Building a successful Etsy business is an art in and of itself. Whether you retail vintage merchandise or create unique, handcrafted goods, turning your hobby into a viable source of income means working hard to get everything right—from the words you use to market your products, to how quickly you fulfill orders and address customer complaints.
And chances are, you’re handling all of these different aspects of your business while juggling a second job, caregiving responsibilities, or both.
With so much to iron out and accomplish on the daily, taking on legal paperwork to create a formal business like an LLC is probably the last thing you want to think about. Well, we’re here to tell you that starting an LLC is not as hard as you think—and it might be one of the smartest choices you make for both yourself and your business as your sales begin taking off.
Read on to learn about the ways an LLC can help your life as an Etsy business owner, and whether it’s the right time to form one.
Already ready to start your Etsy business? Check out our guide on How to Start an Etsy Shop for more.
What is an LLC?
A limited liability company (LLC) is a legal business structure that does exactly what you’d think: it limits the personal liability of its owners. Forming an LLC creates a legal separation between you and your business, which decreases your personal risk while you transact business. For example, your personal debts and assets aren’t lumped together with those of your business—which can be a lifesaver in case of bankruptcy or a lawsuit.
As far as legal entities go, LLCs are also relatively simple to maintain. They lack the formal operating requirements of corporations, and they can be organized in any number of ways.
Why not just run my Etsy shop as a sole proprietor?
Most Etsy businesses are run by sole proprietors, so this is definitely a popular choice. So, what’s a sole proprietor? If you transact business without filing any business formation paperwork with your state, this is your default status. It’s by far the simplest and easiest business structure to operate under—but with this simplicity, you’re assuming greater risk. Because your business and personal affairs are tied together, your home, income, and assets won’t be shielded if and when a legal issue arises.
It’s up to you to decide if your business warrants the extra layer of protection that comes from forming an LLC. You don’t want to underestimate the liability you’re taking on by selling merchandise such as skincare products, baby items, furniture, food, jewelry or clothing. From allergies and injuries to intellectual property disputes, the products you make or sell have the potential to entangle you in a money-draining lawsuit.
Liability considerations aside, your choice of business structure may depend on the amount of sales you make each month, as well as your future goals. If you’re just starting out and don’t do much business yet (or if you think your Etsy shop will remain more of a hobby) a sole-proprietorship may meet your needs. If your operations are beginning to ramp up and you plan to turn your shop into a serious source of income, forming an LLC is an easy and sensible choice.
Benefits of LLCs for Small Business Owners
Here’s a quick overview of the main benefits of LLCs for small business owners—Etsy entrepreneurs included!
- LLCs limit personal liability. The primary advantage of an LLC is the limited liability we discussed above. With an LLC, a business owner will generally not be personally liable for debts incurred by the business. This includes lawsuits against the business, bankruptcy or other business debts.As your business operations grow, things will invariably become more complex, and you will likely be exposed to more risk. Although a lawsuit is a worst-case scenario, forming an LLC can give you the peace of mind that comes from knowing your personal finances are protected.
- LLCs offer privacy protection.When you have a sole proprietorship, you and your business are legally the same entity. This also means that by default, your business name is your name. This isn’t exactly great for personal privacy. An LLC, however, has its own name, which you can list on your Etsy page, your business cards, your packaging and more.Running a home-based business also typically means giving out your home address—a lot. This can result in opening yourself to unsolicited mail, and even unwanted visitors. Creating an LLC with a business like Northwest can help. In addition to listing our business address instead of yours on your public state documents, we also offer mail forwarding and virtual office packages in a growing list of states. These packages offer your LLC a business address with a unique suite number, which helps you look professional while keeping your personal address more secure. And speaking of professional…
- LLCs help to create a professional appearance. If you’d like to raise capital at some point in the future, forming an LLC will increase your chances of doing so successfully. Most investors want the assurance that they are putting their money into an established business, rather than a part-time, home-based venture.Adding “LLC” to your company name can also increase your legitimacy in the eyes of your customers and the Etsy business community. And with the online marketplace as competitive as it is, anything that sets you apart from the pack is well worth the investment.
How do I form an LLC?
In order to create an LLC, you’ll need to file specific state forms and pay the associated filing fees. Depending on your state, you may also need to file a status report each year. We can form your LLC for you with one simple form, and provide registered agent service too. Once you’ve set up your limited liability company, you can get back to running your Etsy business with the added assurance that you’ve covered all your bases.