your local government website, your state’s Secretary of State website, or you can visit the Small Business Administration (SBA) for advice better suited for your situation.
You should also consult a financial advisor or attorney if you plan to operate a business that deals with things like food products or health and beauty supplies.
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