Do You Need to Start an LLC for Your Etsy Shop?

It finally happened. You decided that it was time to start selling your handmade goods on Etsy or your own personal website! Now, before we can get to celebrating, coming down the other side of the highway are all of the things you really wish you knew about sooner…. and then inside you might be thinking ‘Do I need an LLC to sell on Etsy?’….. let’s get to it!

There are many not-fun things about running a business, like paying taxes for your Etsy shop or handmade store, getting licenses and permits, opening up bank accounts, and deciding if you need to be an LLC or not. 

In today’s article, I am going to go over some of the most important things that you should do when you start your Etsy Shop or Handmade Store, including going over the major question I always get:

“Should I be an LLC or not?“

Before we get into all of that though, let’s first go over whether or not you are in fact a business at all.

Step 1. Decide if You Are a Business or a Hobby 

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When you first ask yourself “Do I need an LLC to sell on Etsy” you have to think about a couple different things. There are actually two things you can be considered in the eyes of the IRS, one is that you are considered a business and the other is that you are considered a hobby.  

You see, there is a MAJOR difference in your tax consequences and your legal requirements depending on if your Etsy shop operates as a business or as a hobby. 

So, what is the difference between a hobby and a business? 

It all comes down to what expenses and deductions you can take on your taxes. If you operate as a business you can take certain business deductions like travel, office supplies, rent, and advertising. If you are operating as a hobby, you can ONLY deduct the actual materials, or cost of goods sold that you have, AND you can only deduct UP to the amount of income you have. Now in order to operate as a business and take advantage of the extra deductions, you will need to follow some requirements, so let’s go fully into step 1 of the process…

How do you decide if your Etsy shop is a hobby or business? 

To figure this out, let’s go over a couple of common scenarios in which you WOULD be considered a business. If ANY of these sounds like you, then you ARE a business and you are NOT a hobby. 

1. Are you trying to make a profit by starting your Etsy shop? I am sure this is easy to answer. If you answered yes to this, then you are a business and NOT a hobby. Now, and this is important, whether or not you actually MAKE a profit MAKES NO DIFFERENCE, it is what your intention is that matters.  If your intent is opening up an Etsy shop for profit, it’s a business, not a hobby. 

2. The second question to ask yourself is this. Are you actually MAKING a profit from your Etsy store? If you have made a profit in 3 of the last 5 years, meaning that you made more than you spent in 3 of the past 5 years, then you are IN FACT a business and NOT a hobby.  

3. The third question is this. Is your shop a partnership or LLC? If you’ve formed your Etsy shop as a partnership or LLC, you are 100% a business and NOT a hobby. 

Now, these are the 3 easy questions to ask yourself, if you want to make sure you are 100% operating as a business and can take all of your business expenses and deductions let’s go over how the IRS decides if you are a business or a hobby.  

According to the IRS, here are the 9 factors for considering this a business and NOT a hobby.