Owning a business is a rewarding but potentially risky endeavor. An LLC removes some of the risk associated with being a small business owner.
An LLC business structure isolates potential legal and financial risks to your business and protects your personal assets. If that sounds good to you, read our small business owner’s guide to LLCs and prepare to set up your e-commerce LLC.
What Is an E-Commerce LLC?
Before explaining how to set up an e-commerce LLC, let’s discuss why you should establish an LLC.
An LLC is a business structure that establishes a small business as a legal entity. A small business owner limits their personal liability by making their business its own legal entity.
LLCs can be formed by businesses of any size and are great for e-commerce business owners as they protect your personal assets.
Pros and Cons of LLC Business Structure
While an LLC is a popular e-commerce business structure, many small business owners still debate whether to operate as a sole proprietorship or start an LLC. We will discuss the benefits and disadvantages of the LLC business structure as it pertains to e-commerce.
Pros of LLCs
An e-commerce LLC offers plenty of advantages that make this choice ideal for small business owners. These pros include:
- Personal asset protection. The biggest benefit of forming an LLC for your e-commerce business is personal asset protection. When you form an LLC, you as a business owner are not liable for debt incurred by your business or business lawsuits. If you are sued, no one can collect against your personal assets — only your LLC or business assets can be collected.
- Flexibility. LLCs are a flexible option when it comes to managing your business. An LLC can be managed by either its members or outside managers.
- Credibility. Establishing your e-commerce business as an LLC gives customers a greater sense of credibility because it is seen as more formal than a sole proprietorship. Sole proprietorships do not need to be registered with the state. An LLC shows you have taken steps to formalize your small business and are operating legally.
- Easy to start and upkeep. LLCs are generally more simple to start and maintain compared to corporations. Corporations require more care than LLCs and are not as tax-efficient for small businesses. The paperwork and fees vary by state and are simple enough for owners to handle themselves without the assistance of a professional. Unlike corporations, LLCs aren’t required to assign formal roles, hold official annual meetings, or record meeting minutes.
- Pass-through taxation. Pass-through taxation occurs when a business is taxed through the owner’s personal tax return, and the business profits are taxed at the personal rate. Pass-through taxation is easier on owners than filing corporation taxes because they can generally avoid double-taxation. Double taxation occurs when multiple layers of taxes are imposed by subchapter C of the IRS, and a business’ income is taxed twice. Pass-through treatment is automatic for an LLC under the default tax classification. As always, we are not tax advisors, professionals, or consultants. Please check with a tax professional in your area.
As you can see, there are many pros to the LLC e-commerce business structure. However, there are a few cons you may also want to consider when deciding what the best decision for your business is.
Cons of LLCs
Though LLCs are a fantastic option for small businesses, they do come with a few obstacles you’ll need to factor in when making the decision.
- Self-employment taxation. LLCs can choose their tax structure. By default, an LLC is taxed as a single-member LLC, also called a disregarded entity (if one member) or a partnership LLC (if multiple members), and the members are considered self-employed. This means members of your small business are responsible for paying Social Security and Medicare taxes. One way to avoid self-employment taxation is to sign up with the IRS to be taxed as an S corporation. There are strict eligibility requirements to be taxed as an S corporation as an LLC. Still, if eligible, you only pay Social Security and Medicare taxes on actual compensation and not the sum of the business’ pre-taxed profits.
- Member turnover consequences. If a member of your LLC leaves, goes bankrupt, or dies, the LLC must be dissolved. The remaining members have to pay termination fees and start a new LLC from scratch to continue doing business.
- Investment disadvantages. Being an LLC business is not the most advantageous for investor opportunities because it is not considered a public company. The general public cannot buy equity in an LLC, and venture capitalists generally only fund corporations where stock can be issued. Meaning the LLC could be funded by capital contributions from members of the company but not the general public.
As established, LLCs are amongst the best business structures for e-commerce — so what’s next? How can you form an LLC?
Setting Up an E-Commerce LLC
Forming an LLC for your e-commerce business may seem intimidating, but trust us, it’s a rather simple process. We’ll break it down into several easy steps to follow for starting an e-commerce LLC.
Choose a name and a registered agent.
It’s necessary to register a name to do business with your state. This does not need to be the same as your e-commerce business’ name. You are not allowed to use a business name associated with a registered LLC in your state. However, you can have the same business name as an LLC outside of the state you are registering in. Next, choose a registered agent, the person who will receive all official correspondence for the LLC.
File the appropriate paperwork with your state.
Legally form your LLC by filing articles of organization. Your state will require basic information about your small business, such as the business name, management structure, and registered agent.
Get an employer identification number.
You will need an employer identification number to be compliant with the IRS. This is a nine-digit number assigned to a business for tax purposes. LLCs are classified as either a partnership or corporation by the federal government.
Draft an operating agreement.
An operating agreement will include your business’ management structure, ownership breakdown, member voting rights, powers and duties of members, and how profits and losses are distributed. This is not required by every state but is a good idea to document to hold LLC members accountable as the operating agreement acts as an official contract.
Seek professional help.
Seek help from a small business professional, the SBA, or another outside organization to make the process of starting an e-commerce LLC simple, secure, and legal. This will ensure your business is set up for success.
Establish a business bank account.
To keep business finances separate from personal finances, create a business checking account. This will keep your personal assets separate from business assets.
See how simple that was? Forming an LLC for your e-commerce business is a piece of cake. Now it’s time to start operating. Not enough funding? No problem! Read on to learn how LendThrive can help.
Fund Your LLC With LendThrive
If you are growing a small business LLC, partner with LendThrive to accelerate and achieve your business goals. LendThrive understands funding can be difficult to secure as a small business owner, so we’re here to help!
We offer flexible fixed rate business loans for up to $150K to small business owners just like yours. Our easy and quick 24-hour approval process allows you to feel peace of mind and grow your business.
Grow your e-commerce business with LendThrive. Get in touch with a professional lender at LendThrive today and start thriving!