Seller Handbook

Advice and inspiration for successfully running your Etsy shop

Law 101: A Guide to Setting Up Your Business

Ready to make your US Etsy shop an official business? Here are some tips for choosing between legal structures, including sole proprietorship and LLC.

By Hissan Bajwa Mar 26, 2013
Photo by 2of2

Whether you just opened your Etsy shop or have been selling for a while, one big legal question for Etsy Sellers is: What’s the best legal structure for my business? It’s an important question, but there’s no one answer, because as your business changes, the best way to structure it also changes.

As an in-house attorney at Etsy (and as someone who founded his own little Internet start-up before joining Etsy), I can help you start thinking about this if you’re a US seller. Just keep in mind that business laws vary from state to state, and I can’t give you specific legal advice, so be sure to do your own homework to figure out what’s best for you.

Easy Peasy: Sole Proprietorships

Let’s say you’re working on selling your first handmade necklace. Or maybe you’ve already been selling for a few months, but this is the first time you’re seriously thinking about the legal mumbo jumbo. The easiest and least expensive way to operate your business is to start as a sole proprietorship.

"But I’m pretty new on Etsy and I don’t sell much yet; do I really need to do this?"

Guess what? Technically, you’re a sole proprietorship as soon as you start doing business, so that wasn’t so hard, was it?

You don’t need to file legal forms or pay any fees to launch a sole proprietorship, which is why the vast majority of small businesses start as sole proprietorships, but there are some legal issues to consider. For example, if you want to operate your sole proprietorship under a name other than your own, you’ll have to file a certificate for a “DBA” or Doing Business As name. Depending on what you sell and where you’re selling it from, you may also need to obtain certain business licenses — check your state or city requirements (it’s always important to look up and comply with your local laws to avoid violations and fines).

Two’s Company: When to Consider a General Partnership

Of course, as the name implies, a sole proprietorship is only an option if you are the sole owner of the business (note: there’s an exception for spouses who own a business together — soul-mate proprietorships, anyone?). If you and your friend make and sell candles together, you can enter into a general partnership. Think of general partnerships like sole proprietorships for teams — the process of starting one is just as simple and inexpensive, and profits from a partnership flow through to the partners’ personal income tax returns like they do for a sole proprietor. The one big difference: You’ve got a co-owner of your business now, so be sure to write up a partnership agreement as early as possible. This can be as simple or complex as you want it to be, but it should spell out who brings what assets to the partnership, how you will split profits, and what happens if one partner wants out of the business. A lawyer can help you cover your bases.

Taking Care of (Risky) Business: Stepping Up to LLC Or Inc. Status

“What if my business is larger and more established?”

Let’s say you make and sell beautiful wooden tables on Etsy and you’ve gotten so busy fulfilling orders that you’re planning to finally quit your day job and do what you love full time. The key thing to understand is that under sole proprietorships and general partnerships, the owners can be held personally liable for all debts and obligations. This isn’t meant to scare you, but to make you aware that as your business grows, you will invariably encounter more complex and sometimes risky issues — like raising money or working with tools or materials that can be dangerous.

To reduce your personal exposure to liability, it may be time to seriously consider forming an “LLC” or Limited Liability Company or a corporation. Forming an LLC or incorporating your business both require drafting and filing specific forms with your state as well as paying certain fees, but both will generally limit your personal liability to how much you put into the company and can also make it easier to raise capital from outside investors. An LLC gives you organizational flexibility, and still allows the straightforward pass-through taxation we discussed above. The process of incorporation (for either a C Corporation or S Corporation) requires more time and money than the other entities, and has far more formal requirements (like holding regular board meetings and recording the minutes).

“How do I know if I need to get one of these “limited liability” structures?”

There’s no one answer to this question either. It depends on factors like the size of your business, your growth plans, how you will fund the business, and whether your business is inherently riskier than others to decide whether it’s worth the time and money to create an LLC or corporation.

“What’s this I keep hearing about B Corps?”

Being a B Corp or “Benefit Corporation” is great! Etsy officially became B Corp certified in 2012. Getting certified reflects that your company believes in operating with a certain set of values. Learn more about how to become a B Corp here.

Help Wanted: When to Seek Legal Advice

“This all kinda makes sense, but do I need a lawyer?”

Maybe, but at the risk of hurting my job security, maybe not. It’s always safest to consult an attorney, but you brave DIY folks can find plenty of free resources online — the website for the Department of State in your state will have helpful guides for starting your business. There are also online options that can help you start an LLC or corporation using fill-in-the-blank forms for a small fee. Of course, if your business structure is particularly complex, or you appreciate having a trusted adviser you can actually talk to, don’t hesitate to hire a local lawyer with experience in starting companies in your home state — we’re not so bad!

I know this can be a lot to take in, but when you’re done dealing with all the legal stuff, you can get back to business with some peace of mind. We’d love to learn about your experiences with selecting a legal structure for your business; share your thoughts in comments.

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.

Author

Hissan Bajwa

Hissan is an in-house attorney at Etsy.

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