One of the easiest ways to start an entrepreneurial venture in the modern world is by launching an e-commerce business. All you need is an internet connection and a laptop to start selling goods across the globe on platforms like Shopify, Amazon, Etsy, and eBay.
Many new sellers, however, start with product sourcing and marketing before considering the following question:
“Do I need an LLC to start an e-commerce business?”
Legally speaking, you do not need an LLC in order to start selling anything online. You can work as an individual seller. The long term answer will typically depend on the vision you have for the business, how much you are willing to risk, and how professionally you want to conduct the business.
Let’s explore this in depth.
1. You Can Start Without an LLC
If you will be venturing into e-commerce for the very first time, you can start an online store without registering as an LLC. A lot of entrepreneurs begin as sole proprietors in the U.S and as individuals in other countries.
What this means in practice:
You can simply create an account on Shopify, Amazon, or Etsy under your personal name, list products, and start receiving payments via PayPal, Stripe, or a bank account. It’s fast, cost-effective, and allows you to test the waters before committing to formal structures.
The risks of starting without an LLC:
The downside is that as a sole proprietor, there is no legal separation between you and your business. If a customer sues you over a defective product, or if you run into debt with suppliers, your personal savings, car, or even your home could be at risk.
Practical example:
Imagine you sell phone chargers, and one catches fire and damages a customer’s property. Without an LLC, you could personally be held liable for damages. With an LLC, the business, not you personally, would be responsible. The cycle here indicates that to begin with, every business up to a certain level makes a quick and easy analysis.
2. Why Do Most Entrepreneurs Prefer an LLC
It is not mandatory, but an LLC is relatively beneficial for an e-commerce seller. Here’s why:
Limiting Liability Exposure
Making an LLC helps in distinguishing personal valuables from business valuables. In the case of a lawsuit, no personal assets such as money, a bank account, a car, or even a home is lost. This is very critical for e-commerce sellers dealing with shipping, potential product liabilities and product refunds.
Building a Reputation
Operating under a registered business helps in building a reputation. For instance, “EcoGlow Products, LLC” is better than “John Smith.” This is very important in applying for wholesale accounts or negotiating with suppliers, partners, and manufacturers
Flexible Taxation
An LLC has multiple taxation options available:
- Taxation as a sole proprietorship by default and a single member LLC, or as a Multi member LLC partnership.
- Electing an S Corporation status for U.S. residents in order to lessen on self-employment taxes.
- Electing as a C Corporation if profit reinvestment is the goal,
This provides e-commerce sellers with the ability to tackle any growth in their company as a result of the business expansion.
Easier Banking & Payment Processing
Banks and payment processors prefer and require a defined business structure.
The following steps become easier:
- Application for business accounts with US banks
- Approval for PayPal and Stripe accounts
- Merchant accounts and e-commerce accounts financing.
These services are most easily available to foreign residents or non US residents.
3. When You Might Not Need an LLC
As useful as LLCs can be, do consider these situations to know when to skip LLCs.
- Hobby sellers: If you craft a few necklaces and sell them on Etsy, or if you dropship as a side gig, not giving too much thought to an LLC makes sense.
- Low-risk products: Supplements, cosmetics, and electronics are much more exposed to liability than digital products, online courses, and print on demand shirts.
- Idea validation stage: Many sellers prefer to test a product idea for a few months. Having said that, waiting too long could expose you to unnecessary risk if your sales grow wildly.
Also, in the event that you receive a dispute from a customer, you would be better off having an LLC. When Should You Start Thinking About Setting Up an LLC
4. When an LLC is highly recommended.
E-commerce businesses that have moved past the ‘trial stage’ are more profitable.
Establishing an LLC brings about the following benefits.
- Physical products that present potential risk are sold: Supplements, beauty products, electronics and baby items are high risk items.
- Scaling of the brand is easier: Building a company facilitates better relations with manufacturers, influencers and wholesale buyers.
- Use of Amazon and Walmart for selling is easier: Most of these platforms prefer registered accounts, especially for the Brand Registry.
- You have partners or investors: Increase in the number of partners and investors also increases the profits, ownership percentages, and decision making powers.
You can grow your business without the fear of losing your personal funds with an LLC.
5. What About Taxes?
The taxes associated with operating an online store are not easy to deal with. Setting up an LLC helps to deal with taxes in a more organized manner.
Without LLC: Taxes on income are individually reported on a tax return. American citizens are residents report income on a personal country tax return. There are non-residents that earn income from USA but they only submit taxes in their country.
With LLC:
- U.S. citizens and residents do not have to pay self-employment taxes do not have to pay self-employment taxes if they elect to be treated in a certain way.
- Non-residents are able to sell on Amazon and Shopify using a US LLC and are not subject to US tax obligations provided they do not have US businesses. They still have to report taxes in their country.
This is why LLCs are popular among sellers on the rise. The growth in sales is the reason for setting up an LLC then.
6. How to Make a Choice
In order to help with this, we have it framed as a simple decision making process.
Are you a beginner testing a new concept? Start out without an LLC to keep the expenses as low as possible.
Are you consistently selling, while also reinvesting the profits? Then it would be a good idea to form an LLC, as this will help protect your assets, as well as build your reputation.
Do you want to expand your business all over the globe? if this is the case, then an LLC is almost mandatory for tax purposes, banking purposes, and also for global brand recognition.
How Bizstartz Helps
At Bizstartz, we assist entrepreneurs, particularly those living outside the United States, with forming LLCs and providing the necessary tools for further development. This includes:
- Establishing an LLC in any of the fifty states
- Acquiring an EIN for tax obligations
- Opening a U.S. business account (a requirement for merchants on Amazon and Shopify)
- Approval of payment processing services (via Stripe, PayPal, etc.)
- Setting up an Amazon seller account
- Provision of bookkeeping and compliance assistance
- Filing of BOI
Our goal is to remove the hassle from business formation in the U.S. so you can concentrate on selling and growing your e-commerce business.
Final Thoughts
While you do not legally require an LLC to operate an e-commerce business, there are many advantages that come with it. These include limited personal liability, business credibility, flexible taxation, and easier access to financial services.
If you are selling as a hobby, you may not need to set up the at once. However, if you plan to establish a sustainable business model, expand internationally, and grow, then the LLC is the way to go.
