E-commerce represents the new frontier for entrepreneurial-minded people. There are reportedly upwards of 26.5 million e-commerce platforms worldwide, with the U.S. dominating the field with more than 14 million. America’s nearest competitor, the UK, has only about 1.2 million to its credit.
Some of the largest purely digital companies — Amazon, eBay, and Etsy — started as relatively modest organizations and have enjoyed exponential growth. Their presence has not deterred innovative thinkers from making a digital claim in the global economy.
Online sales have skyrocketed since the beginning of the health emergency and show no signs of slowing. According to ZipRecruiter, the average e-commerce business owner earns more than $127,00,0 with top-tier operators taking home more than $339,000.
People who want to tap into the steady revenue streams and benefits of owning and operating an e-commerce business need to officially form a company. If you want to join the e-commerce ownership ranks, these are reasons why creating a Limited Liability Company (LLC) may be in your best interest.
Why E-Commerce Start-Ups Choose LLCs
Known for protecting owners from civil litigation and business-related debts, all 50 states allow people to form LLCs. While each state has a slightly nuanced approach to acquiring an in-state business name, taxation, paperwork, and bureaucracy involved, limited liability companies remain a popular choice among e-commerce ventures. These are common official documents needed to file an LLC.
- Articles of Organization
- Operating Agreement
- Employer Identification Number (EIN)
- Annual Reports
States vary on which documents they require to recognize a legitimate business. Some ask only for an EIN and articles of organization, while others call for a variety. The common theme that runs through LLC formation is that states task owners and operators with less paperwork and a streamlined process compared to others. Entities needing even fewer hard copies or electronic filing typically do not provide adequate protection against civil lawsuits or creditors.
Benefits of Forming an LLC for e-Commerce Businesses
Although an LLC allows people to create a legal barrier to protect personal wealth and assets, the structure lets owners flow revenue through the e-commerce business onto their individual tax returns. This mechanism sidesteps state business taxes, giving owners an opportunity to keep more of their hard-earned money. These are other benefits commonly enjoyed by e-commerce LLCs.
- Operational Flexibility: An LLC can be run by a single owner, its members, or managers. The business can be run remotely or at a brick-and-mortar facility. An LLC can sell products or services, and many e-commerce operations use the dropshipping model. In these cases, a savvy business professional enlists the support of supplies to fulfill orders. The e-commerce company takes a percentage for processing purchases and payments.
- Streamlined Compliance: Secretaries of state ask little of LLC owners and operators. It’s common to file sales and use taxes, and sometimes an annual report. But, overall, the required official documents take little time. An LLC generally calls for less stringent record-keeping. That means go-getters can spend more time growing their business and their salaries.
- Enhanced Privacy: If you wish to maintain your privacy, there are states that allow e-commerce business owners to keep your identity separate from the entity’s. By filing the LLC with a registered agent, states such as Delaware afford owners the right not to have their names disclosed.
- Credibility and Trust: Forming an LLC demonstrates to vendors, clients, and others that you are not operating a loose side hustle. An official entity, filed with the state and possessing an EIN, indicates legitimacy. This status makes it easier for organizations and everyday people to trust products, services, warranties, and promises made by ownership.
- Open Business Accounts: Separating business and personal accounts is essential to maintaining an LLC’s liability and financial protection. Should a customer or another company file a civil lawsuit against your LLC, lawyers may attempt to “pierce the corporate veil.” That means the business owners played fast and loose between personal and business endeavors. Establishing an LLC allows owners to secure separate and distinct business checking, savings, and credit card accounts.
There are wide-reaching types of e-commerce businesses that flourish under the LLC banner. Your start-up could carve out a niche in wholesale, B2B, retail, dropshipping, digital products and services, or subscriptions, among many others. The entity you select will have a substantial impact on long-term success and profitability.
How Does An LLC Compare to Other Business Structures?
Making a truly informed decision about which business entity to form requires due diligence. Although e-commerce and other small and medium-sized enterprises typically gravitate to the LLC, your unique situation and venture may not follow suit. These are other types of business entities available and the associated pros and cons.
Sole Proprietorship
As the name suggests, a sole proprietorship is an outfit owned and operated by one person. The owner-operator exercises complete operational control. They are generally used for side hustles, handyman operations, and gig professions. Hard-working community members sometimes create sole proprietorships to present their side gig as an official business.
- Sole Proprietorship Pros: This structure offers agility and creates a sense of trustworthiness. The revenue generated by the business is not taxed. Like an LLC, it flows through to the individual’s personal income tax filing. Sole proprietorships generally require only minimal filings with the state. It’s usually not necessary to apply for an EIN because the owner is the default workforce.
- Sole Proprietorship Cons: Unlike an LLC, a sole proprietorship offers no protection against civil liability or creditors. Any missteps by the business or debts accrued are the responsibility of the business owner. Moving forward with an e-commerce sole proprietorship may put the owner at risk.
Partnership
A partnership involves creating a legally binding agreement between two or more parties. Its operating agreement defines the partnership’s revenue sharing, contributions, fiduciary duties, and obligations. This entity type requires applying for an EIN, opening business accounts, and filing a substantial number of official documents.
- Partnership Pros: A partnership delivers the same level of liability and creditor protection as an LLC. It can also be run by the partners or enlist a manager to oversee operations. It’s generally a good choice for complex organizations with significant staffing needs.
- Partnership Cons: A partnership does not afford the agility and tax benefits of an LLC. Business revenue is usually taxed by the government before stakeholders receive dividends and salaries.
Corporation
Forming a corporation may make sense if you plan to sell shares, onboard investors, and hire professionals to manage day-to-day operations. The courts have found that corporations hold many of the legal rights of citizens. Members of the corporation elect a board of directors to oversee the leadership team and make critical decisions.
- Corporation Pros: Like LLCs, corporations insulate owners, shareholders, and other stakeholders from civil liability and creditors.
- Corporation Cons: Corporate taxes are deducted from the entity’s revenue before profits are distributed. Forming a corporation requires numerous and complex legal document filings and bookkeeping.
State-Specific LLC Considerations
Choosing the best state to open an LLC tasks prospective e-commerce business owners with conducting significant research. Some states do not levy a personal income tax, while others charge varying sales and use fees. Issues such as property values, quality of life, and infrastructure are all valid items to consider when choosing the right state to open an e-commerce LLC. Each state takes a slightly different approach to filing the entity. As an example, registering an LLC in New York requires you to do the following.
- Secure an Available LLC Name from the Corporation and Business Entity Database
- Appoint a Registered Agent
- Prepare and File Articles of Organization
- Pay a Standard Filing Fee
- Publish a Notice of Organization in Two Newspapers for Six Weeks
- Craft and Adopt an Operating Agreement
- File a Biennial Statement with the NYS Department of State After the initial Articles of Organization were Filed
In an effort to demonstrate the differences between how states handle LLC formations, consider how California works. California has a “Bizfile Online” platform via the Secretary of State’s office. The sparse website has a variety of e-forms available and options to file online. These are steps involved in filing an LLC in California.
- Conduct a Search and Select an Available LLC Business Name
- California has Specific Criteria for Business Names
- Choose a Registered Agent
- Craft and File Articles of Organization
- Create and Submit a Statement of Information
- Create an LLC Operating Agreement
- Pay Filing Fees and Annual Franchise Taxes Upfront
The Golden State requires e-commerce LLCs to acquire a general business license. Depending on the products or services, additional licenses and permits may be needed to operate.
Tap into Growing E-Commerce Market By Forming an LLC
The e-commerce sector is expected to grow by upwards of 39 percent in the coming years. Global revenue streams are on pace to surge from $5.8 trillion in 2023 to more than $8 trillion in 2027. In the U.S., e-commerce LLC owners can anticipate the market to exceed $1.9 trillion by 2029. Starting an e-commerce LLC gives savvy business professionals an opportunity to garner wealth and an improved quality of life.