Seller Handbook

Full disclosure: Tons of successful Etsy sellers run their shops without a limited liability company (LLC). In fact, most businesses on Etsy start (and thrive!) as sole proprietorships—the default business structure when you operate independently.

LegalZoom has helped millions of small business owners form their LLCs throughout the years, and it’s safe to say that during that time, we’ve learned a thing or two about how, when, and why a business should take that next step.

So, why do some sellers decide to start an LLC—and is it the right choice for you? Let’s walk through everything you should think about.

At a glance

• What is an LLC and how does it work
• When should you start an LLC?
• Why should you start an LLC?
• How to start an LLC in 7 steps
• Do you need an LLC to grow your Etsy business?
• FAQs

Friendly disclaimer: This article is intended for informational purposes only, is subject to change over time, and is not legal advice, nor should it be considered a substitute for obtaining legal advice specific to your business. It is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The authors, Etsy, Inc. and Etsy Ireland UC, disclaim all responsibility for any and all losses, damages, or causes of action that may arise or be connected with the use of or reliance on these materials. Please consult an attorney or legal expert if you have any questions.

What is an LLC and how does it work?

An LLC is a business structure that protects your personal assets by legally separating you from your shop. In practice, running an LLC isn’t drastically different from how you operate now. You’ll still focus on your passion, make products, and fulfill orders, but you’ll do it under your LLC instead of your personal name.

Here’s what changes when you form an LLC:

• Your business becomes a distinct legal entity. Your personal assets (like your home or savings) are typically shielded from business debts and liabilities.
• You’ll separate finances. You’ll manage separate bank accounts and bookkeeping to keep your personal and business transactions apart.
• You may have additional filing requirements. Depending on your state, you might need to file annual reports and pay specific LLC maintenance fees.

In many respects, establishing an LLC isn’t just a legal formality. Rather, it gives your business more room to grow while minimizing your risk as the owner.

When should you start an LLC?

Unlike, say, stocking up on supplies before a big project, there’s no clear-cut moment that signals the need to make your Etsy business an LLC. That said, you might consider an LLC more seriously during these milestones:

Launching the business

While many Etsy sellers start as sole proprietors, forming an LLC from the start can make sense if you’re launching with significant investment, expensive inventory, or risky items (e.g., products that could be choking hazards for children).

However, if you’re testing the waters or starting small, you can always start with a sole proprietorship and transition to an LLC when it makes more sense for your business.

Hiring employees

You can technically hire employees as a sole proprietor, but an LLC generally makes more sense if you’re in the process of building a team. The structure lets you handle payroll, employment taxes, and benefits under the LLC instead of your personal name, which helps protect you if an employee-related issue ever leads to legal trouble.

Recruiting investors

If you want to grow your Etsy business with outside investment, an LLC (or other formal business structure) is almost always a must. Some investors won’t consider funding a sole proprietorship because the structure is too informal and risky from their perspective.

Moreover, an LLC can specify membership interests and profit-sharing splits, which can incentivize investors to fund your vision. And since your personal assets are separate from the business, the financials are focused only on your business operations.

Reaching sustained profitability

When your Etsy shop starts generating consistent profits, an LLC can offer smarter ways to manage and protect your hard-earned money, including the following:

• More options for how your business income is taxed
• Access to more financing options
• Clearer tracking of business expenses and revenue

The higher your profits, the more you have to protect—and the more an LLC makes sense as a business structure. Nonetheless, don’t think that there’s a set dollar figure you must cross before creating an LLC. It ultimately depends on your shop finances, outlook, and need for liability protection.

Signing contracts

As your business grows, you’ll likely start signing more significant contracts with suppliers, service providers, or business partners. When you sign contracts as a sole proprietor, you’re personally responsible for fulfilling all obligations.

With an LLC, on the other hand, the business itself becomes the responsible party, which reduces your liability if something goes wrong with the contract. This is particularly important if you start dealing with larger orders, long-term commitments, or high-value agreements.

Transitioning to full-time

The shift from side hustle to full-time business is a defining moment for many Etsy sellers. It’s when your creative passion officially becomes your primary source of income—and with that comes a change in how you think about your business.

You’re no longer just fulfilling orders when you have the time—you’re building a sustainable, creative business that needs to support you long-term. Many sellers find this to be the perfect time to form an LLC, as this officially signals you’re building a more structured and professional operation.

Buying or renting commercial real estate

If you’re moving your business out of your home, it might be time to set up an LLC—whether that means you’re going to lease a studio space, open a small warehouse, or sell in person. Most commercial landlords and real estate agents will expect to work with an official business entity, which makes this an ideal transition point to establish your LLC.

Why should you start an LLC?

As you can see, there’s no single “right time” to form an LLC. It’s more about understanding what this business structure can offer and whether these benefits align with your goals. Here are the most notable advantages of starting an LLC:

Liability protection

Personal liability protection is the cornerstone of an LLC. After all, it’s included in the name: limited liability company. Unlike a sole proprietorship, where your personal and business assets are legally the same thing, an LLC creates a “corporate veil”—a legal separation between you and your business.

In practice, this means if your business faces a lawsuit or can’t repay its debts, only your business assets are at risk. As long as you maintain proper separation between personal and business finances, your personal savings, home, and other assets remain protected.

Tax flexibility

By default, a sole proprietorship has one way to handle taxes—everything flows through your personal tax return. An LLC, however, typically has more options. While many single-owner LLCs still file taxes like a sole proprietorship (i.e., reporting income from the LLC on a personal tax return), you can choose to be taxed as an S or C corporation if it makes more sense for your situation.

For instance, you might find tax advantages in how you pay yourself, deduct expenses, or handle business profits. In addition, having a separate tax filing for your business can make it easier to track expenses and maintain clean financial records—something you will appreciate come tax season.

Professional credibility

Adding “LLC” to the end of your shop name shows your customers and partners that you’ve taken steps to establish a formal business structure. This can be especially valuable when you:

• Approach wholesale buyers or retail partners
• Work with suppliers and manufactures
• Build relationships with other businesses and advertisers

The quality of your products and customer service undoubtedly matter most, but operating as an LLC shows that you’re running an organized business (and not just as a hobby).

Funding options

While sole proprietors typically rely on personal savings and loans, an LLC can access a broader range of financial and lending products exclusively for businesses. Banks tend to view LLCs more favorably for business loans, and the structure allows you to bring in partners or investors relatively easily.

These options are particularly useful when you’re ready to scale up production, make significant investments, or take on larger projects—opportunities that might be out of reach as a sole proprietor.

Compliance and reporting

This might sound like extra paperwork (and it is), but the reporting and compliance requirements for an LLC can help you run a more organized business. While less complicated than the reporting requirements for corporations, you’ll need to keep detailed records, maintain separate accounts, and follow certain formalities.

Plus, having these systems in place from the start means you won’t have to scramble when you need to apply for things like business loans or insurance coverage.

How to start an LLC in 7 steps

If you’ve decided it’s time to start an LLC, you can start by identifying your state’s specific requirements. You can typically find this information through your Secretary of State’s office or a similar state agency that handles business formation.

While requirements vary by state, the overall process follows a similar pattern across the country. Here’s what to expect:

1. Pick a unique business name

If you already have an established Etsy shop name, you’ll likely want to use this for your LLC. If you don’t already have a name, as a general rule, you should keep it simple and accurate to what you do. Or, you might use a business name generator for inspiration.

Regardless, you’ll still need to follow your state’s naming requirements and verify availability. In general, your business name must meet these criteria:

• Be unique and not already registered in your state
• Include “LLC,” “Limited Liability Company,” or an approved abbreviation
• Not be misleading or suggest government affiliation

Before making it official, you should conduct a business name search through your state’s online registry to confirm your desired name is available. If you discover someone already claimed your preferred name, you might need to consider slight variations.

2. Choose a registered agent

Every LLC needs a registered agent to act as an official point of contact for important mail and notices.

In most states, your registered agent typically needs to:

• Have a physical address in the state where your LLC operates
• Be available during regular business hours
• Be either a resident of the state or a company authorized to do business there
• Be at least 18 years old (if an individual)

Many states allow you to serve as your own registered agent or appoint someone close to you, such as a family member or employee.

However, you might consider using a registered agent service to ensure you never miss important documents and keep your personal address off public records.

3. Decide who's in charge and how

For many Etsy sellers forming an LLC, this step is easy—you’ll likely be the only business owner (called a “member”) and manager. Still, you’ll need to specify your management structure in your operating agreement during the next step.

LLCs can be either:

• Member-managed. All owners participate in running the business (most common for small businesses)
• Manager-managed. Owners appoint one or more people to run the business

As a solo Etsy shop owner, member-managed is typically the way to go. This structure lets you maintain complete control over your business operations, from creating and selling products to making financial decisions. Still, you can usually change this structure if you later decide to bring in business partners or transfer management duties.

4. Draft your LLC operating agreement

Not all states require you to file an operating agreement, but it’s generally recommended to create one. An LLC operating agreement effectively acts as an instruction manual and rulebook for your business, covering the following points:

• How the business is managed and operated
• Your ownership percentage (likely 100% as a solo owner)
• How profits and losses are distributed
• What happens if you want to sell or close the business
• Basic procedures for making decisions

Although this agreement might seem unnecessary for a solo owner, having one can help maintain liability protection and provide clear guidance if you expand later. You can draft it yourself, use a template, or work with an operating agreement service for a fully customized experience.

5. File your articles of organization to make it official

It’s time for the big moment—filing your articles of organization to establish your business with the state. Most state agencies make this process straightforward, offering either an online filing system or a PDF to submit the form by mail.

You’ll typically need to provide basic information like your LLC’s name, business address, and registered agent information. You’ll then sign the articles, along with any other LLC members, and pay a filing fee (usually ranging from $50 to $500, depending on the state).

Once your articles are accepted—typically within a few business days to a few weeks—your LLC is officially registered.

6. Get an EIN and business bank account

An employer identification number (EIN) is a unique code assigned by the Internal Revenue Service (IRS), similar to a Social Security number for your business. An EIN helps separate your personal and business finances, plus it lets you file business taxes, open a business bank account, and work with suppliers without sharing your personal SSN.

You can apply for an EIN for free through the IRS, after which you can look into bank accounts or lending products for your business. Along with your EIN, banks may ask you to provide a copy of your articles of organization or operating agreement.

7. Check if you'll need any business licenses or permits

You might be able to operate normally with just an LLC registration, but you should confirm you don’t need any licenses or permits for your business. Common requirements might include sales tax permits, special licenses for certain products (e.g., food items or cosmetics), or a general business license.

To figure out what you’ll need, be sure to check through your state, county, and city government authorities, as each may have its own set of requirements. If you’re unsure, you can also leave the business license and permit search to a professional service like LegalZoom.

Do you need an LLC to grow your Etsy business?

The short answer: no, you don’t absolutely need an LLC to grow a successful Etsy shop. Many Etsy sellers (and small businesses in general) operate as sole proprietors, and that works perfectly fine for them.

After all:

• A sole proprietorship is the simplest way to run your business—you’re already set up (or will set up) this way by default
• Many successful Etsy sellers never move beyond this structure
• There’s nothing wrong with staying as a sole proprietorship if it meets your needs

That said, forming an LLC is worth considering as your business grows or if you want extra protection at any point.

The decision ultimately comes down to your business goals and how much you value the extra protection. There’s not necessarily a wrong choice—just the choice that works best for you and your business.

The good news? Setting up an LLC is probably simpler and less expensive than you might think. In fact, you can start your LLC with LegalZoom for as low as $0 + your state’s filing fee (or you can read our guides to find out how to do it all yourself!).

FAQs

Are there disadvantages to starting an LLC?

LLCs do require some investment and maintenance. You’ll need to pay state filing fees, potentially submit annual reports, and keep detailed business records. There’s also more paperwork than a sole proprietorship, and some business owners might need professional help with setup and maintenance.

What should you do after starting an LLC?

Your first priority is to file the Beneficial Ownership Information Report (BOIR) with FinCEN within the required deadlines (anywhere from 30 to 90 days after registration, depending on when you form your business). Then, you might look into business insurance, permits, and financial tools (e.g., bank accounts or systems to track sales and franchise taxes).

How do you pay yourself as an LLC owner?

As a single-member LLC owner, you can pay yourself by transferring money from your business account to your personal account (known as an owner’s draw). For federal tax purposes, remember to record these transfers and set aside funds since self-employment tax isn't automatically withheld. Alternatively, you can designate yourself as an employee or contractor.

Can you start an LLC by yourself?

Yes! No state requires that you work with a lawyer or use a paid service to start an LLC. That said, you might still look into these options, as any errors or omissions in your articles of organization may lead to delays and complications.