Hi All,
I am starting to sell some of my projects (yay!) but I am not too sure about my obligations tax wise and any liability etc etc. Setting up an LLC seems to be an option but I would be really interested to hear from other users who might sell on etsy or one of the others. I guess a perk is that you can write of materials/tools to a certain extent?
Thanks,
MMc
Timely question. I just met with a tax accountant on this and other stuff (taxes).
Financially, it’s not required.
LLC protects your other non business assets (somewhat), were you to be sued as a result of the business…
You can deduct tools and materials, etc., under the LLC.
Get your EIN. For profit LLC filing (expedited) is about $325.
Get a separate bank account and separate debit/ credit card.
Purpose: "Any lawful purpose under Texas Uniform Business Code. "
That way, you can sell umbrellas or tacos later.
You get around 2 years of losses from Uncle Sam. If you’re not showing revenue, they can declare it a hobby. Not so cut and dried as that, but 2 years is a rule of thumb. That’s the “inventory building” period.
You’ll pay a payroll tax rate of 15.3%, since you’ll have to pay both sides of FICA.
If all of my notes are correct, that’s the broad brush summary.
What does “pay both sides of FICA” mean?
Working for an employer, Social Security, or FICA is split 50/50. They pay half. Working for yourself, you get it all.
Charlie provided a good top level summary of an LLC. I have an LLC myself and the biggest benefit to me, other than protection is, separation. Having my personal accounts separated from business accounts makes everything simpler financially.
If you’re on Etsy or Amazon they will already be handling the sales tax aspect of a sale. Another tax one is responsible for annually is franchise tax. Franchise tax is only required once above sales of $1.18 million. Anything below that you’ll be able to file for an exemption (more info here → Small Business Taxes in Texas: The Basics).
You can still run your business without a legal entity. You’d be considered a “Sole Proprietor” business on taxes. All of the same tax rules apply to being a sole proprietor and you can still deduct expenses at the end of the year on your taxes. The danger of sole proprietorship, as mentioned by Charlie, is that there is no legal difference between you and the business vs. an LLC where the business is separate from the individual.
In my personal opinion, there is little liability risk with selling on Etsy. The Etsy consumer understands the goods are intended to be handmade and craft. On the other hand Amazon consumers are much less forgiving and having the protection of an LLC when selling is beneficial. Amazon actually requires liability insurance once you pass the threshold of $10,000 in sales. Liability insurance is another way to protect yourself but adds up when you’re paying for it month to month. More information on liability insurance can be found here Amazon Seller Insurance | NEXT Insurance.
Hope some of that helps!
Thanks, Charlie and Maziar - this info is much appreciated!