Disclaimer: I’m not a lawyer by profession and nothing in this article should be construed as legal advice. Although I strive to provide accurate general information, the information presented here is not a substitute for any kind of professional advice or free from errors, and you should not rely solely on this information. Always consult a professional in the area for your particular needs and circumstances prior to making any professional, business, legal, and financial or tax-related decisions. This information is also not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional. I am not liable or responsible for any damages resulting from or related to your use of this information.
Whether or not your handmade business needs a business license to operate is a common question and a topic surrounded by a lot of confusion. And that’s because…
But in most cases, your business does indeed require a business license or permit, no matter how small it is.
I’m going to shed a bit of light on the subject, as well as if you must register your handmade business and if it should have insurance.
If you’d like more in-depth answers and a guide to other laws you must follow as a handmade business, you can download LAWS FOR SELLING HANDMADE.
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THE DIFFERENCE BETWEEN A BUSINESS LICENSE AND BUSINESS REGISTRATION
There can be confusion between a business license and business registration, and leave business owners wondering if they need one or the other, or both.
To help explain, let’s consider a similar license/registration scenario.
The first thing a cop will ask when they pull someone over is for their license AND registration. They may also ask for proof of insurance.
- Your license tells the cop you’ve been approved to operate the vehicle.
- Your registration tells the cop the vehicle belongs to you. (If it doesn’t, they’ll check to be sure you have permission to be driving it).
- Insurance tells the cop you’ll be able to pay for any expenses that arise from an accident.
Your business’ license, registration and insurance act in a similar way.
- A license or permit gives you permission to operate your business.
- Registration allows you to claim the business and business name as yours.
- Insurance, in most cases, is not mandatory but helps cover your costs in the case of an accident.
DO I NEED A BUSINESS LICENSE TO SELL HANDMADE ITEMS?
Your business most likely needs a license and/or permit(s) to legally operate; even if you’re operating a sole proprietorship and running it out of your home. Some factors that determine if you need a license and/or permit are:
Where you operate your business will determine if you need a business license or permit and which ones you require. You’ll have to look up the laws for your area/where you’re operating your business.
WHAT YOU SELL
The type of product you sell and how it’s regulated (e.g. by state law) will determine if you require a license. Selling food or drink items, working with flammable materials or production processes that disrupt air and water quality also likely require you to have a permit.
Although I didn’t have employees and I never had customers visit my home, I did require a business license to legally operate my handmade business out of my home. If you plan to have customers/clients visit your home/studio/commercial space, require parking space, want to put up signage, etc. you’ll likely also need zoning permits.
Your bank may require proof of proper licenses and permits to set up a business bank account or apply for a loan.
DO I NEED TO REGISTER MY HANDMADE BUSINESS?
The answer is, you guessed it…it depends. Here are some of the factors that will determine whether or not you must register your handmade business:
Where you plan to do business will determine if you need to register your business. Some locations do not require you to register your business if operating as a sole proprietorship or partnership and using your legal name (e.g. Jane Smith).
There are different ways you can structure your business. Some of the most common business structures for small businesses are:
- Sole Proprietorship
- General Partnership
- Limited Liability Company (LLC)
If you are setting your business up as anything other than a sole proprietorship or partnership, you must register your business. Most jurisdictions don’t require the registration of sole proprietorships or general partnerships if they’re conducting business as the owner’s legal name (see next point).
It’s important you choose the right business structure for your business, as it will determine the type of protection you have, how you pay your taxes, etc.
For example, if you make skin care products or baby items, you have a higher-risk business because your skincare products could cause an allergic reaction and attract a lawsuit, or your baby items could cause a choking hazard.
If you’re selling higher-risk products (i.e. more likely to attract a lawsuit), it’s best to set your business up as an LLC or Corporation so you have limited liability. Meaning, in the case of a lawsuit, your personal assets are protected.
This is not the case if your business is set up as a Sole Proprietorship as you have unlimited liability and may have to sell personal items (like your car or house) to pay your business debts.
More on business structures and which one is right for you in LAWS FOR SELLING HANDMADE
If you’re operating your sole proprietorship or partnership as anything other than your personal name(s) you likely must register a trade name (also known as a DBA (doing business as) or fictitious name).
For example, if I start a sole proprietorship and call it Erin Mooney, I would not need to register it in Alberta. If I call my business Erin Mooney’s Jewelry, I do have to register the name as a DBA/trade name.
You would also register a DBA/trade name if your LLC or Corporation uses a name other than the one it was registered with. For example, McDonald’s legal business name is “McDonald’s Company” but they do business as “McDonald’s”.
Registering your business name also gives you *some protection from another business coming along and using it.
*To better protect your business’ name you may want to register it federally, incorporate and/or trademark it (more on protecting your intellectual property and ensuring you’re not infringing on another business’…*ahem, selling Disney characters*…is found in LAWS FOR SELLING HANDMADE.
You also want to do your due diligence to ensure the name you choose isn’t infringing on another business’s name or trademark.
If you build a business using a name that’s already in use, registered and/or trademarked, that business can file a lawsuit against you.
You may be required to register for a tax ID number to file income taxes and/or sales tax. Whether or not your business is required to collect sales tax and/or file taxes will depend on jurisdiction, how you operate your business, what you sell and where you sell it; important to note if you ship your products out of state or country
Tax registration is covered in LAWS FOR SELLING HANDMADE
You may want to register for a trademark, copyright or patent to protect your work. You absolutely want to be aware of other’s registered trademarks, copyrights, and patents so you do not infringe on them.
If you plan to set up a separate bank account or apply for a loan, you’ll likely require proof of business registration.
DO I NEED INSURANCE TO SELL CRAFTS?
In most cases (but not all), you’re not legally required to have insurance for your handmade business, but may want it based on the following variables:
WHERE YOU OPERATE YOUR BUSINESS
If you have clients coming to your home, studio or even a separate office space, you may want additional coverage.
Homeowner’s insurance policies don’t cover home-based businesses. This means, if someone comes to your home, trips and falls and has medical bills to be covered, your insurance policy won’t cover it if that person was in your home because of your business.
Some craft shows may also require you to have proof of insurance to be accepted as a vendor. If someone is injured in your booth or your tent blowing over at an outdoor event damages property, someone must cover that. If the event doesn’t provide blanket insurance, you’ll likely be on the hook.
WHAT YOU SELL
Some products are more prone to injury, damage, and lawsuits than others, such as bath & body products, candles, children’s products, etc. Product liability insurance can help protect you and your business if someone gets a rash from your soap and decides to sue.
You may also want insurance based on the type of structure your business is set up as. If you choose a business structure that does not offer limited liability, it means your personal assets are not protected.
For example, if someone sues a sole proprietorship or partnership (which do not offer limited liability), the owner’s car, home, and other personal assets can be at risk. Liability insurance can help lower the risk. Although LLCs and Corporations do have limited liability, they may also be interested in liability insurance to lower their risks even further.
Banks may require proof of insurance before approving a loan.
DO I NEED A BUSINESS LICENSE TO SELL ONLINE?
Platforms such as Etsy or Shopify don’t check that every business using their site has the proper licenses, permits, registration, etc. to do so.
However, that doesn’t mean you don’t need them.
Online businesses generally must follow the same rules as offline businesses.
The laws can actually get a little more complicated when selling online. For example, you must follow the laws regarding product regulations based on the country you’re shipping the item to, not just the country you’re producing it in.
Sales tax becomes a little more complicated when selling online as well (which I explain more in LAWS FOR SELLING HANDMADE). If living in the US, you must know whether you live in an origin-based state or destination-based state, as that determines how you charge your customers sales tax.
You must understand how to charge, collect and remit sales tax for not only your jurisdiction but also for jurisdictions your customers are in.
WHAT HAPPENS IF I DON’T GET THE PROPER LICENSING OR REGISTER MY BUSINESS?
There are many handmade businesses operating without a proper business license/permit, aren’t properly registered, are infringing on trademarks/copyrights, etc. That doesn’t mean it’s legal or that they won’t get caught.
Government officials do conduct their own research. They may stumble upon your business online and decide to visit your home office to ensure you have the proper licenses/permits and are properly following regulations.
Someone may also complain about your business. It could be a shopper at a farmers’ market who notices you don’t have the proper permits displayed or doesn’t think you made your cupcakes in a sanitary kitchen with a valid health permit. It may be your neighbor who’s tired of cars being parking in front of their home and always seeing people coming and going from your place. Or a competitor may decide to complain because they believe you haven’t jumped through the same hoops they had to in order to get their business properly set up.
Being caught without the proper licenses and permits or registration can result in hefty fines. You can’t expect mercy because you’re a small business and only sell a few items a year.
For more information on each area covered in this article, as well as other legal topics related to operating a handmade business, please download LAWS FOR SELLING HANDMADE. Details on what’s inside LAWS FOR SELLING HANDMADE can be found here.
You may also be interested in reading: 3 BIG LEGAL MISTAKES CRAFTERS MAKE