Do You Need An LLC To Sell On Shopify? All You Need To Know

0 comments

Do You Need An LLC To Sell On Shopify? All You Need To Know

Table Of Contents

Do I need an LLC to sell on Shopify? It's not a surprise since Limited Liability Companies (LLCs) have been the most common type of business organization for partnerships for 20 years, making up 71.7% of all partnerships. 

This article is your comprehensive guide to making this critical choice. We'll explain the legality, pros, and cons of creating an LLC for your Shopify company and answer all your questions. By the conclusion, you'll have the information to choose the structure that best meets your goals confidently.

What Is An LLC? Do You Need An LLC To Sell On Shopify?

Limited Liability Company

LLC stands for Limited Responsibility Company, a designation for a corporate form that provides owners with personal responsibility protection and tax advantages. Because LLCs essentially separate business owners from their corporations, they are not liable for any legal infractions committed by their companies.

For the question, "Do You Need an LLC for Shopify?". The answer is "No." Shopify enables you to sell things as a single proprietor, which means you and your company are legally the same entity. While this is a straightforward setup, it provides less security than an LLC. 

Let's examine the advantages and disadvantages of creating an LLC to help you decide which is best.

The Benefits And Drawbacks Of Shopify Seller LLC Formation 

The Benefits Of Shopify Seller LLC Formation

The LLC is a popular option for Shopify merchants. However, like with any company structure, there are pros and negatives. Discuss its benefits and drawbacks before determining whether an LLC is ideal for your Shopify company.

Advantages Of Forming An LLC

Here are the five primary advantages of incorporating an LLC:

1. Personal Liability Protection

Personal Liability Protection

Risk in business is inevitable. This is why you need an LLC.

As we’ve said above, an LLC distinguishes between your assets (home, vehicle, and money) and your business. Think of it like a shield for your personal life. This means someone who sues your brand says only to take the store's belongings, not your lovely sofa or dream trip money.

However, the exception is if you sign a personal guarantee for company finance, which allows creditors to hold you personally liable for repaying the loan. Also, you are personally liable in a lawsuit if there is proof of fraud or carelessness that causes injury to the people involved.

2. Low-Cost And Simple To Join

Compared to corporations, forming an LLC for your Shopify store is simple (and will not break the bank!). We're talking about less than $1,000 in most circumstances.

Sure, the actual procedure may differ somewhat according to your state, but the paperwork is simple.  It's far easier than wading through corporate legalese, so compare it to creating a new product listing on Shopify.

Here's an overview of everything you'll need:

  • Formation Documents: A brief form and "Articles of Organization" (your LLC's introduction). You don't need legal expertise—there are many templates online.
  • Operating Agreement: Defines LLC ownership. Templates are available, but a tax expert may provide peace of mind.

But wait, don't LLCs need a lot of continuous maintenance? Nope, LLCs have lower maintenance requirements than corporations. There aren't any yearly shareholder meetings or elaborate reports. All you need is a registered agent (someone who receives legal paperwork on your behalf), which may be a friend or family member in certain areas.

3. Flexible Taxation

The third of the primary advantages of using an LLC as your company structure is its flexibility in terms of taxes. LLCs don't face double taxation, where companies pay taxes on corporate earnings and owners pay taxes on their income.

While all LLCs benefit from pass-through taxes, they may be classed in four ways for tax purposes. The categorization selected influences how earnings and losses are distributed to owners and how self-employment taxes are handled. A breakdown of the four classifications:

  • Sole Proprietorship (Single-Member LLCs Only): This categorization transfers all firm earnings and losses to the lone owner's tax return. As a self-employed person, the owner pays income tax and Social Security and Medicare taxes.
  • Partnership (Multi-Member LLCs Only): Like a single proprietorship, LLC members share earnings and losses according to their ownership ratio. Members file personal tax returns and pay self-employment taxes on their share of the revenue or loss.
  • S Corporation (Single or Multi-Member LLCs): Profits may be distributed as payroll-taxed salaries. The remaining earnings are distributed to the proprietors as income without self-employment taxes.  S companies also avoid double taxes.
  • C Corporation (Single or Multi-Member LLCs):  Most LLCs should avoid this most complicated categorization. Corporations pay corporate income tax on profits. Double taxation occurs when LLC members receive dividends subject to personal income tax.  While owners don't pay self-employment tax, LLC employees pay payroll taxes.

The best LLC tax categorization depends on ownership structure, profit distribution choices, and tax ramifications. Consulting a tax specialist to identify the best categorization for your case is advised.

4. Ownership Flexibility

Unlike corporations that have restrictions on member kinds and numbers, LLCs offer a broader choice of ownership options.

For example, imagine you are a baker who creates a successful LLC that sells cupcakes. You (the baker) own 100% of the company. But your buddy, a marketing expert, wants to collaborate. With an LLC, you may quickly enroll them as a member and agree on an ownership portion based on their participation. In this manner, people benefit from the earnings and have a part in the company's success.

This differs from a sole proprietorship, in which you are the lone owner and cannot readily split ownership or earnings with a co-working. An LLC's flexible structure allows you to bring them on board as a member and formalize their position while still keeping some control over the firm.

5. Management Flexibility

There is no limit on the number of members holding an LLC. This enables you to bring in partners or investors as your company expands.

Furthermore, unlike corporations, you are not obliged to establish an official board of directors or officials. Instead, LLCs may be controlled by either members or managers.

For example, a small LLC with two founders may select member management to ensure equitable decision-making.  However, a bigger LLC with several investors may choose a manager-managed structure, which allows them to outsource day-to-day work while maintaining control via ownership.

Disadvantages Of Forming An LLC

While LLCs provide an attractive mix of personal asset protection and tax flexibility, there are more than one-size-fits-all answers. Here's a deeper look at some possible negatives to consider when considering if an LLC is the best option for your Shopify business:

  • Personal Liability Exceptions:  Remember that this protection has limits. Fraud or willful misbehavior might still result in personal culpability.
  • Self-Employment Taxes:  LLCs escape corporate income tax, but members may pay self-employment taxes. Consult a tax advisor to understand LLC tax ramifications.
  • Transferring Ownership:  Unlike C companies, LLCs are more complex to transfer ownership in. Your LLC operating agreement's processes make it possible.

LLC and statutes vary somewhat per state. We suggest reviewing our state-specific recommendations for founding LLCs in your area to guarantee a successful setup. 

The Difference Between An LLC vs. A Sole Proprietorship 

An LLC vs. A Sole Proprietorship

The most common Shopify business types are sole proprietorships and LLCs. Each has advantages, but understanding their differences is essential to picking the right structure.  

Let's examine sole proprietorships and LLCs' main distinctions:

Feature

Sole Proprietorship

LLC

Ease of Filing Taxes

Very Easy - File business income on your personal tax return (taxed once).

More Complex - Requires separate tax filing for the LLC but avoids double taxation.

Personal Liability

High - The owner is 100% responsible for business debts and lawsuits. Your personal assets are at risk.

Limited Liability protects your home, automobile, and money from most company obligations and claims. Consider it a personal shield.

Ideal for

Solo businesses with low risk and minimal profit.

Businesses seeking personal asset protection and potential for growth. Most Shopify stores fit here!

The best structure for your organization is determined by your goals and risk tolerance. An LLC provides significant security for most Shopify enterprises, but a single proprietorship may be preferable for a tiny side hustle.

Read more: What are the benefits and drawbacks of becoming a sole proprietor? 

Do Other Considerations Apply To Legally Establishing A Shopify Business? 

Starting a Shopify company is an exciting move, but there are certain legal and tax implications to consider. Here is a simple tutorial to help you get started:

Feature

Sole Proprietorship

LLC

Business Structure

Simplest uses SSN for taxes

Popular choice, protects personal assets

Ideal for

Low-risk, single-owner businesses

Most Shopify stores

Tax Filing

Use your personal tax return

Separate tax filing required

EIN Required

No

Yes (recommended)

Business Licenses

It may require a state/local license

it may require a state/local license

Dropshipping License

Varies by location

Varies by location

Remember: Choosing the correct structure and securing the relevant permissions ensures that your company runs smoothly and lawfully.

Read more:

  • Partnership Business Benefits and Drawbacks
  • Advantages and Disadvantages of Corporations
  • What Is An EIN? Do You Need An EIN To Sell On Shopify?

    Employer Identification Number

    Completing this separation requires an Employer Identification Number (EIN) from the IRS. Consider an EIN to be your company's unique social security number. It enables you to submit company tax returns separately from personal tax returns, which promotes clean financial records and simplifies tax filing for your LLC.

    Do you need an EIN for your Shopify store? The answer depends on your situation. You are not legally obliged to get an EIN if you run your Shopify business as a single proprietor without workers. As a lone owner, you may file business taxes using your SSN.

    Getting an EIN is a simple and free procedure that the IRS gives. While not required for all LLCs, it is strongly advised for Shopify firms that want to keep a clear separation between their personal funds and company activities.

    FAQs

    1. Can I Form An LLC If I'm Not A US Citizen?

    Yes, a foreigner may establish a limited liability corporation in the United States. The LLC's organizer does not need a permanent address in the United States; a house address or a mail-receiving service address might serve as the LLC's business address.

    2. Do I Need A Lawyer To Set Up An LLC, Or Can I Do It Myself?

    Absolutely, you can create an LLC yourself and save money. If your LLC has a basic structure and you're familiar with web resources and state guidelines, making it yourself might be smart.

    However, if your company structure is complex, you have issues with particular legislation, or you need clarification about any element of the procedure, talking with a lawyer is strongly advised.

    Also, if you anticipate considerable development or may want legal guidance, consider talking with a lawyer throughout the creation process. They can put you on the correct legal basis from the beginning.

    3. Does Having An LLC Affect How My Shopify Store Appears To Customers?

    No, registering an LLC does not directly impact how your Shopify business looks to clients daily.

    However, a few consumers may consider an LLC a more established and trustworthy company, mainly if your shop is young or works in a competitive field. An LLC provides limited liability protection, which may engender trust among specific clients.

    Read more: The Best Method to Become a Trusted Store Shopify.

    Final Thoughts

    So, do you need an LLC to sell via Shopify? It is not essential to begin, but it is a crucial instrument to consider for safeguarding your assets and stimulating future development. 

    Now that you've established a solid basis for your company, why not concentrate on creating a visually appealing and user-friendly online store?  

    EComposer Builder Page's interactive #1 drag-and-drop editor lets you rapidly design any page type or section. This powerful tool enables you to build landing pages, product pages, customizable footers, and collection pages without coding.  

    EComposer Builder Page

    Let EComposer build a beautiful and functioning online shop while you focus on your items and company strategy.

    May_2024_EC_Facebook_group_invite-_Blog_footer_1cff0281-7bbe-4adf-a48b-b927509b0f36

    Related Posts