Etsy has provided artists, crafters, and collectors with a highly visible online marketplace for selling their handcrafted arts and crafts, vintage items, and crafting supplies. Are you a talented, hands-on individual with a vision of offering your creations to customers across the United States or even beyond? Then you have probably wondered how to initiate a small business on Etsy.
I can comprehend why! Here are just a few data points that I find exhilarating:
- The number of active buyers on Etsy has steadily increased over the years, going from 9.3 million in 2012 to over 46.3 million in 2019.
- The number of sellers who have joined Etsy has also grown—from 830,000 in 2012 to nearly 2.7 million in 2019.
- Many Etsy sellers use the platform to take their creative pursuits from “hobby” to “legitimate business,” and 95% of Etsy sellers run their businesses from home.
- Top selling Etsy stores have revenues of $1.8 and $1.4 million in sales.
Etsy offers several advantages, including easy setup, reduced shipping costs, extensive online reach, and numerous options for keeping customers engaged. Etsy has made it simple for anyone, anywhere to become an online seller of virtually any kind of merchandise, from craft and supplies to handmade items and home decor.
On the Etsy.com website, you’ll find additional details about establishing a shop there. In this article, I’m going to explore the primary legal and administrative steps for starting a small business on Etsy. I aspire to provide you with an understanding of what may be involved as you explore this opportunity. However, for legal, tax, and accounting advice, consult with trusted legal and financial professionals. They can assess your situation and provide expert guidance.
1. Determine If Your Product Idea is Feasible
No entrepreneurs in any line of business can be certain of their success. Similarly, setting up an Etsy store to sell your products carries no guarantees.
However, you can increase your chances of succeeding by conducting research to comprehend your target market and your competition on Etsy. Making that effort before opening your Etsy store will ensure that the products you sell offer something unique that will attract buyers.
Pricing, of course, is crucial as well. It’s vital to understand your direct costs and indirect costs so that you can price your products appropriately for customers and operate a profitable business.
Examples of direct costs include:
- Materials to produce your products (or costs to purchase the items you’re selling on Etsy)
- Packaging costs
- Shipping costs
- Direct labor costs – Labor costs directly associated with creating your products. If you’re not paying yourself for this work, it’s still important to factor in 1) the time required to create each unit and 2) the monetary value that corresponds to that time.
Examples of indirect costs include:
- Rental of your studio, workspace, or storage
- Taxes
- Etsy fees – Currently set at $.20 listing fee with a 6.5% transaction fee and 3% $.25 payment processing fee.
- Indirect labor costs – Consider the time spent on aspects of the business not directly related to product creation. For example: Managing your Etsy store, posting on social media, responding to email messages, etc.
- Professional fees – Such as those paid to your attorney and tax advisor.
- Business compliance costs – Such as licenses and permits, as well as state fees for business registration, fictitious name filing, annual report filing, etc.
Etsy charges sellers various fees.
I’ve emphasized a number of them below:
- Cost of listing – Imposed on vendors when they put up an item in their Etsy store ($0.20 per listing). Vendors must pay this regardless of whether a sale occurs.
- Fee for multiple quantities – Imposed on vendors when they sell multiple quantities of an item in a single transaction ($0.20 per additional item). The cost of listing covers the first item. Only additional quantities sold in the transaction are subject to this fee.
- Fees for transactions – Imposed on vendors every time they make a sale (5% of the total cost of the transaction, which includes the price of the product, shipping, delivery, and gift wrapping).
- Fee for payment processing – The U.S. rate is 3% of the total sale, plus a per order fee of $0.25.
You can find a complete list of Etsy’s fees in its online Help Center.
2. Determine the Optimal Business Structure
The type of business structure you select for your Etsy business will impact your tax responsibilities, your personal liability for your business debts, and the formalities you must fulfill to comply with legal requirements. I recommend seeking professional tax and legal guidance when making this crucial decision.
Most Etsy vendors operate as sole proprietorships. However, vendors might find it advantageous to establish a limited liability company (LLC) or incorporate their Etsy business. Here is an overview of common business structures:
- Sole Proprietorship (or Partnership, if there is more than one owner) – Running a business as a sole proprietor (an unincorporated business structure) requires no filing of formation documents with the state (except for possibly a DBA—more on that later!). From a business compliance standpoint, this is the simplest option. One potential downside is that a sole proprietorship offers no legal or financial separation between the business and the owner’s personal assets. This means that the owner is fully responsible for any lawsuits against the company or its debts. Owners report and pay taxes for business activities on their personal income tax returns. All business profits are subject to federal income tax and self-employment (Social Security and Medicare) taxes. Typically, sole proprietors pay themselves through non-tax-deductible draws from the business rather than payroll.
- Limited Liability Company (LLC) – A limited liability company provides much of the simplicity of a sole proprietorship while establishing a legal barrier between the business and its owners (referred to as “members”). LLC members and the LLC are treated as separate legal entities. Therefore, if someone files a lawsuit against the LLC or if it cannot pay its debts, the personal assets of the LLC owners are protected. For tax purposes, an LLC is considered the same tax-paying entity as its members. All business tax obligations pass through to the owners’ individual tax returns. LLC members pay themselves through non-tax-deductible draws from the business rather than payroll. Similar to a sole proprietorship, all profits of the company are subject to self-employment taxes.
C Corporation (C Corp) – A C Corporation functions as a distinct legal and tax-paying entity from its owners (referred to as “shareholders”).
- Limited Liability Company (LLC) – This configuration provides the utmost protection against legal liability for proprietors of businesses. Corporations are required to disclose and remit income tax (at the tax rate for corporate income) through their personal income tax returns. Owners who actively participate in the operations of the business receive compensation via the company’s payroll system rather than taking draws from the business. You have likely come across the term “double taxation” regarding the taxation of C Corporations. This is because some of the corporation’s profits are taxed twice: first at the corporate level when the business declares its profits and then a second time at the shareholder level as dividend income when the profits are distributed to shareholders.
- S Corporation – The S Corporation is not a distinct type of business entity. Instead, it constitutes a special tax election that LLCs and corporations can choose (if they meet the eligibility criteria set by the IRS). As an S Corporation, a business’s profits and losses are transferred to the individual tax returns of its owners. When an LLC opts for S Corp tax treatment, it is usually in order to decrease the self-employment tax burden for its owners. Owners of S Corporations who are involved in the day-to-day activities of the business receive compensation through the company’s payroll system rather than taking draws. Instead of paying Social Security and Medicare taxes on the entire business profits, owners are only liable for those self-employment taxes on the wages and salaries they receive from the company. Profits that are disbursed to shareholders are not subject to those taxes. Corporations that elect S Corp treatment often do so to eliminate the issue of double taxation (profits are reported on owners’ tax returns).
No single business entity type can adequately meet the needs of all Etsy business owners. Conduct thorough research on the advantages and disadvantages, and consider seeking guidance from a lawyer or accountant to assist you in making your decision.
3. Select Your Business Name
Your business title will be one of your most valuable branding and marketing assets, so it’s crucial to choose it wisely.
When narrowing down the business name you wish to use, ensure that another business hasn’t already claimed it on Etsy. It is also prudent to consider performing a corporate name search to confirm the name’s availability in your state. Additionally, consider verifying if the business name is accessible in all 50 states by conducting a trademark search. This is significant if your company will be registered in multiple states.
Etsy provides some points to consider when deciding on shop names for sellers. As you select your business’s legal designation, bear in mind that Etsy’s platform only permits a shop name to have 4 to 20 characters. If an Etsy store owner chooses a shop name that differs from the legal name of the owner (whether an individual or a business), the seller may need to file a DBA (fictitious name registration) in the state to sell under that name. This is something an attorney can help you determine.
4. Designate a Registered Agent
An Etsy business that functions as an LLC, S Corp, or C Corp must appoint a registered agent in the state where it is registered. The role of a registered agent is to accept “service of process” (important government, legal, and tax notices) on behalf of the business. The designated registered agent must meet the state’s qualifications, including specific office hours from Monday through Friday, in order to serve in that capacity. Some companies, like CorpNet, are authorized to provide their registered agent services in all 50 states.
5. Register Your Business With the State
To make a business entity official with the state, it necessitates filing registration paperwork. LLCs must file Articles of Organization, and C Corporations must file Articles of Incorporation. (Some states have different names for the paperwork, but essentially they require the same information.)
When a qualifying LLC or C Corporation wishes to be treated as an S Corporation for federal income tax purposes, it must file IRS Form 2553 in addition to its formation documents.
Businesses that intend to operate as a sole proprietor typically do not need to file official registration documents with the state. However, they do need to file a DBA (“Doing Business As”) if they will conduct business under a fictitious name. So, if they are selling products under a made-up name that doesn’t include the first and last name of the owner(s), the DBA filing will inform the state and the public about who operates the business.
For instance, if Maura Longo desires to operate her Etsy venture using the title “Maura’s Enchanting Masks” instead of “Maura Longo’s Masks,” she would be required to submit a DBA.
Also, a registered enterprise may need to submit a DBA if they will utilize a title other than their legal enterprise name as their Etsy shop title (remember, Etsy only permits shop titles to be 4 to 20 characters long).
Depending on the enterprise entity type and the state, the enterprise formation paperwork may become a little perplexing. Enterprise proprietors may choose to prepare and present the filing themselves, enlist an attorney to do it, or save money and ensure it’s done correctly by using an online enterprise formation service, like CorpNet.
6. Acquire an EIN from the IRS
Most banks require an EIN (Employer Identification Number) to open a enterprise bank account. Also referred to as a Federal Tax ID Number, an EIN is a distinctive nine-digit number utilized by the federal government to identify the enterprise as a tax-paying entity. EINs are utilized when reporting and submitting taxes and are occasionally necessary for other reports and submissions. The IRS issues them for free. Enterprise proprietors can apply for an EIN via the IRS website or request CorpNet to finalize and submit the EIN application.
7. Establish a Enterprise Bank Account
It’s advantageous to uphold a enterprise bank account so that you can keep your personal and enterprise financial transactions and funds separate. For LLCs and corporations, it’s paramount to have that separation. Owners of registered enterprise entities that intermingle personal and enterprise funds risk losing their personal liability protection. If someone brings a lawsuit against the company, a court of law may determine that adequate measures were not taken to preserve the “corporate veil” that separates the owner’s personal assets from the obligations of the company. A dedicated bank account for the enterprise and credit card account in the company’s name (and utilizing them for enterprise transactions exclusively) will aid in drawing the line drawn between personal and enterprise funds.
8. Request Business Licenses and Permits
Etsy doesn’t necessitate sellers to possess a business license to sell products via its platform. However, the state, county, and local municipality where you’ve established your enterprise may require you to hold licenses and permits to operate your company legally.
Depending on where the customers placing orders for your products reside, you may also need to apply for a sales tax permit in those states or local jurisdictions.
In states with Marketplace Facilitator laws in place, Etsy calculates, collects, and remits sales tax on orders shipped to those states. You can find an up-to-date list of the states for which Etsy does sales tax collection and remittance on the Etsy website.
So, what about sales taxation for orders delivered to states that do not have Marketplace Facilitator legislation?
In those states, the Etsy vendor may be responsible for registering with the state or local tax agency—and for computing, gathering, and submitting sales taxation. Generally, sales taxation registration is mandatory when a vendor has either economic nexus or a physical presence in the state.
Economic nexus occurs when a vendor achieves a threshold of either sales revenue or the number of sales transactions in a state. The thresholds that determine economic nexus vary across states. For instance, California’s economic nexus threshold is when a remote vendor’s total sales surpass $500,000 in a 12-month period. Conversely, Arkansas has established its threshold at taxable sales of more than $100,000 or 200 or more separate sales transactions.
If a purchaser buys a taxable product from beyond its taxation jurisdiction and the vendor did not collect sales taxation, the buyer must report and pay a use taxation for the storage, use, or consumption of that item.
Bear in mind that sales taxation policies have experienced numerous changes over the past few years. Obtaining professional tax and legal guidance will assist in ensuring that you comprehend what you need to do to comply with the laws and satisfy any sales taxation permit prerequisites for your Etsy business.
9. Establish an Etsy Account
Craft an Etsy account, or if you already possess one, sign in.
You will utilize your account to manage your Etsy shop.
To provide a visual representation of your brand and enable other members of the Etsy community to become acquainted with you, upload a high-quality profile image and compose a compelling biography.
Etsy mandates that profile images adhere to the following specifications:
- At least 400 x 400 pixels in dimensions
- No larger than 10MB
- In either .jpg, .png, or .gif format
Etsy offers some beneficial dos and don’ts for crafting a biography, and I encourage you to examine them before composing yours.
10. Establish Your Etsy Shop
To commence selling on Etsy, you will need to set up and open your Etsy shop. To accomplish this, visit the Etsy website using a desktop web browser.
- Navigate to “Sell on Etsy” (at the upper right corner of the Etsy website) and subsequently select “Open Your Etsy Shop”.
- Select your shop preferences (including the language, country, and currency).
- Enter your shop name.
After establishing your shop, you will have the ability to refine and manage it utilizing the Sell on Etsy mobile app.
11. Include Entries to Stock Your Store
To insert the items you wish to sell, go to your Etsy account and choose “Shop Manager.” Then, if you’re a new seller, select “Your Shop.” Once you already have items in your shop, you can insert new entries by selecting “Entries.”
There are various components and information to insert when establishing an entry:
- Product pictures – Etsy suggests utilizing at least five images of each item so that shoppers can view your product from different perspectives and feel more confident in their purchasing decision. Images should be no smaller than 2,000 pixels wide (height may vary). The larger the image, the better buyers will be able to zoom in to examine your product up close. As you’re uploading pictures, consider which one you would like to be the thumbnail image. That’s the one that buyers will see on your shop home page, in Etsy search results, and other areas of the website.
- Videos – Uploading product videos is optional, but they can further showcase your entry. Videos must be 5 to 15 seconds long (ideal resolution is at least 1,080 pixels). Take note that listing videos do not contain audio. If your video was recorded with sound, the audio will be removed when the video is uploaded.
- Listing details – This information will influence how your entry is categorized on Etsy and found in Etsy search. Provide your entry with a descriptive heading (up to 140 characters). Additionally, complete the “About this listing” information to inform customers about the item’s nature, creator, creation date, and whether it is Handmade, Vintage, or a Craft Supply. Then, select the product category in which your item should appear on Etsy’s Categories page. You can also set other attributes to further define your entry.
- Listing description – How you portray your product will impact the initial impression you make on customers and how easily your item will be found in Etsy search. When describing your entry, consider utilizing titles and tags to assist people in finding your product when they’re searching for items similar to those you create. Also, pay attention to incorporating keywords that shoppers are likely to use when searching for products akin to yours. You don’t have to be an SEO expert, but it can be beneficial to acquire some Etsy SEO basics to enhance your shop’s visibility in Etsy search.
- Pricing and inventory – In addition to determining the price and displaying the quantity of your items in stock, you can also include SKU (Stock Keeping Unit) numbers to keep track of your inventory.
- Shipping – After establishing shipping profiles for your shop, you can choose the shipping option you desire for your entries.
12. Select Options for Customer Payment
Etsy demands that sellers in the United States and other qualified nations receive payments from customers using its Etsy Payments platform. Sellers from different countries, however, have the flexibility to accept payments through PayPal, physical checks, money orders, or any other approved alternative suggested by sellers and approved by Etsy.
13. Begin Your Etsy Store
Once you have completed the setup process for your store, added listings, and configured your payment options, there is one final step to officially launch your Etsy shop and make it available to customers. Click on “Open Your Shop” and let the enjoyment (and revenue) begin!
Your store can be accessed through the following website URLs:
https://www.etsy.com/shop/yourshopnameor
https://yourshopname.etsy.com
When sharing the website for your Etsy shop with others, replace “yourshopname” with the actual name of your shop.
You can make modifications to your shop even after it has been opened.
14. Promote Your Shop
Strategize on how you can attract customers to your Etsy store. Regardless of how remarkable your products are, you will need to invest time and effort into spreading the word about your business.
- Social Media – Platforms such as Facebook, Instagram, TikTok, YouTube, Snapchat, and Pinterest can serve as valuable tools for raising awareness about your Etsy store and displaying your products. Whenever you introduce new items to your shop, create posts on social media to inform your followers.
- Live Events – Additionally, consider the possibility of taking your Etsy shop offline by participating in events like art and craft fairs, where you can personally showcase your creations. Such opportunities can boost your sales and introduce new customers to your Etsy store.
- Etsy Advertising – Another way to generate momentum for your shop is to advertise your products via Etsy Ads. When setting up ad campaigns on Etsy, you can establish a daily budget, which can help you control costs. Etsy ads appear throughout the Etsy website and the Etsy app, including on Etsy Search, Category pages, and Market pages.
15. Ensure Business Compliance
In addition to adhering to Etsy’s seller policies, your company will have other legal and tax compliance responsibilities that must be fulfilled annually or on varying schedules. The specific requirements will depend on your business structure, the nature of your products, local and state regulations, and other factors.
Several examples include:
- Filing and submitting taxes
- Maintaining a registered agent
- Renewing licenses and permits
- Renewing a DBA
- Conducting member or shareholder meetings
- Filing annual reports
Consider consulting with your lawyer and accountant to understand your obligations and keep track of deadlines to avoid missing due dates. Failure to attend to compliance requirements could result in fines, penalties, and even the suspension or dissolution of your business.
