If you're starting your Etsy shop as a hobby, you probably haven't given much thought to the structure of your Etsy business. It's just you, creating or curating stuff and putting it up for sale. But if your Etsy shop grows into a full-time operation — or if you want it to — you'll need to consider what business structure is best for you. The structure that you choose affects both your personal liability if your business is sued and the taxes you'll have to pay.
Depending on your location, you may be required to obtain a business license to operate your Etsy shop in an aboveboard manner. You may also need a business license to open a business checking account. You can find information about business license requirements in your area online.
When it comes to business structures, you have a few main options:- Sole proprietorship: If you're just starting out with your Etsy business, odds are you're running a sole proprietorship, sort of by default. That is, you own your business outright and you're solely responsible for all decisions and debts that pertain to it. This type of business is by far the easiest to start, but it's also the riskiest type to run. This is because you'll be held personally accountable if something goes wrong. For example, if someone using your product becomes sick or injured, that person could sue you, personally, placing your assets (and any assets that you hold jointly with a spouse) at risk. You're also personally accountable for any debt that the business assumes.
- General partnership: A general partnership consists of two or more co-owners. Typically, the parties in a general partnership split the profits from the business equally, although that's not always the case. For example, if you and your friend go into business together but you invest more in startup costs, you may agree to a different split of the profits — say, 60/40. General partnerships are similar to sole proprietorships in that you and your partner(s) are personally responsible for any debt that the business incurs.
- Limited partnership: In addition to general partnerships, limited partnerships exist. In that case, one partner contributes funds and shares in profits but assumes no role in the workings of the company.
- Corporation: A corporation is a legal entity all its own, separate from its founders (you), managers, and employees, and owned by its shareholders (again, you, along with anyone else you decide to bring into the fold). Operating as a corporation means, among other things, that your personal assets are protected in case the company is sued. Two types of corporations exist: C-corporations and S-corporations. Although C-corporations provide the most financial protection to shareholders and offer other advantages, many small businesses go the S-corporation route because they're cheaper to start and easier to maintain. To avoid running afoul of the IRS, speak to your accountant in detail about how to deal with profits if you opt to form a corporation.
- Limited liability company (LLC): A popular choice for many business owners, a limited liability company (LLC) is a sort of hybrid between a partnership and a corporation. An LLC not only limits your liability for business debt but also allows you to choose whether you want to be treated as a partnership or as a corporation, depending on which has the lower tax burden.
