No matter where you look, there are creative people making things—sweaters, soaps, drink coasters, cupcakes, wood products, and more. When crafters and artists have created all that they need for their personal use, they often start giving their goods away to friends, family, and neighbors. When they’ve saturated that market, the more ambitious crafters start to think seriously about selling their handmade and handcrafted goods for profit.
As long as you sell just a few items by word of mouth, you can usually avoid operating as a business. But if your operation starts to grow in size and scope, including plans to advertise, and to sell online, in shops, or at craft fairs, then it's probably time to treat it like a business.
Here are some of the steps you need to take to turn your craft or hobby into a business.
How to Start a Home Business
The basic steps to starting a home business are as follows:
- Select a business entity. For many small artisans and crafters, a sole proprietorship makes sense because it's the most simple. But if you want to limit your personal liability, you might wish to establish something beyond a sole proprietorship, like a corporation or a limited liability company.
- Choose a name for your business, called a "DBA," short for “doing business as.”
- File your business name with your county. Depending on your location, this filing could be required or optional.
- Obtain an employer identification number (EIN), which is your federal tax ID. Your EIN is what you use to report revenue and pay taxes to the IRS. Yes, all businesses must report and pay taxes to the government.
- Research any federal, state, and local business licenses and permits that might apply to your particular business.
- Consider taking out a small business insurance policy that will offer protection in case someone is hurt on your premises or by your products.
While these steps apply to most small businesses, you'll need to take additional steps as a seller of handmade goods.
Take Care when Selling Children’s Items
If you're making and selling handmade or handcrafted items for children, you're subject to a wide range of child product safety regulations—just like any large manufacturer. Anything sold to children has safety requirements for flammability, lead content, and choking hazards. There are also special requirements for marketing to children online.
Charge Sales Tax on Handmade Items
Once you're set up as a small business, you can then focus on selling your products—whether it's online, to retail outlets, or at craft fairs and farmers’ markets. If you're selling a taxable product in your state, it's your responsibility to collect and pay sales tax on that item.
You collect the tax at the time you sell the product and then you're required to file and pay the taxes to your state (or local municipality) either annually, quarterly, or monthly, depending on the amount of sales tax you collect. If you sell online, you'll need to check the online sales tax rules for the state where you make your sales state (discussed more below).
Selling Crafts & Handmade Goods from Home
Usually, you don't need special permits to make your goods or crafts at home as long as you don't disrupt your neighbors. If you live in a residential area, however, and suppliers, delivery services, and buyers regularly come and go from your home, you might need a special license. If such licensing isn't available and your business is going well, you should consider moving to a retail location.
Selling Online
If you plan to sell your items online, you'll need a website and a host. To sell physical goods, you'll need a service that can securely handle e-commerce transactions and credit card processing.
Alternatively—or additionally—you can sell your crafts on sites like Etsy, Craigslist, Amazon, eBay, and many others. At these sites, you register as a merchant and pay some combination of a participation fee to list a product and a “closing” fee when you actually sell something.
Do I Need a Business License to Sell on Etsy or Amazon?
Generally, online marketplace sites don't require a permit or license to sell your items. However, you might need other local and state business licenses, depending on your location and your products.
Your state or city might require all businesses to apply for a license—typically called a "general business license." Alternatively, only some business types might be required to apply for a special license. For example, your city might only require businesses that sell liquor, lottery tickets, gasoline, or firearms to obtain a license. You should check your state and city's websites for more information.
Collecting Sales Tax Over the Internet
When you have a robust online presence, it's easy for taxing entities to find you. You'll be expected to pay sales tax for items sold within your state, as well as tax on your income. You should also be aware that some states require you to collect sales tax if you sell to customers in their state, even if your business is located elsewhere.
Traditionally, the question of whether you were required to collect sales taxes over the internet depended on whether your business had a physical presence in a state, such as a store, office, or warehouse. If your business didn't have such a presence, you weren't required to collect sales taxes from customers in that state.
The U.S. Supreme Court called this practice into question in a 2018 decision, South Dakota v. Wayfair Inc. In its decision, the Court said that states can charge tax on purchases made from out-of-state (remote) sellers, even if the seller doesn't have a physical presence in the taxing state.
Many states now require remote, out-of-state sellers to pay sales tax if the business makes a certain number of sales within the state. For example, in its law that was under scrutiny in the Wayfair case, South Dakota required retailers that either made more than $100,000 in sales or engaged in at least 200 transactions within the state to pay sales tax. If you have sales in other states, you should check those states' rules for remote sellers.
A Business Lawyer Can Help
Many small business owners can navigate the legal process for starting and running a business themselves. But the law surrounding the sale of handcrafted and handmade products can quickly become complicated. Plus, the facts of each case are unique. For professional advice tailored to your business, please contact a business lawyer.
