If you're making stuff to sell you are legally speaking a business, so you need to comply with all the relevant legislation
the major one for online sellers to be aware of is the distance selling regulations which means buyers CAN return stuff just becasue they've changed their mind
http://www.oft.gov.uk/shared_oft/business_leaflets/general/oft913.pdf
You don't have to set up a company, but if you don't you you will be personally liable for legal challenges if you don't (eg you sell a 'faulty' candle holder and the buyers house burns down)
As to not opperating a business from council property you need to talk to your council (and check out your contract). Some things may be prohibited (eg running a scrapyard) but others may be fine (eg operating as an accountant).