We many times get the question of whether starting a drop shipping store on Amazon or Shopify requires the entrepreneur to register a Limited Liability Company (LLC) or corporation with their state of choice in the US. There is not a universal response to this question, as the answer depends on each individual’s unique circumstances.
So what exactly are these factors? The factors that will largely decide whether you need an LLC for this purpose include the residence or citizenship of the entrepreneur, risk mitigation considerations, business earnings, and ongoing filing costs. Let’s look at these factors in a bit of detail from the perspectives of US and Non-US persons.
The simple answer is that for a non-US person yes – you will need an LLC.
When setting up your account for your online store, you will find that you need to have an EIN (Employee Identification Number) in order to integrate with a payment gateway such as Stripe or PayPal. And the fact is, to have EIN, you need to have a company incorporated either as an LLC or corporation in one of the states in the US. At BizLauncher, that is our specialty. We will be able to navigate the legal framework at the state and Federal level here in the US to have your business registered and your tax identification numbers assigned. We also give you access to resources that will help you better understand your specific tax and filing obligations.
US Persons – When is the RIght Time to Form an LLC?
While as a US person you do not necessarily need an LLC to start your E-commerce or dropshipping store, there are significant benefits to having one formed for that purpose. But before we get there, one of the things that has to be considered is timing.
So, when is the right time to form an LLC?
If you are just starting out and have not yet figured out exactly what you’ll be selling online, or you are just earning a couple hundred dollars from your online store sporadically, it may be best to operate as a sole proprietor before seeking to form an LLC.
Why do we say this?
That fact is that starting an LLC comes at a cost. The state you choose to register your business in charges a specific fee, and there are other costs you will incur to keep your business current or in good standing such as annual filings etc. You want to ensure that your earnings from your business are consistent and robust enough to handle these costs. Otherwise, you will be consistently using personal resources to keep your e-commerce business afloat.
Reasons for Forming an LLC – Risk Mitigation
Let us look now at the risk of not having an LLC. While you can start out as a sole proprietor, there are certainly risks to taking that route. The first major risk is the risk of loss from lawsuits or other legal proceedings as your personal assets may be used for payment of business debts and judgments as you will not have limited liability.
Another factor regarding risk mitigation you will need to consider is the type of products that you will be selling. If you will be selling products that entail high risk (medical supplies, supplements, cosmetic products), you will especially want to ensure there is a buffer between your personal assets and issues related to your business.
Reasons for Forming an LLC – Tax Benefits
Unlike a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses “pass through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership. Because of this, there can be significant tax benefits to having an LLC registered through which you run your e-commerce business.
Another reason is that sometimes people prefer conducting business with a legally formed entity rather than with an individual.
If you’d like to discuss the specifics of forming an LLC or any other legal business entity in the US, please contact us at BizLauncher. We provide you with a simple and affordable way to start your business so you can start pursuing your entrepreneurial dreams.