Do I Need an LLC for My Etsy Business?

Starting a limited liability company (LLC) for your Etsy business can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For an Etsy business, lawsuits can arise from things like copyright infringements (i.e., a competitor claiming that your product mimics their design.), or from bodily injuries suffered after using one of your products.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your business seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Should I Start an LLC for My Etsy Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for an Etsy Entrepreneur

By starting an LLC for your Etsy business, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Etsy entrepreneurs will benefit from liability protection because of the risk of being sued for trademark infringement, personal injuries, property damage, and more.

Example 1: You create a product with a design similar to that of a trademarked logo. The company with the existing trademark sues you for infringement. As the owner, your personal assets are protected as an LLC with limited liability so they could not be taken in the settlement.

Example 2: A customer has an allergic reaction after wearing the necklace they purchased from you. They believe the necklace was the cause and ask you to pay for their medical bills. Your personal assets as the owner could not be used to pay for this due to limited liability from being an LLC.

Example 3: A competitor sees your online advertising and believes it makes libelous remarks against them. They are attempting to take you to court over this. Should the court rule against you, they could not take your personal assets in the settlement due to limited liability since your business is an LLC.

Example 4: You create a product with a design similar to that of a trademarked logo. The company with the existing trademark sues you for infringement.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for an Etsy Entrepreneur

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if an Etsy entrepreneur can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Etsy entrepreneurs rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a dependable LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because limited liability protection from being an LLC protects your personal assets, not your business assets.

Etsy businesses need insurance because of the liability involved in selling people your products. If something goes wrong and someone is injured by your product, insurance can help cover the costs involved.

Common Situations Business Insurance May Cover for an Etsy Business

Example 1: While visiting your workshop, a potential investor in your art business falls, breaks an arm, and decides to sue. General liability insurance would pay for an attorney to defend your business and any required settlement.

Example 2: As you transport a sculpture to a customer’s car, you lose control of the dolly, and it slams into the car. General liability insurance would cover the customer’s vehicle repair costs.

Example 3: Another Etsy seller sues your business for libel. While you’re uncertain why this seller thinks you libeled him, you want to hire a lawyer immediately to protect your interests. General liability insurance would pay for your legal fees.

Other Types of Coverage Etsy Entrepreneurs Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all Etsy businesses should obtain.

Product Liability Insurance

While you put your best effort into the products you sell on Etsy, there’s always a chance someone might claim your product caused them harm. In the event of a lawsuit, product liability insurance would cover your legal fees and any required settlement.

Commercial Property Insurance

You made a major investment in the supplies and equipment you use to make your products. In the event of a fire, theft, or natural disaster, commercial property insurance would cover the cost of repairing or replacing your business-related property. This includes your business equipment, supplies, and product inventory.

Home-Based Business Insurance

If you run your business from home, you may need a home-based business insurance policy to safeguard your equipment and space in your home devoted to your business. A typical homeowner’s insurance policy may not cover business-related items or customer injuries in your workshop if you don’t disclose you use your home for business purposes.

Commercial Umbrella Insurance

While your general liability insurance policy covers most claims, some accidents or lawsuits may be so catastrophic that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for any legal fees and awarded damages that exceed your primary policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance.

Read our Etsy Entrepreneur Business Insurance article for more info.

The startup costs for an Etsy business are low. The main expense is the cost of materials for making goods or the cost of buying goods to sell. The other startup expense is Etsy’s listing fee, which is $0.20 per listing.

Many business owners keep only a small amount of inventory on hand. They make or buy more inventory as their current stock sells.

Visit our How to Start an Etsy Business guide to learn more about the costs of starting and maintaining this business.

Ongoing expenses include material and inventory costs, transaction fees, and shipping fees.

Learn more about running an Etsy business.

An Etsy entrepreneur business sells items on Etsy or similar online platforms at a profit.

Learn more about starting an Etsy business.

Although people buy mass-produced goods most of the time, there is still a thriving market for vintage and handmade items. Platforms like Etsy fill this need by offering a marketplace for those who want to sell these kinds of goods.

While it is certainly possible to sell through one’s own website, using an established platform like Etsy can attract more customers. It also can provide additional credibility for a fledgling business.

The profits of an Etsy entrepreneur business depend almost entirely on sales volume and overhead costs.

Learn more about starting an Etsy entrepreneur business.