So you have finally made the jump into turning your art hobbies into a business. Congratulations! Entrepreneurship is a very worthwhile and rewarding pursuit when done correctly. Before jumping into the deep end, though, you should know a few legal things to help yourself prepare before selling at craft fairs and flea markets. One of these very important considerations is whether or not you require a business license.
Do I Need a Business License?
What Is a Business License?
A business license is a legal approval by the government to operate your business in a certain jurisdiction.
Some states require a business license for every business, while others don’t require one at all. Some local governments will require a local business license, even for home-based businesses. It is important that craft vendors do their research on the legal requirements before starting their crafts business.
Do I Need One? Why?
The short answer to this question is: it depends. Probably not the answer you were hoping for, but there are many variables to consider when looking at whether or not a business license is needed. For instance, each business purpose is different, and that can matter when considering business licenses, not to mention which state you are operating in as each state has its own separate requirements.
See some common business licenses by state.
What Happens If I Don’t Get One?
Regardless of which type of small business you are running, you are taking on a big responsibility. By not getting a business license, you are technically breaking the law, and your business could get shut down. When you first get started, nobody is likely going to notice, but as your business gets larger (and most importantly, profitable), you become a bigger target.
In addition to the business license, there are a few other requirements of running a craft business, you may want to be aware of.
In addition to the business license, there are several other things to do before officially starting your business. The first one is choosing a business structure, which is sometimes called a business entity. The business structure just refers to how the business is legally organized. There are four primary types (sole proprietorship, general partnership, corporation, and Limited Liability Company), that I’ll explain below.
A sole proprietorship is an individual who decides to go into business for themselves. The sole proprietorship is the easiest and least expensive structure to form as there is no official filing to create it. There is one huge downside to consider, which is a lack of liability protection. This means if the business is sued, the owner’s personal assets are potentially at risk. While this risk is low, it is worth mentioning.
A general partnership is when a group of two or more people go into business together. This entity is similar to a sole proprietorship in that there isn’t a formal filing requirement in most states. The income that is generated from a general partnership is subject to self-employment tax and does not pay tax through business income but instead personal losses of the group making up the general partnership.
Just like the sole proprietorship, if the business is sued, ALL of the partner’s personal assets are potentially at risk!
Corporations are a business structure that is much different from the previous two. Instead of the business and owner’s being intertwined, the corporation is a separate legal entity, so if the business is sued, the owner’s personal assets are protected in most cases. The corporation is more expensive to create and maintain and also comes with requirements such as issuing shares of stock, having a board of directors meeting, shareholders meeting and, taking minutes at the meetings. All of this has to be done, even in single-owner corporations, in order to keep the liability protection.
The corporation is created by filing paperwork (typically called the Articles of Incorporation) with their state’s entity formation office, which is typically the Secretary of State.
Limited Liability Company (LLC)
An LLC or Limited Liability Company provides the liability protection of the corporation but doesn’t have many of the same administrative requirements. The LLC is more expensive than the sole proprietorship and partnership but is typically quite low and worth the liability protection.
Learn more about the different types of business entities.
Many craft businesses operate as a sole proprietorship, because their liability risk is pretty low, but may need to register for their business name. In most states, a business operating under a name that is different from the owner’s full first and last name will need to register for a DBA (sometimes referred to as a Doing Business As name, Fictitious Business Name, Trade Name, or Assumed Name).
Name registration takes place with the state or county clerk. See more information on when and how to register for a DBA in each state.
Do I Need a Sales Tax Permit?
Any business selling taxable items will need to register for a sales tax permit (sometimes referred to as a seller’s permit sales and use tax permit or sales tax license) in order to legally sell and collect sales taxes. The definition of taxable items varies by state as not all products and services are taxed, but handmade crafts are taxable. See the requirements of sales taxes by state.
Sellers who operate in a state that has a sales tax will need to get a sales tax ID to collect sales taxes on sales of their items. In most states, the tax rate varies on the physical location of where items are sold. Cities and counties will levy an additional local sales tax rate on top of the state’s sales tax rate, so it’s important to know the correct amount of sales tax to charge, otherwise you as a seller are liable for paying it personally. In other states, there is a fixed amount throughout the state for all taxable sales.
Sales taxes for online sellers (this includes Etsy sellers) who sell to different states outside of their home state get more complicated as states will require sellers in certain circumstances to collect sales taxes. Each state has a different threshold on the amount of revenue or number of items you have to reach before they require registering for a sales tax permit and collecting sales taxes.
Companies occasionally selling at fairs, festivals, trade shows, and similar events in other states will also need to go through the business tax registration process. Some states like Colorado and California offer temporary vendors to get a one-time special event or temporary sales tax permit and not have to hassle with the more cumbersome sales tax filing requirements when a general sales tax license is required. Event promoters are liable for tax on sales made by vendors, so they will be checking to make sure everyone is registered before allowing them to participate in the event.
Do I Need Insurance to Sell Crafts?
Insurance is not mandatory for craft vendors but it is always a good idea to have that protection and peace of mind. According to Handmade Business, craft shows want their vendors to have general liability insurance and some shows themselves offer blanket policies for vendors.. Here are a few different options for craft vendors when it comes to insurance:
- General Liability: protects your craft business from bodily injury or property damage to someone else
- Product Liability: protects your business if one of your products causes damage or bodily injury
- Inventory Insurance: protects your property (i.e., your craft booth and inventory)
- Business vehicle Liability: protects vehicles when being used for business purposes; most personal auto insurance won’t cover any accidents when being used for business.
If you are planning on getting insurance for your business, make sure you are dealing with an insurance company that specializes in this such as Hiscox as not all insurance companies carry this insurance.