“Do you need a business license to sell on Etsy?” Users often ask this question about the platform.

However, even this popular online marketplace’s own website doesn’t answer this question clearly. It is probably because there is no straight answer.

To break it down in simple words, Etsy doesn’t ask you for your license but the business world does. You need a license to operate a business on Etsy as much as you would need one in a traditional business model. However, it’s not that you can’t sell without a license at all. Let’s say it will just authorize your way to a successful kickoff.

Confusing, is it? Let’s break it down to understand what it really means.

Here is all you need to know about Etsy businesses. Learn when you will be required to have a license, why you need one if you can operate without it, what happens if you don’t have a license and lastly how to get one.

How Businesses on Etsy Work

Etsy is not just your everyday online marketplace. It is much more than that because it doesn’t sell commercial products. It focuses only on handmade and vintage goods. Etsy is a platform where you can sell your handcrafted goods and supplies. You can create your own shop in simple steps.

To start selling your goods on Etsy, all you need to do is go to the Etsy website and go to the option ‘Sell on Etsy’. This link will redirect to the signup page where you have to select your language, country, currency and create a name for your shop.

After you have filled in the basics, you need to set other details for your shop preferences. This includes the payment method, stocking up items, your personal bio, and your seller policies. After this, your shop will be open.

You see, Etsy doesn’t really ask you for your license to sell when you are opening your shop. You simply sign up and register your shop name to start your business.

There are a number of policies that sellers on Etsy need to abide by

However, Etsy’s policies outline that they do not hold any liability of any state or federal laws applicable to the seller. They issue a disclaimer saying that it is the seller’s responsibility to obtain whichever licenses they need for their shop.

This means that when selling at Etsy, you come under the regular sellers’ category. This is the same as if you were operating a physical (not online) shop.  

When and Why Do You Need a License?

Following the law is your prime responsibility as a citizen. Whatever you do, you must always be abiding the law. A license is permission to do something legally under the rule of law for the area. When selling goods, whether you do it online or physically, you enter the business and the economic world.

The first thing that comes in question is taxes – sales or income tax. You need to collect sales taxes on your goods. And then submit them to the state when you start selling goods in the market. If you fail to pay taxes, heavy fines are imposed, which – frankly – is not worth it.

When you start a business setup, whether it is online or otherwise, you first need to know everything about your state laws regarding the business. This includes the business structure and the types of products you are dealing with.

The structure of the business can be a sole proprietorship or a partnership. Permits and licenses are needed for different reasons for each type of business structure.

The purpose of the licenses is to protect you from any legal complications that may incur. It only protects you from liabilities. You will need a license to sell when you are dealing with a significant amount of goods and money.

In order to secure your profits, you need a legal cover. Online sellers on Etsy who don’t make big profits and are dealing with a lesser amount of money often skip the legal mumbo jumbo. We will tell you when you need a license for your business and why.  

Sole proprietorship is when you are the sole owner of the business and you enjoy all the profits

Sole Proprietorship

The simplest business structure is sole ownership. When opening a shop on Etsy for your handmade products, chances are that you want to go for sole proprietorship as it is the easiest and least complicated way.

Let’s say you are a sole proprietor and you’ve opened your shop on Etsy. So, do you need a business license? According to the laws, sole owners don’t need to pay registration fees or go through complicated legal procedures to validate their shops – whether online or otherwise.

However, they still need to obtain a business license based on what they are selling. Obtaining licenses is not a complicated process either but it will protect your legal liability and avoid any kind of fines. The license will depend on the requirements of the city or state in which you live.

A partnership business is when two or more people come together to form a business entity

Partnership Business

When you make partners in business, you automatically double the responsibility and divide the profits. Partnerships have their own pros and cons. But in the light of legality of the business, partnerships can increase your liabilities. Whether it is a general partnership or public partnership, obtaining a license for your partnership business can be twice as complicated.

The legal procedure for partnerships requires you to come up with an agreement about the assets, liabilities, and distribution of profits. When opening a shop on Etsy as a business partner, you must come up with an agreement. This is so that if your partner wants to opt out of the business at any time, the legal system can help you cover the division.

Other Considerations

Your local government always takes interest in the type of products you are selling. Etsy users often upload their crafts or vintage products. They don’t realize that their ‘cool’ products are subject to certain state or city laws.

Furthermore, if you are operating from home, there are three things you need to consider:

  1. Zoning: City or country zoning is a permit for every business being run or operated from home.
  2. Residence Address: For your home-based business, you need to put in a legit home address. If you are living in a rented space or your apartment is on a lease, you may want to recheck any rules regarding business operations. If your home doesn’t identify your address, you can be buried in legal complications later.
  3. Sales Tax ID: Since all online sellers are required to pay sales tax on their sales, they need to ensure they have a sales tax ID. This is issued by the government in addition to the license.   

What Happens If You Don’t Have a License?

Many Etsy owners do not have permits or licenses for their online shops as it is not a requirement under Etsy’s terms of use. Not just small home-based businesses but large profit-making businesses are also operating without licenses. If you fail to get a license for your online shop, you may be at risk of being caught by the Internal Revenue Service.   

Even for your online store, you will have to go through the same legal complications as for a physical business entity. The fines can be huge sums of money with chances of being blacklisted by the government – while also finding yourself buried in paperwork with legal formalities.

You can enjoy selling your goods on Etsy as long as your shop is a hobby and not a largely profit-making business. As soon as you start making profits in your Etsy shop, you will be subjected to the legal requirements similar to businesses.

You can also use a five-year exemption on taxes if you have just started your business and haven’t started making profits as yet.

Types of Licenses and How to Get Them

If you want to open a shop on Etsy and don’t want trouble with legal complications, these are the types of business licenses that you may need:

1. Basic Business License

You will obtain this license under the state law in which you are living. This is the basic permit that will validate your business and give you the license to operate within the local government jurisdiction. The licensing usually cost a minimal amount for online businesses.

An employer identification number is what you need to report taxes to the government

2. Employer Identification Number (EIN) 

To pay your taxes, you need an Employer Identification Number (EIN). Without this number, you won’t be able to report taxes to the government.

You can apply for an Employer Identification Number online to sell on Etsy without any worries

For sole owners on Etsy, EIN is not required. This is because the taxes will be reported through the owner’s personal tax returns. For any other business type, it is required.

3. Home Occupation Permits

These are permits issued by your state government giving you permission to operate your business from home. For Etsy accounts where most of the sellers are selling handmade products from their homes, this permit is essential to ensure you and your home business’ legal position. You can get these permits from local municipalities.

Now that you know the type of license you need to get, you may be wondering how to get them. Well, you can contact your state’s Department of Revenue or Small Business Association after you have opened your shop at Etsy.

They can help you walk your way through the legal procedures of your Etsy shop. You may not need a license if you haven’t started making profits. However, the minimal cost of the license can go a long way for the future of your business.