Federal Firearm Licensees (FFL’s) are individuals “engaged in the business” of selling guns and are required to register with and be licensed by the US government. They are also required to conduct instant criminal background checks on all gun buyers -and are prohibited from selling guns to convicted felons, domestic abusers, and juveniles.
Unlicensed sellers are people who may sell a small or large amount of guns but do not (or are not supposed to) earn their livelihood from firearm sales. These sellers do not have to conduct criminal background checks on gun sales. Unlicensed sellers may sell guns at gun shows, out of their homes, or even over the Internet.
What is the “gun show loophole”?
The Gun Control Act of 1968 requires anyone engaged in the business of selling guns to have a Federal Firearms License (FFL) and keep a record of their sales. However, this law does not cover all gun sellers. If a supplier is selling from his or her private collection and the principal objective is not to make a profit, the seller is not “engaged in the business” and is not required to have a license. Because they are unlicensed, these sellers are not required to keep records of sales and are not required to perform background checks on potential buyers, even those prohibited from purchasing guns by the Gun Control Act. The gun show loophole refers to the fact that prohibited purchasers can avoid required background checks by seeking out these unlicensed sellers at gun shows.
https://www.csgv.org/issues-archive/gun-show-loophole-faq/