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Creative people are often approached by friends, family and coworkers who would like to purchase items. In some cases, creatives may decide to open up a business that provides either a full- or part-time income. In other cases, however, artists, designers and craftspeople may not want to take on the responsibility of business operations and would prefer to simply make and sell their products as a hobby. The legality of doing this depends on several factors, including state, federal and local laws.
If you are just starting out or thinking about selling homemade products, it is best to take a look at the simple process of it. If you want to learn more, there is a detailed guide about selling homemade products made by us. Just click on the link and you can access the guide.
Now, let’s see the basic steps of selling homemade products:
It can be tough to produce product ideas out of thin air, so use yourself as the starting point. What would you enjoy making? What would you want to have in your house? What did you create that everyone liked? If it is something you like, making it will be more fun and rewarding in the long run.
The internet is your friend too. It is a great source for inspiration and you can see the trending products from different industries. What is appearing on the homepage of Etsy (If you don’t know, Etsy is a famous site for handcraft artists to sell their products)? Does Costco seem to be stocking more home decor than usual?
If it is a product that you can batch easily, you can keep it a low price point and reduce the starting budget. In the worst case scenario, you will only end up with more than enough things that you enjoy.
Before you finalize on a product, you should ask yourself a few questions, such as:
After that, we go to the second step: Pricing.
For any business, pricing the product is a hard problem to solve. Your profit margin is important in making rooms for your product’s price to scale, and when your business grows bigger, it is the profit for adjustment. One method to set the price is looking at the types of products you want to make, the venues you want to sell, and come up with products that fit the price range.
You can also show your products to friends and family, ask them how much they would pay for it in a store. There are many interesting psychological effects involved in pricing. You don’t have to go for the lowest prices on the market to sell, know your product’s worth.
For example: If you have five products and want to sell at five different price points. It is a good idea to make one or two items displayed at physical stores higher priced. This makes even the most expensive of your five main products look cheaper in comparison.
There are three selling avenues that you can sell your homemade products legally: in-person, wholesale, and online. Each has its own pros and cons, but once you know where you sell and the price, the following strategies for promotion, logistics, scaling get a lot easier.
Let’s go through each place:
Pop-up stores or craft fairs are great places to research the market. You can meet people, talk about ideas, and adjust the price based on the prospect’s reactions. Promoting is fun too, you can set up all kinds of decoration to show your brand’s personality. The downside is that you have to move a lot of logistics to set up, and nothing guarantees you won’t stand for hours without a sale.
If you get large batch orders, it is easier to manage. Usually, you can build a relationship from this with regular order, longer preparation time, and fewer shipping times. But you have to lower the profit as well. And there is a certain percentage of the price you will have to pay for the wholesale company.
With many convenient platforms such as Shopify, you can reach a very large audience when selling homemade products online. For small businesses with small products, you get many quality tools from these platforms, and you have your own website or social media pages to promote as well. But if you sell large items like furniture, shipping cost can be a hassle.
Well, that is it. These are the handy steps that you need to start selling homemade products. There is a lot more required if you get your hands on it, but for now, let’s stick with the basics. Next up, we will see how to sell homemade products legally.
Further Reading: How To Sell Homemade Products in 2021
You may be thinking this: Who cares if I sell my homemade products without a license? Well, usually, no one. Craft show organizers won’t check all your legal steps, customers won’t ask for it when buying from you, and your neighbors couldn’t care less if you are selling your cookies.
It only takes one of these, and your home-based business may have to suspense. So I strongly recommend you complete all the below steps to launch your store legally.
No matter what you sell, what form of business, or where you sell it, you almost certainly need a business license or permit to sell homemade goods legally. Some common business structures for small businesses are:
First, you must decide on your business structure. This will determine how you pay the taxes, if you are personally responsible in the case of a lawsuit, and how you will register this business. There are strict regulations that you must follow, and they exist to protect the customers.
Products in different industries have different regulations to follow. For example: With the Cottage Food Laws, there are certain foods that you can and can’t make at home then sell. There are also rules on what kind of information to put on the labels and safety guidelines.
These regulations can get complicated and vary by locations. If you are shipping your products overseas, there are international laws and destination laws as well. It may sound overwhelming, but if you contact your city or county to get advice, you will get all the information needed to continue.
Your business license will also prevent competitors from using your name to do business. This name is known as DBA – Doing Business As Fictitious Name. Even if you are selling online for fun, a local business license is still required.
In most cases, people who engage in regular financial transactions that involve the sale of goods and services must obtain one or more business licenses. These might include a state business license, a local business license as well as specialized permits – such as those needed to operate a commercial kitchen, to sell food products or to work from home.
However, state and local laws can differ significantly on permitting and licensing requirements. This may mean that if you only occasionally create something and sell it to someone under your own name, you aren’t violating any laws or ordinances by not having a license or permit to do so. If you are confused on this matter, you can either contact the Small Business Administration in your area for guidance, a private attorney or your town’s office of business affairs to find out what you might need.
One thing to keep in mind is that business licenses, particularly for people who are not dealing in areas that require special permits, such as the production of food, beverages, or medicines, are usually easy to get and inexpensive to apply for. Before rejecting the idea of getting a business license, find out what getting one will actually require.
The fact that you aren’t required to obtain a business license doesn’t make you exempt from paying taxes on your income from the items that you sell. You may also be liable if someone is injured as a result of using one of your products or if your product damages the property of a user. Having a business license may make it easier to qualify for liability insurance, as well as getting a bank account that can help you keep income from the sale of products separate from your other funds. At tax time, this separation of funds can make determining your tax responsibility easier.
If your research shows that you are not required to obtain a business license, you’ll want to understand how the law is worded so that you can avoid engaging in actions that would mandate a business license. For example, you may not need a license if you only make a few dozen Christmas ornaments every year and sell them to members of your social circle.
Other options may include making products, which you then sell or cosign to a retailer who deals with the general public. A prime example of this sort of arrangement would be an artist who creates drawings, watercolors or oil paintings and places them for sale in local cafés and restaurants.
If you’ve been selling handmade items without a business license for a while, take stock of what you are doing. While you might have made your decision to avoid licensing because you didn’t want to deal with the cost or hassle, a steady demand for your products indicates that your prospects for developing a lucrative business are good.
At this point, you have a decision to make: Would you prefer to have a hobby that brings you small amounts of cash or are you willing to create a business? Only you can answer this question in light of what is in your own best interest, as well as that of your family.
Consider getting advice from a trusted third party, such as a counselor at your local Small Business Administration office. An experienced attorney can help you determine the types of licenses and permits that you might need, an accountant can review the financials and an insurance agent can provide you with information about the kind of coverage you’ll need to protect you and your business.
Product liability issues can always arise, whether you are selling candles or cupcakes. Instead of having the threats of opening up your own personal assets to liability, having insurance will cover your business activities.
Especially if you are selling foods made at home, if anyone suffers from allergies and wants to sue your business, insurance will make sure you don’t have to pay heavily. If your products have high risk, you can set your business as a Limited Liability Company or Corporation to have limited liability. Which means if there is a lawsuit, your personal assets are still protected.
You also want to register for a copyright, trademark, or patent to protect your creation. And, of course, you want to be aware of other company’s copyright, trademark, and patent so you don’t accidentally copy from them.
However, note that homeowners’ insurance policies will not cover home-based businesses. Which means if a customer has an accident at your home and has medical bills to be covered, your business will have to pay for it, not the insurance company.
Again, especially if you are selling homemade foods, you must have a safe-for-health permit for your products. You will need to contact the state or local department of health to inspect your home kitchen and make sure you are complying proper sanitation procedures. Your standard recipe may be required to comply with FDA labeling regulations.
This labeling requirements states that your label must have the following:
If you are selling in the U.S, The U.S Food and Drug Administration has many resources to help you navigate all the requirements for sellers in each state. If you are selling online, Etsy has a seller’s handbook to start selling food online.
Properly track expenses or income for taxes purpose
You can’t roughly calculate your expenses for tax forms. The better you track the money flows, the lower income total to pay taxes for. Whether you are in a destination-based state or an origin-based state, the sales tax rate of the customers or the business will be determined. You should also be aware of tax laws in jurisdictions of where you sell your products.
Online businesses must follow the same rules as offline businesses
It is not legal just because Etsy sellers are doing it. Do your own homework and avoid using other brand’s commercial assets. A Disney character requires license to be used on products, and those stores on Etsy may just haven’t been caught yet.
To keep a better track of your business income/expenses, get a separate bank account
You’ll likely be required proof of business registration if you want to do this or apply for a loan. Banks may also require proof of insurance before approving your loan.
As you can see, just because you are a home-based business, it does not mean you don’t need to comply with laws or regulations. Better safe than sorry, you don’t want to be caught without the proper license, permits, or registration and end up getting into a lawsuit. You can’t just sell and hope for the best.
I hope the article is helpful for you to sell homemade products legally. You have made it this far, keep the momentum going and take the next steps to have a business you can be proud of. And as always, best of luck on your entrepreneur journey!