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Starting an online business is a huge step. Whether you are selling an item or perhaps your services, you may be wondering if you need to start an LLC in order to do so.
While an LLC isn’t required to be able to sell products online, it depends on the setup of your business and whether or not you need one. Not to mention that there are many benefits to having an LLC which might convince you to set one up even though it isn’t required.
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Read on to learn more about setting up an LLC and whether or not you should set one up for your business.
Do I Need an LLC to Sell Online?
Whether or not you need an LLC to sell online depends on the structure of your business. If your business is truly just you, with no employees and no excise tax, then you can indeed sell online without one.
But, if you currently have employees or plan to expand your business in the future, such as adding employees or maybe even growing into a corporation, then you absolutely must have an LLC.
Even if it is just you, for now, know that you must at least claim a sole proprietorship when you file taxes. A sole proprietorship is attached to your social security number and will be the way you pay taxes over what you are selling online.
Should I Form an LLC?
Now that you know whether or not you need an LLC, it’s time to talk about whether you should form one or not.
First of all, if you are still in the idea stage of your business, it is not time to form an LLC just yet. Wait until you have your first paying customer, or at least have one on the horizon. Otherwise, you may end up spending money to create an LLC that won’t go anywhere.
You’ll know that it is time to form an LLC when your company meets the following criteria:
- You’ve got customers
- You want to avoid putting personal assets at risk
- You have a partner or multiple employees
- You want to expand your business in the future
- You want people to take your business seriously
If you meet any, or all, of the above bullet points, then it is definitely time to form an LLC. Not only are you required to (in the case of the third bullet point), but it could save your hide in the case that your business goes south.
LLCs separate your finances from that of your business. Meaning even if you make a bad business deal and find yourself being sued, the individual or entity suing you will not be able to take your personal assets. Thus the LLC keeps your house and bank accounts safe from the failures of your business.
If you are still up in the air about forming an LLC, you may want to take the time to evaluate how much risk your business faces. For example, if you are selling a product, is there a possibility that the product could injure someone? You’ll need to get creative, thinking about a possible injury and maybe even death if a baby were to choke on a part of your product.
Sure, you can go through the process of putting disclaimers on everything, but forming an LLC is a great way to create a barrier from a freak accident, taking all of your hard-earned savings.
What is an LLC, Exactly?
An LLC stands for “limited liability company,” and what opening one does is basically make your business its own entity. This means that your business can open a bank account, own property, and can sue other beings.
While an LLC isn’t important when your business is just you, it is critical to have one when you have employees. Because while you may not make mistakes, they could, and these mistakes could jeopardize your business.
Don’t get too excited, however, as you are still liable for some actions of the business. For example, if you take out a business loan only to default on it, you will still need to pay it, and the bank may be able to touch your personal assets depending on what you put up for collateral.
It is also important to note that you can’t open an LLC later when things go south. You must have an LLC in place before you are sued for it to do any good. This is why it is always recommended to open an LLC when you plan to sell products online.
The Downsides of an LLC
While we strongly suggest getting an LLC for any business, we want you to make an informed decision which is why we will include the downsides of an LLC.
First and foremost, opening an LLC will have huge tax implications. Rather than just paying taxes over your profits at the same rate as income tax, you may be liable for additional taxes at the corporate level. Some people find that this doubles the tax they owe.
There are many tax breaks you can take, however, so if this is the only reason you aren’t forming an LLC, it's a good idea to speak to an accountant before you make your final decision.
Secondly, an LLC, as mentioned above, doesn’t protect against everything. Someone can still sue you as an employee of your LLC, even if you have one in place. This means that it is easy to get too comfortable behind an LLC. So before you open one, be sure you know exactly where you are and aren't protected.
Another thing to consider is that if you have an LLC, you can only do business in the state where the LLC is registered unless you take the time to specify this on your application. So for someone who plans to sell online, you need to be very careful as you register your LLC to ensure it is safe for you to ship your products to all 50 states. This adds a level of complication that some business owners aren’t ready to deal with just yet.
If you’ve made it this far and you aren’t sure if you want an LLC, know that it is perfectly okay to begin your business as a sole proprietorship and change it to an LLC later. Just be sure that while you are a sole proprietor, you don’t hire any employees or anything else which would violate the terms of your sole proprietorship.
How to Open an LLC
The good news is, opening an LLC is fairly simple, but it varies widely by state. Usually, you can just do a google search to see how you can open one in your state and the fees that are involved.
While the fees to open an LLC are generally low, they can be up to $800 or more, depending on your state. It’s a good idea to look at these costs in advance, so you can have them ready to go before you need your LLC. Then, keep your receipt, as you can write this fee off as start-up costs for your business.
It is recommended that you hire a lawyer or at least have a consultation about the LLC process. They can help you decide if an LLC is truly for you, as well as help you through the signup process.
Either way, in the same place you find the fee for starting an LLC in your state, you should also find the documents you need to fill out. You will need the following information to open an LLC.
- Have a unique business name (no, you can’t copy another business even if it is out of state).
- Personal information about yourself, such as your address and social security number.
- Information about who will run the company in the case of your death or disablement.
- The address of your business
- The length you have been in business
- The purpose of your LLC
You will use all of this information to fill out the documents. After you finish filling them out, you will send them to your state for approval. Once they are approved, you will receive your LLC certificate. Once you have that, you can obtain an EIN needed for the hiring of employees.
Final Thoughts on Do You Need an LLC to Sell Online
Overall, the final answer is that you don’t need an LLC in order to sell products online. It is, however, a good idea to get one unless you plan to be a one-man show for the duration of your business.
Even if it is just you right now, if you think you ever want to expand in the future, you will need an LLC in order to do so. Therefore it is a good idea to get an LLC for your business before you start to sell products online.
Reference Legal Explanations
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"Do You Need an LLC to Sell Online?". Legal Explanations. Accessed on November 30, 2023. https://legal-explanations.com/blog/do-you-need-an-llc-to-sell-online/.
"Do You Need an LLC to Sell Online?". Legal Explanations, https://legal-explanations.com/blog/do-you-need-an-llc-to-sell-online/. Accessed 30 November, 2023
Do You Need an LLC to Sell Online?. Legal Explanations. Retrieved from https://legal-explanations.com/blog/do-you-need-an-llc-to-sell-online/.