Started an Etsy Business? Here's How to Make it Legitimate.

So, you’ve started a business on Etsy. Whether you’re creating screen printed shirts, custom leather goods, pottery or furniture, you made the decision to bring your talent, skills and keen eye for design to the masses and sell your products online. Congratulations! Etsy is a great place for those that are looking to turn a hobby into a money making opportunity or grow a business that has quickly jumped out of the idea phase and into reality. If you’ve ever had the thought, “what do I need to do to make this Etsy business legitimate,” this post is for you.

Many Etsy businesses start with an owner who never could have imagined that their designs, products, and goods could convert into a successful enterprise. But before you know it, your filling order after order and making serious money. The good news is that without filing any paperwork with New York State, by simply operating your Etsy business, you are the owner of whats known as a sole-proprietorship. Technically, a sole-proprietorship is not an actual legal entity, but merely the way that we refer to an unincorporated business that is owned by an individual. Sole-proprietorships still allow you to operate your business on Etsy, but do not come with the formalities and legal protections of an actual legal entity, like a limited liability company or a corporation.

The single biggest distinction between a sole-proprietorship and an LLC or corporation is liability. Under a sole-proprietorship, the owner is personally liable for all debts and liabilities of the company. This means that creditors can come after your personal assets (i.e., your home, car, personal bank accounts, etc.) should you default on paying bills or answering a lawsuit against your business. The best way to protect and preserve your assets is to legitimize your business. Here are some basic tips to take your Etsy business to the next level by making it legitimate:

Reserve Your Business Name: There’s a good chance that you’ve already come up with a name for your Etsy shop/business. You’ve tested it with friends and family and settled on the perfect name. If you know that you want to legitimize your business, but aren’t ready to take the leap, the first thing you’ll want to do is check the NY State Department of State’s website to make sure that someone else doesn’t already own a business with your Etsy shop name. If you perform the search and the name is available, you can easily reserve the name for $20, which gives 60 days before you need to complete the filing. This can be extended for two additional 60-day periods, at a further cost of $20 per request.
Register Your Business: Filing your business with the NY State Department of State is the first step in truly legitimizing your Etsy business. Whether you choose to file as an LLC or corporation, you’re taking this venture to the next level by separating yourself from the business and providing that extra layer of protection. Although the filing requirements are different for LLCs vs. corporations, once the process is complete, you’ve now limited that risk against your personal assets. Also, unlike the first step, if you’re immediately ready to file, once accepted by the State, you don’t have to worry about reserving the business name because that happens automatically upon filing.
Request an EIN with the IRS: Once the NY State Department of State accepts your business filing, you must request an Employer Identification Number (EIN) with the IRS. An EIN acts like a social security number for your business. It’s mainly used for tax purposes, but it is also required for opening business bank accounts, credit cards and other business related transactions.
Draft an Operating Agreement (LLCs) or Shareholder Agreement/By-Laws (Corps): The next step in this process is drafting the organizing documents that help establish the legitimacy of your business. The Operating Agreement or Shareholder Agreement/By-Laws help establish the processes and procedures of how the business will operate. While there are templates available online, it is best to consult with an attorney who can help draft a tailored document suited for your business.
Open Bank Accounts in Your Business Name: After your business filings are accepted and you’ve requested an EIN, you’ll want to open bank accounts in the name of the business and stop using your personal bank accounts. Keeping a business legitimate means separating personal and business assets. If you’re doing something with your Etsy business or getting paid for your products, it should all now run through your LLC or corporation.
Register for NYS/NYC Sales Tax Licenses/Certificate: Depending on what type of goods/products you’re selling on your Etsy business, you may need to collect and pay sales tax. It’s important that you consult with an accountant to ensure that you are set up properly to handle sales tax as it pertains to your Etsy business.

Although this may seem tedious and time consuming, legitimizing your Etsy business is the next step towards growing your business and protecting yourself and your assets. The earlier that you get started on this process, the easier it will be for you to scale your business and make the jump from hobby to full-time career!

Disclaimer: This blog post and similar posts are not to be considered as providing legal advice. The discussion here is meant for educational and informational purposes only and shall not create an attorney-client relationship with the readers of this content.