Thinking of operating your e-commerce as an LLC? Here’s what you should know.
If you are thinking of starting an e-commerce business in America, now is the time to do so. According to Statista, the number of digital buyers in the U.S. is projected to reach 278.33 million in 2024. This is an increase from 256 million buyers in 2020.
Whether you have an e-commerce business or are considering dipping your toes in the online business world, one of the most important questions you will need to address is whether which business format you should use.
LLC or sole proprietorship?
While it’s tempting to consider a sole proprietorship, especially if you are planning going solo, you should be aware that the IRS views you and your business as one and the same, which could potentially put your personal assets at risk. This means the courts can seize your personal assets like your home, vehicle or personal bank account in the event your business goes into debt.
Forming an LLC is another option to consider. Almost anyone can form an LLC (there are a few exceptions), irrespective of whether your business has a single owner or more. LLCs also have the added benefit of personal liability protection, which means your business is viewed as a legal, separate entity, safeguarding your personal assets from being used to pay business debts or in the event of legal disputes.
What protection does an LLC offer my online business?
1. Simple Taxation
An LLC enjoys pass-through taxation. In a nutshell, this means an An LLC doesn’t pay taxes directly, but the company’s income is passed through to the owners who claim the LLCs profits and losses on their personal tax returns. If you form an LLC to run an online business, you qualify for the 20% pass-through deduction.This deduction, which is in effect until 2025, allows owners of pass-through entities (which LLCs are), to deduct for income tax purposes, up to 20% of the nett income their businesses earn. So, if you earn a profit from your online business, you will get this deduction.
2. Keep business income separate
When you’re starting out, it’s crucial to split up your personal and business finances. Doing this makes it easier when it comes to tax time and prevents you from dipping into the business account for personal expenses. LLC owners are able to open a business bank account and acquire business credit cards, which makes it easier than for sole proprietorships, to keep their finances separate and organized. In addition, banks and creditors will view you as more credible, which enhances your chances of loans and other forms of credit.
2. Adaptable tax structure
LLCs can choose how they want to be taxed. Because the IRS doesn’t have a specific category for LLCs, they are treated as “disregarded entities”, allowing LLCs to be taxed as either a:
- sole proprietorship (single-owned entity where the owner is legally responsible for its debts),
- partnership (a business association of two or more individuals) or a
- S Corporation (this is not a type of business entity, but an IRS classification where owners pay income tax and self-employment tax on a predetermined salary).
3. Flexible management
LLCs may consist of a single owner or an unlimited number of members and have flexibility in how they are managed: by owners (called members) or managers, which can consist of members or non-members. In addition, LLCs can decide how they want to split up the profits. Unlike corporations, LLCs have fewer corporate record keeping responsibilities: LLCs don’t have to hold regular board meetings, shareholder meetings, record company minutes etc. This informal structure allows you with more flexibility in the way you run your business and make decisions.
Do I need a physical address to operate my online entity?
When running an e-commerce business, customers and clients will most likely contact you online or on the phone. It is advisable, however, to have a physical address, and while using your home address is an option, for security and privacy options, may not be feasible. When forming an LLC, state laws require you to have a registered agent, who is someone that accepts or sends legal documents on your company’s behalf. To maintain privacy, most LLCs opt to hire a registered service to handle this side of their business.
Also, having a physical address enhances your business credibility and professional image, especially with potential clients worrying that an online business without one might be a scam or disappear without a trace. Fortunately there are options available. For a reasonable fee, you can make use of the following:
Virtual offices and business addresses are a good option if you’re just starting out or a small home-based business. It provides you with a physical address and protects your personal and home privacy and offers many other services such as an office phone number, receptionist service and mail forwarding services.
Coworking spaces provide you with a professional workspace like the use of Wi-Fi and other shared resources without the costs of leasing private office space.
Do I need a business licence for my online entity?
Operating an e-commerce business, whether you decide to run it from home or not, does not exclude you from needing certain business licenses and permits. To find out what licences and permits you need, check with your local city, county and state. For example, you’ll need a federal license if you plan on selling alcohol or firearms. You can review federal licences and permits here. State licences differ from state to state, so be sure to check out those. In addition, running your online entity from home, may also subject you to legal requirements like zoning laws. Check with your local planning office if there are any restrictions in your area like the use of signage.
Do I need business insurance?
Yes, to operate lawfully, business insurance protects your LLC in the event of a loss. There are several types of insurance policies that offer protection against various risks, and depending on your type of business, some will be a better fit than others. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. On average, eCommerce businesses in America spend between $350 – $900 per year for $1 million in general liability coverage.
Other types of coverage your eCommerce need include:
Product Liability Insurance covering your business when for example, someone claims your product caused them injury or illness.
Data Breach Insurance covers damages resulting from stolen customer information due to cyber attacks.
You can also opt for a Business Owner’s Policy that bundles all types of insurances your LLC might possibly need. Most range between between $700 and $3,800 a year, depending on the type of insurance your business needs. Conduct thorough research into the type of risks your business is faced with before getting a business insurance quote from a trusted resource.
Your ecommerce is now up and running. Now you will want to ensure your business stays compliant. To do this, you will need to fulfill all legal requirements like renewing your licenses and permits, reporting and paying taxes and filing your annual reports.