You’ve probably heard that you need to form an LLC for your business. But what if you’re just starting out and don’t have the money or resources to do so? Is it really necessary?
The short answer is: it depends. But, the recommended answer is: yes. If you’re dropshipping, there are a few things to consider before making the decision to form an LLC. In this blog post, we’ll explore the pros and cons of forming an LLC for your dropshipping business.
What is an LLC and do you need one for dropshipping?
A limited liability company (LLC) is a business entity that can help protect entrepreneurs in the event of legal or financial issues by shielding owners from personal liability for business debts and obligations. It combines characteristics of both the corporate and partnership structure.
Setting up an LLC is relatively straightforward and it can be very beneficial to keep your personal assets separate from any potential liabilities coming from your online transactions.
Whether you’re a budding entrepreneur looking to take your online business to the next level, or a veteran e-commerce professional, exploring limited liability company (LLC) options for your dropshipping business makes sense. In addition to security, there are other benefits like limited personal financial liabilities and potential tax savings.
Consulting with a tax advisor or legal professional can ensure that you are considering all aspects of running an LLC in conjunction with operating a successful and profitable dropshipping business.
The benefits of having an LLC for dropshipping
When it comes to starting a dropshipping business, having limited liability protection from the start is an essential first step. Forming an LLC business structure offers a considerable amount of protection for both personal assets and the business itself, shielding the owner from any potential damage or financial lawsuits the company may come across.
Below are the top 5 benefits of creating an LLC:
1. Limited Liability: One of the biggest advantages that LLCs offer is limited liability protection for their business owners. This means that owners are not personally liable for any debts or liabilities incurred by the business.
2. Flexible Tax Options: Another benefit of forming an LLC is that you can choose how to be taxed. LLCs have the freedom to choose whether or not they want to be taxed as a partnership, sole proprietorship, C-corp, or S-Corp.
3. Separate Legal Entity: LLCs are seen as separate legal entities from their owners in the eyes of the law. This means that business assets and liabilities remain separate from personal assets and liabilities.
4. Easier Ownership: LLCs can have one or more owners which makes them easy to set up and manage. There is no need for complex ownership agreements or documents in order for the business to be legitimate.
5. Cost Efficiency: Forming an LLC does not require as much paperwork as other business structures. This makes it an affordable and cost-effective way to get your business up and running.
Overall, LLCs offer entrepreneurs a number of legal and financial benefits that make them an attractive choice for starting a business. With limited liability protection, flexible tax options, easy ownership structure, and low setup costs, it’s easy to see why LLCs are becoming a popular choice.
It should be noted, though, that there are certain restrictions and requirements when it comes to forming an LLC. Different states have different rules and regulations when it comes to LLCs so it’s important to do your research before you form one. Additionally, different types of businesses may have additional requirements that need to be met in order to be legally compliant.
Forming an LLC can provide you with a number of legal and financial benefits, but it’s important to make sure that you understand all the rules and regulations associated with it so that you can make an informed decision. With careful planning and research, forming an LLC can be an excellent choice for new dropshippers who want to protect their personal assets while still enjoying the many benefits that LLCs offer.
How to set up an LLC for your dropshipping business
Depending on the size and nature of the business, an LLC can be set up as either a C Corporation, an S Corporation, or a Single-Member LLC. The full description of each setup is discussed further in the article but most online businesses are fine starting with a Single-Member LLC before moving to an S Corp if needed.
Sole Proprietorships don’t require registering with the state; all the profits will belong to one person and there are fewer paperwork requirements compared to other LLCs setups.
These are the list of steps to create an LLC for your new online business:
1. Choose a Registered Agent: You will need to choose someone within your LLC who can receive legal documents on behalf of the business. This person is called a registered agent and they must have a physical address in the state where you are forming your LLC.
2. File Articles of Organization: Next, you will need to file the Articles of Organization with your state’s Secretary of State. This is a legal document that outlines basic information about your business such as its name, purpose, and registered agent.
3. Create an Operating Agreement: Once you have filed the Articles of Organization, you should create an Operating Agreement which sets out the rules and regulations for running your LLC.
4. Obtain an EIN: An Employer Identification Number (EIN) is a federal tax ID number for your LLC and can be used to open a business bank account and for filing taxes. You can obtain an EIN from the IRS website.
5. Open a Business Bank Account: Once you have obtained an EIN, you will need to open a separate bank account for your LLC. This will help you keep your personal and business finances separate.
6. File an Annual Report: Most states require LLCs to file annual reports with the Secretary of State in order to remain in good standing. Make sure you are aware of any filing requirements and fees in your state.
7. Comply With Taxes: Lastly, make sure you are aware of the different taxes that may apply to your LLC such as income tax and sales tax. You may also need to register for other types of taxes depending on the services or products you offer.
Let’s go through these steps in more detail.
Choose a Registered Agent
A new business needs to select a registered agent for their LLC because the agent is responsible for receiving and sending important documents to the business. The registered agent should be someone of age, reliable, and able to accept correspondence from the state during business hours.
It is important to ensure that all contact information provided for the registered agent is up-to-date so that any official documentation can be received in a timely manner. If you are a solopreneur, you will be the registered agent for your LLC.
If the business chooses to hire an external registered agent, it is important to ensure that they are in good standing with the state and provide a valid address for correspondence. It is also important to periodically check in with the registered agent to make sure contact information has not changed. The registered agent should be informed of any changes to the LLC structure or contact information.
File Articles of Organization
This document may be called the “articles of organization”, “certification of organization”, “articles of incorporation”, or “certificate of formation” depending on your state. This is a legal document that provides information about the LLC, such as its name and purpose.
This information usually includes:
• The name and address of the LLC
• The purpose of the business
• How long it will exist (can be perpetual)
• Whether there are any members or managers, and their names and addresses
• The name of the LLC’s registered agent, who is responsible for receiving legal notices.
• Whether there will be classes of membership or capital structure
• Any other information required by state law.
You need to file this document at the Secretary of State’s office but most have the capability to file online. Simply search for “where to file LLC in” with the state of choice. In some states, you will also need to publish a notice of the formation of the LLC in a local newspaper. This is often required when DBA (“doing business as”) another name other than your LLC name.
Once you file the Articles of Organization, your LLC is considered legally formed in that state.
Create an Operating Agreement
You should create an operating agreement when starting an LLC. An operating agreement is a legally binding contract between the members of your business that outlines the rights and responsibilities of each individual. It should include details such as:
• How the LLC will be managed
• Who is responsible for making decisions on behalf of the LLC
• How profits, losses, and taxes are to be handled
• How disputes between members will be resolved
• The roles and responsibilities of each LLC member
• How new members will be added, and how existing members will be removed
• How the business can be dissolved in case of a disagreement or other event
Having an operating agreement is vital to the success of your LLC if you have multiple members. If you are a single-member LLC, you may not need an operating agreement but, if you want to create one, there are many templates available online.
Obtain an EIN
You will also need to obtain an Employer Identification Number (EIN) from the IRS. An EIN is a nine-digit number that allows the IRS to identify your LLC for tax purposes and reporting.
The main reasons why you need an EIN number is to open a business bank account and to file your LLC’s taxes. You can apply for an EIN online through the Internal Reveue Service website or you can also call their customer service line.
Be sure to keep this number in a safe place as it will be used for any future tax filings. Additionally, depending on your state, you may need an EIN to register your LLC with the state.
Open a Business Bank Account
Opening a business bank account will help you keep your personal and business finances organized. There are a number of important reasons to keep your personal and business finances separate.
First, separating your personal and business finances allows you to easily track and monitor the financial performance of your business. Knowing how much money is coming in, how much is going out, and what expenses are associated with running the business can all be easily tracked when your personal and business finances are kept in separate accounts. This helps ensure that your business is running efficiently and allows you to make informed decisions about how to use the money coming into the business.
Second, keeping your personal and business finances separate makes it easier to file taxes. By having two sets of financial records, you can more easily track income and expenses for tax purposes. This helps to ensure that your business is compliant with all relevant laws and regulations as well as protecting you from potential fines or penalties that could be associated with incorrect filing of taxes.
Finally, having distinct personal and business finances can help you protect yourself in the event of a lawsuit or other legal action. By separating these accounts, your personal assets are less likely to be at risk in the event of a financial dispute related to your business.
Overall, separating your personal and business finances is essential for protecting yourself and ensuring the success of your business. Taking the time to create separate accounts and track your expenditures can help pay dividends down the road by creating an organized, compliant financial record and providing legal protection.
Additionally, keeping your personal and business finances separate can help you build business credit. This is because lenders will usually look at the financial history of your business when deciding whether or not to offer a loan or line of credit. Separating your personal and business accounts can help establish a solid business credit history, which can be beneficial if your business plans to apply for loans or lines of credit in the future.
When looking for a business bank account, you should consider the fees associated with the account, the available features and services, and other discounts or advantages offered by the financial institution. You can also look for a bank offering online services such as mobile banking and bill payment.
After opening the business bank account, make sure to deposit checks and cash promptly in order to avoid unauthorized transactions. You should also keep a record of all deposits and withdrawals for easy tracking of your finances. Make sure to check your bank statement regularly for any fraudulent activity or errors.
File an Annual Report
When you have an LLC, you must file an annual report. This report is typically required in all 50 states and serves to update the state on any changes that have occurred within the LLC’s business structure.
It is also used to inform them of any financial reports, such as quarterly or annual profits and/or losses. Additionally, you may need to file other documents like applications for licenses or permits depending on your specific business. To file your annual report, search for “how to file annual report for llc” along with the state where your LLC resides.
Comply With Taxes
In addition to filing an annual report, LLCs must also complete other tasks like paying taxes and creating a business plan. Depending on the state you’re operating in, you may be required to pay local or state taxes as part of your LLC’s operations.
When selling goods online using the dropshipping business model, companies may be required to pay state and/or local taxes dependent on the laws of the particular state or locality. Generally, if a company has a physical presence in the state, such as an office, warehouse, retail store or other property located in the state then they must collect and remit sales tax from customers for transactions conducted over the internet.
Each state has its own laws regarding sales tax collection, so it is important to check with your local government to make sure you are compliant with their regulations. Additionally, some states may have special taxing requirements depending on the type of product or service being sold.
For example, certain clothing items may be subject to additional taxes in certain states. To ensure compliance, it’s a good idea to keep an up-to-date list of the taxes and regulations that apply in each state you conduct business in. This information can also help you determine which products or services are subject to additional taxes or fees when sold online and how much those taxes may be.
If you are running a Shopify store, you will be able to review and collect sales tax for the appropriate states. The collected sales tax can then be paid to the state each month (or quarterly) to satisfy your tax requirements.
Types of corporations for online business owners
What is a Single-Member LLC?
A single-member LLC (or SMLLC) is a type of limited liability company that has only one owner. The owner, known as the “member,” has full control over the business, and receives all profits from it. Like other LLCs, an SMLLC offers its owners protection from personal liability for any debts or obligations of the business. The member of an SMLLC is also responsible for paying taxes on any profits from the business.
In most states, it’s easy to form an SMLLC by filing a few simple forms with the state government. However, there are some important legal and tax considerations that must be taken into account when forming a single-member LLC. For example, the owner of an SMLLC should consult with both a lawyer and an accountant to make sure that their business is properly structured and compliant with state laws.
Overall, single-member LLCs are a popular choice for entrepreneurs who want to start a business without taking on any additional partners or investors.
What is an S Corporation?
An S corporation, also known as an S corp, is a type of business entity recognized by the IRS. It allows businesses to be taxed like a partnership or sole proprietorship while still providing limited liability protection for its owners.
This means that the owners of the company are not personally liable for any debts or obligations that may arise from their business. S corporations also offer certain tax advantages that other business entities do not. These include the ability to avoid double taxation, pass-through of income and losses to the owners, and more favorable treatment of fringe benefits.
To qualify as an S corporation, a company must meet specific criteria set by the IRS. This includes having no more than 100 shareholders and only one class of stock. Ultimately, an S corporation is a great option for business owners who want the benefits of limited liability protection and tax savings.
What is a C Corporation?
A C corporation, or standard corporation, is a business structure recognized by the Internal Revenue Service (IRS) and most states. It creates a corporate entity that is separate from its owners, providing liability protection for shareholders and other stakeholders for their personal assets.
A C corp allows for an unlimited number of shareholders and provides ownership flexibility with different classes of stock, including voting and non-voting shares. It also offers tax incentives for businesses, such as the ability to deduct employee benefits from corporate income taxes, which can result in a lower overall rate of taxation than other business structures. However, C corporations are taxed twice; first when the corporation earns the profit, and again when the shareholders get the money in the form of dividends.
C corporations are most commonly used by larger businesses and organizations because they can be more expensive to set up and maintain than other business structures, such as LLCs or S Corporations. Additionally, C corp designation may also be required for public companies or those that plan to go public in the future.
Establishing a C corporation requires filing paperwork with the state, such as Articles of Incorporation, and abiding by corporate laws. The owners will also need to draft and file other documents including bylaws, corporate resolutions, and board minutes.
What is a Sole Proprietorship?
A sole proprietorship is a business owned and operated by one individual. It is the simplest form of business organization to start and maintain, as there are few legal requirements involved. The owner has full responsibility for all debts and liabilities incurred by the business. All profits generated from the business go directly to the owner, who also pays taxes on the profits. It is important to note that the owner remains personally liable for any debts or other liabilities of the business.
Sole proprietorships offer a number of advantages, including flexibility and low start-up costs. The owner has complete control over how the business is run, and can make decisions quickly without consulting with partners or shareholders. In addition, the business can be started without any formal paperwork or registration.
On the downside, sole proprietorships have unlimited liability, which means that the owner is personally liable for any debts or liabilities of the business. In addition, it can be difficult to raise capital as there is no legal separation between the owner and their business assets
The drawbacks of not having an LLC for dropshipping
Starting an e-Commerce business without forming an LLC can be highly risky, as you could potentially lose personal assets in the event of a lawsuit. Not having any legal structure in place also means that all of the money flowing in and out of your company will go through your personal bank account and be lumped together with personal expenses, which can complicate reporting taxes.
With limited liability protection, the owner’s (your) personal assets are less likely to be affected by losses that can arise during operations, so you can rest easy knowing your finances and home will be safe if anything were to happen. Working with an LLC allows you to have both protection and security when it comes to your business dealings, further assisting in building a sustainable foundation for future success.
Creating an LLC comes with tax benefits as well, as personal income tax is only imposed on distributions rather than all income generated by the business. Ultimately, failing to form an LLC for a dropshipping business leaves owners completely exposed and unable to take advantage of important opportunities.
For anyone who is running an online business such as a dropshipping store, it is a good idea to separate your personal from business transactions.
Do you need an LLC to drop ship on Shopify?
Dropshipping is an increasingly popular business model, and setting up an LLC can help protect your personal assets. One of the most important steps in getting started with dropshipping is obtaining an employer identification number (EIN) and registering your business with different states that your business may operate in.
Additionally, it’s important to open a business bank account for the LLC and obtain any local business licenses that may be required in your area. In order to provide protections for yourself and ensure compliance with any applicable laws, setting up an LLC when starting the dropshipping venture is a smart move.
Setting up an LLC for dropshipping can be a bit daunting but with the right know-how and research, it can be an exciting endeavor! First and foremost, you’ll want to assign your LLC an employer identification number (EIN).
Secondly, depending on what state you’re in and what type of items you are selling, there might also be some other filing requirements. You will then have to decide which state you’d like to form your LLC in and make sure that you have all necessary paperwork filled out correctly.
Additionally, opening up a business bank account will allow you to separate your personal finances from any money coming into or out of your LLC.
Lastly, if you are receiving sales from customers located within the same state as where you set up your LLC, getting a local business license might be beneficial for tax purposes.
So there you have it! Now you know everything there is to know about setting up an LLC for your dropshipping business. The benefits definitely outweigh the drawbacks, so if you can swing it financially, it’s highly recommend that you get one set up.
Do you have any other questions about setting up your dropshipping business? Let me know in the comments and I’ll do my best to answer them!