Seller Handbook

Advice and inspiration for successfully running your Etsy shop

Seller Handbook

3 Legal Tips for Starting Your Etsy Shop

Setting up your new business’s legal structure, protecting your intellectual property and collecting taxes can be tricky business. Here’s how to begin.

By Matt Glick Jul 21, 2016
Squid print by Hiné
Photo by Hiné

If you’re like most Etsy sellers, you opened your shop to pursue a passion, share your craft or supplement your income. Learning more about corporate legal structures, intellectual property or tax law was probably not your primary motivation. But a basic understanding of these three areas can go a long way in setting your Etsy Shop up for success and avoiding potential legal pitfalls.

1. Choose the Right Legal Structure

One key issue that lots of new businesses grapple with is choosing the right legal structure. If you’re based in the US, you can either operate your Etsy shop as an unincorporated entity — a sole proprietorship or a general partnership — or you can incorporate and form a corporation or a limited liability company (LLC).

Sole proprietorships and general partnerships are the two simplest options. The only difference between the two is whether there is one owner (sole proprietorship) or multiple owners (general partnership). These two types of legal structures are simple and inexpensive to form and are also easy to maintain. But if they’re so simple and inexpensive to form and easy to maintain, why isn’t every business a sole proprietorship or a general partnership? Well, most Etsy shops are sole proprietorships. But there are good reasons why some Etsy shops may want to consider becoming either a corporation or an LLC.

The main advantage of a corporation or an LLC is limited liability. Limited liability means that in most cases the owners will not be held personally liable for the debts and obligations of the company, unlike for a sole proprietorship or general partnership. For example, if a corporation signs a lease and is unable to pay the rent, the landlord cannot go after the owner of the corporation as an individual for the debts of the corporation. The landlord would have to sue the company and the personal assets of the owner would be protected. Corporations or LLCs may also have an easier time raising capital from outside investors than sole proprietorships or general partnerships. The ongoing requirements that apply to corporations and LLCs, but not to sole proprietorships and partnerships, help protect investors. Many investors often insist that the company incorporate and comply with those requirements before investing.

When selecting a legal structure for your business, the key decision is whether the simplicity and low costs of a sole proprietorship or general partnership are more important to you than the limited liability and other benefits of a corporation or an LLC. Read Law 101: A Guide to Setting Up Your Business for more information about the types of legal structures. Talk to a lawyer if you have questions.

2. Protect Key Elements of Your Brand

For creative entrepreneurs, intellectual property is often the heart of your business. Intellectual property is a broad term that refers to things like your brand name, logo, slogans and designs. In other words, pretty important stuff! If intellectual property is a significant part of your business, then you should consider your options for protecting it. The three most common forms of intellectual property protection are copyrights, trademarks and patents. You may already be comfortable with these concepts, but if they are new to you or if you’re in need of a refresher, read 4 Legal Terms You Should Know to learn the basics. After you have a handle on the basics, it’s time to think about the role that intellectual property plays in your business. Do you use designs that are eligible for copyright protection? Have you developed a valuable brand name or logo that might warrant applying for a trademark? The answers to these questions may change as your business grows and evolves, but it’s important to consider them from the start.

3. Understand Your Tax Obligations

Taxes are one area of life that is both ever-present and totally mystifying. Though mastering the tax code could take a lifetime, that doesn’t mean that you shouldn’t learn the basics about the types of taxes that are most likely to apply to your Etsy shop: income tax, sales tax and value-added tax (VAT).

You’re probably already familiar with income tax, which is the tax you pay each year on money you earn. In the US, both the federal government, many state governments and even some local governments charge income tax. US Etsy sellers are required to pay income tax on their Etsy sales, along with any other employment income (such as income from another part-time or a full-time job).

Sales tax is another tax you’re likely familiar with, and, in fact, there’s a good chance that you’ve already paid it today. If you bought a cup of coffee this morning, the store that sold it to you probably added a percentage to the price to account for the sales tax charged by the state and local government. That’s how sales tax works as a consumer, but what about as an Etsy seller?

US Etsy sellers generally need to collect sales tax from buyers who live in a state where they have a physical presence. For example, if you live in California, you would need to add on, collect and remit California sales tax on any taxable charges made to California customers. Tax rules can be complicated and change frequently, so check out our post on How to Determine Your Sales Tax and speak with your accountant if you have any questions.

That leaves Value Added Tax (VAT), which is a tax based on the consumption of goods and services that is common in the European Union and some other parts of the world. For all Etsy shop owners, VAT is automatically added to the listing price for digital goods sold to buyers located in the EU. Check out this help article for more information on VAT for digital goods. For physical goods, US Etsy sellers are not required to collect VAT, but are responsible for collecting any applicable sales tax.

This information is for educational and informational purposes only. The content should not be construed as legal advice. It is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The author and Etsy, Inc. disclaim all responsibility for any and all losses, damages, or causes of action that may arise or be connected with the use of these materials. Please consult a licensed attorney in your area with specific legal questions or concerns.

If you’re still hungry for more information about income tax, sales tax or VAT, take a look at Taxes 101 for Etsy Sellers.

What was the most valuable thing you learned while starting your Etsy shop? Share your insights in the comments below.

With QuickBooks Self-Employed, you can keep your finances and business expenses organized. Etsy shop owners in the United States and United Kingdom can export their Etsy sales and expenses directly into QuickBooks Self-Employed. To try out QuickBooks Self-Employed or QuickBooks Self-Employed Tax Bundle with TurboTax, click here. For the first 12 months, QuickBooks Self-Employed is available at $5 per month, and QuickBooks Self-Employed TurboTax Bundle is available at $12 per month.

Author

Matt Glick

Matt Glick is a member of Etsy’s in-house legal team.

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