Is an LLC good for an online business?

You’ve likely heard that you can protect yourself from personal liability with an LLC in some instances. But, are there any downsides to having an LLC or other legal entity as part of your business setup? Can you still get sued even after incorporating? And which kind of LLC would work well for me? Let's take a look at all this and more.

If you have been thinking about forming an LLC for your online business, but aren't sure whether it will benefit you or not, here's everything you need to know. We'll also explore why many people think they might want one when they don't really. We're going to cover both advantages and disadvantages so you can make up your mind on whether or not to incorporate.

What is the best business structure for an online business?

The first step in deciding between different types of entities is understanding exactly what each one does. Each has its own pros and cons, but we'll start off looking at two main options - Sole Proprietor and Limited Liability Company. The next question then becomes, "which is better?"

Sole Proprietorships. A sole proprietorship is like being self-employed without any formalities. You can set up a website selling items, open an Etsy shop, etc. This means no taxes, no payroll, and no employees. It's relatively easy to establish. There's no limit to how much money you could potentially earn. However, it comes with a lot of responsibility. If something goes wrong, it falls back on you personally.

Limited Liabilities Companies. A corporation is similar to a sole proprietorship except instead of having full ownership rights over the business, it belongs to shareholders who share equally in profits and losses. Corporations may also form subsidiaries to help manage their investments. They come with tax benefits, but they require a bit more paperwork and planning than sole proprietorships.

There are other forms of business structures available, such as partnerships, S corporations, trusts, and non-profits. These each have their unique uses depending on your needs. For example, a partnership is great for creating joint ventures or holding real estate together. Non-profit organizations allow you to avoid paying certain kinds of corporate income taxes while still sharing profit and loss among members.

While these choices are helpful, you probably won't find them suitable for every situation. That's because the right choice depends largely on your goals and expectations. So let's dive into the answer to the question, "what is the best business structure for an online business?"

What is the best business structure?

When considering the suitability of a particular business structure for your online store, consider the following questions:

Do I plan on growing my business significantly?  A larger scale requires additional responsibilities. For instance, if you decide to sell products internationally, you'll need to comply with international regulations regarding sales tax collection and shipping, among others. Additionally, you'll need to hire employees and pay wages.

Am I interested in protecting myself against lawsuits? An LLC protects you from personal liability for debts incurred by your business. In order to qualify for protection under state laws, however, your business must meet specific requirements. Your state's secretary of state office maintains a list of qualified states. Check out our article on the Best States To Form An LLC to see where you live.

Will I ever need to raise capital through outside investors or partners? Many businesses grow beyond their initial owners' ability to fund growth alone. Raising funds through external sources allows you to expand quickly and effectively.

Are there any special considerations related to running my business remotely? If you run your business entirely from home, or intend to do so, you'll want to keep things simple. Otherwise, you risk becoming overwhelmed by accounting tasks. Plus, you'll miss important opportunities to network with customers.

How much time am I willing to spend managing my business? Managing an LLC takes effort. From setting up bank accounts and filing annual reports to making sure that payments go out on time, it's a lot of extra work. Depending on your circumstances, this may or may not be worth it.

Is an LLC good for ecommerce?

Online shopping is booming. According to Statista, Americans spent $1 trillion dollars online last year. As a result, more companies are turning to eCommerce platforms like Shopify and BigCartel to power their storefronts. Although eCommerce sites often offer lower prices and free shipping, they lack the same protections afforded by traditional brick-and-mortar stores.

For starters, you lose control over inventory management and distribution. Since you operate the site directly, you'll have to deal with taxes and tariffs and other fees associated with importing goods. Also, unlike physical retailers, you can't return unsold merchandise. Lastly, you'll always face the possibility of fraud and theft.

Despite these risks, many small businesses choose to use eCommerce solutions. One reason is simply convenience. Another is that they provide tools to build trust and loyalty with customers. While the latter is certainly true, it doesn't mean that you shouldn't think carefully about how you handle customer data. We've written extensively about privacy concerns surrounding eCommerce websites.

To learn more about this topic, check out our guide to keeping your customers safe online.

Which business structure is most common for home based businesses?

Home Based Businesses. Home based businesses include services provided via telecommuting, independent contractors, freelancers, entrepreneurs, and consultants. Most of these businesses fall under the umbrella term “home business.”

Whether you call it a hobby, side gig, or profession, you have a variety of ways to monetize your skills. Some people turn to freelance writing gigs, whereas others focus on web design or social media marketing. Regardless of your area of expertise, you'll still need to register your business using either a sole proprietorship or a corporation.

To learn more about registering your business, check out our overview of choosing an LLC versus a C Corp. Or read our detailed comparison of the differences between C Corps and LLCs. The bottom line is that you'll need to file taxes separately regardless of whether you choose a Corporation or LLC. Once again, we have a complete explainer on how to prepare your federal and state returns.

In addition, there are plenty of resources you can tap into to ensure that your new venture runs smoothly. Here are three places we recommend checking out:

RocketLawyer, a marketplace designed specifically for the creation, maintenance, and sale of LLCs and other business formations.

BizFilings, another marketplace dedicated to helping you launch and maintain your business.

ZenBusiness, a comprehensive resource hub featuring guides, templates, calculators, and other useful information.

Is an LLC good for online businesses?

As discussed above, an LLC offers several benefits to those who operate an online business. It helps shield you from potential liabilities, increases revenue streams, and provides flexibility. At the end of the day, though, you'll have to weigh the costs of incorporation against the rewards.

Your decision will depend on your plans for expansion, financial stability, and overall success. An LLC will give you peace of mind knowing that you're covered legally. On the flipside, it will consume valuable time and energy. There's no guarantee that incorporating will yield positive results. After all, just because you're incorporated doesn't necessarily mean you'll succeed.

You've heard the saying "If I had known then what I know now about starting my own business, I would have started sooner." It's true that most people start their businesses in their 20s or 30s -- but there are some who don't wait until they're older before taking action. Instead, they take matters into their own hands when they can afford to buy out their co-founders' shares and gain full control over their venture. This may include hiring their own employees, opening up shop on Amazon FBA, going through all the legal paperwork to register as a corporation, and so much more.

But even though these entrepreneurs may make decisions based on financial constraints, one thing we hear time and again is that many choose to go with a Limited Liability Company (LLC). So why exactly are LLCs better than other types of companies? And which ones should you consider using for your business?

Are LLCs worth it?

Yes! When choosing between Sole Proprietorships (SP), General Partnerships (GP), and Corporations, LLCs offer several advantages. One major benefit of forming an LLC is its ability to avoid double taxation: While corporations pay taxes at both federal and state levels, a person running his/her own business only pays tax once at either level. The same goes for general partnerships. Both SPs and GPs will also see any profits made off their efforts taxed twice.

Another big advantage of forming an LLC is its flexibility. Unlike corporations, LLCs allow members to set up different classes of membership, such as professional and personal, which helps them decide whether to keep certain aspects private. For example, if someone owns a medical practice and wants to open a new spa next door, he could form two separate entities: one for medical services and another for beauty treatments. Then, each entity could retain ownership of the respective building while sharing expenses like property management, advertising, etc.

Finally, having multiple owners allows everyone involved to focus solely on growing their business without being distracted by daily operations. Since every member has equal voting rights, this means no team conflict or ego issues to deal with. You'll also find these teams to be less likely to engage in shady behavior since each owner knows that everything they say and do affects the entire group.

So yes, creating an LLC provides numerous benefits compared to other options available to solo entrepreneurs. But what kind of business is best suited for LLC?

What doesn't an LLC protect me against?

While LLCs provide plenty of protection for individuals who want to run their own small enterprise, there are still risks associated with operating a business outside of a corporate structure. Here are just a few things you might encounter:

- If you operate a restaurant or bar, you won't be able to deduct employee business travel expenses or write off meals as eligible work expenses.

- Employees will be unable to file workers compensation claims unless they're working under a specific employer agreement. In addition, employees cannot sue employers directly for workplace injuries. Instead, the injured worker must prove negligence on the part of the employer.

- Businesses that sell products to customers face stricter regulations regarding product safety. These rules apply regardless of whether the seller operates inside or outside of a corporation.

- Individuals selling goods on eBay or Craigslist will have a hard time proving fraudulent intent in cases where fraud occurs. They also cannot qualify for relief under the Consumer Protection Act (CPA) for unfair trade practices.

These examples show that although forming an LLC protects you from some liabilities, it comes with its fair share of drawbacks too. However, unlike corporations, LLCs aren't bound by strict requirements like paying dividends or reporting earnings quarterly. Plus, they can be easier to dissolve.

As mentioned earlier, LLCs come with their own pros and cons. Which one is right for you depends largely on what you hope to achieve by incorporating. Do you plan to expand your current operation or launch a brand new business entirely? Are you looking to diversify your revenue streams by expanding into various industries? Will you be managing other peoples money? Each situation requires a unique approach, so be sure to think carefully about whether a particular model makes sense for your needs. For instance, if you're hoping to raise capital from investors, you shouldn't use an LLC because VC firms generally require investments to be made by shareholders.

And finally, remember that starting a business isn't easy. Even if you follow the steps outlined above correctly, there's always room for error. That's why it's important to hire a reputable registered agent service to handle all the tedious filing tasks required to get your business ready to move forward. A well-established provider will help ensure smooth integration into your local government and give you peace of mind knowing that your business is properly established.

What type of business is best for LLC?

The answer here really depends upon what you intend to accomplish with your business. Some common scenarios to consider include:

- An individual entrepreneur wanting to incorporate her business as an S Corporation, C Corp, or partnership. She could opt for a single class of membership, allowing her to maintain complete control over her firm. Or she could divide membership into categories including family and friends, clients, suppliers, staff, and future employees. Either way, she wouldn't have to worry about potential conflicts of interest arising due to unequal decision making among partners.

- A couple who wish to establish a joint venture or marriage license partnership. In order to prevent disputes later down the line, they could elect to have a board of directors oversee the day-to-day operations of the business. Alternatively, they could simply sign a document indicating their intention to enter into a partnership. No matter what route they choose, they'd enjoy greater flexibility in terms of deciding how to split profit and loss responsibilities.

- Entrepreneurs who wish to receive funding from third parties. Rather than raising funds independently by applying for loans, grants, or equity, they could instead seek investment opportunities from accredited investors. To meet the minimum threshold for investing, however, they'll need to pass through additional hoops. First, they'll need to obtain SEC registration statements, which involves filling out forms detailing their company's assets, revenues, and net income. Next, they'll need to undergo interviews conducted by qualified professionals who evaluate their qualifications to invest in startups. After passing muster, they'll be allowed to participate in public offerings alongside accredited investors who meet the aforementioned criteria.

- Professionals interested in establishing themselves as freelancers. Whether freelance writers, photographers, consultants, lawyers, accountants, or others, they could set up a LLC to protect their intellectual property, streamline client communications, and secure a steady source of income. With an LLC, they'll also save on unnecessary overhead costs by avoiding office space rent payments and health insurance premiums.

- Small businesses seeking to grow larger. If your startup already employs 10+ people and generates $10k per month in annual sales, you probably don't need an LLC anymore. On the contrary, you can continue operating as a sole proprietor. Yet if you expect to reach profitability within five years, you should consider setting aside some cash reserves by registering your business as an LLP. By doing so, you can increase your chances of success by receiving preferential treatment from lenders and granting yourself access to valuable perks afforded to LLPs.

In short, an LLC offers great versatility. Depending on your goals, it could serve as the perfect fit for your budding business ventures. Just be careful to stay informed about relevant changes in the laws governing LLCs, especially if you plan to pursue funding from external sources. As with anything else related to entrepreneurship, proper planning ahead ensures smoother sailing throughout the journey.

Do Etsy Sellers Need an LLC?

Many Etsy sellers turn to LLCs after discovering that they can't claim expenses like car mileage, gas, parking fees, or utility bills as deductions on their Federal Income Tax Returns. Additionally, they often struggle to find ways around the IRS's disallowance of itemized deductions for home mortgage interest and charitable contributions. Because of these reasons, many Etsy merchants prefer to remain independent contractors rather than become incorporated.

However, if you're self-employed and live outside of the United States, you may not be subject to US tax law. Therefore, you might still be entitled to deduct business-related expenses. Also, depending on your country's tax code, some of those expenses may actually be deductible.

To learn more, check out our article explaining your options for claiming business expenses abroad.

When it comes time to start your own online store or service, there's no better way to protect yourself than with an incorporated entity called a Limited Liability Company (or LLC). An LLC offers several advantages over other types of businesses, including greater protection from personal liabilities, more flexibility in managing partners' rights and responsibilities, and less risk of being forced out of your business due to litigation.

If you're considering incorporating as part of your startup plans, we've got some advice on choosing the right type of business form for your needs. But before diving into that discussion, let's first take a look at why many people choose to incorporate their small businesses instead of operating them as sole proprietorships.

How do you structure an ecommerce business?

One reason so many entrepreneurs decide to incorporate rather than operate as a sole proprietorship is because they want to limit their personal exposure to legal risks. In a sole proprietorship, all profits and losses go directly to the owner personally. If anything goes wrong, they could end up taking the hit.

With an LLC, however, only certain owners can have access to the company's assets. The rest of the members don't have any control over the money earned through the business. Any income generated will flow straight back to the shareholders. To make matters worse, individual members may also face lawsuits from third parties who believe they were harmed by the actions of the company.

Another benefit of having an LLC is that its existence allows each member to keep his/her shares separately under his/her name. This means you won't lose ownership of those shares when someone buys them. You'll still retain full title over your property once you sell it.

On the flip side, it's important to recognize that not every entrepreneur wants his or her business to become public knowledge. For example, if you run a bakery but prefer to remain anonymous, maybe it makes sense to set up shop as an LLC.

Also consider whether you plan to offer services across multiple states. Many states require businesses to register with local authorities. That means anyone who lives within the same state as yours would see your business information if it's registered there. However, registering with a different state doesn't necessarily mean that everyone living outside of that area has access to your business info.

In addition, even though most states allow companies to list addresses throughout the country, you might find that doing so raises privacy concerns among potential customers. It's best to consult with a lawyer about these issues before deciding which kind of business form works best for you.

You can learn more about setting up an LLC here.

What is the downside to an LLC?

Despite all of the benefits of forming an LLC, there are still downsides associated with this choice. One problem is that the IRS treats LLCs differently than corporations. Corporations must pay taxes based on their profit-and-loss statements whereas LLCs aren't required to submit such reports. Instead, the IRS relies on the annual returns filed by each member to determine taxable income.

The lack of transparency inherent in this process creates problems for taxpayers who owe money to the IRS. Because the IRS isn't able to track the exact amount of money owed to each person, it becomes difficult to figure out who actually owes whom. When you file an amended return, you must prove that the correct amounts were paid to the government. Furthermore, since LLCs are considered pass-through entities, the IRS considers them separate legal entities from their members. As a result, each member is responsible for filing his/her own 1040 tax forms.

There's another issue related to LLC taxation. Although the IRS requires individuals to report their share of net income received from partnerships, LLCs are exempt from reporting requirements. That means that the IRS sees your earnings without knowing exactly where they came from.

What are the pros and cons of starting an LLC?

As mentioned above, an LLC provides several key advantages over running a single-member corporation or sole proprietorship. Let's now discuss the reasons behind this decision.

Pros

Limited Liability: With an LLC, you get additional layers of protection against personal liability beyond what you'd receive by operating solely as a sole proprietorship. Each member holds a percentage of the company's equity and owns a portion of the company's assets. Under the law, he/she cannot be held liable for the debts of the company unless he/she knowingly participates in fraudulent activity or intentionally commits malpractice.

Flexibility: Since each shareholder owns a smaller piece of the pie, you won't experience the headaches typically associated with large corporate structures. Your ability to manage day-to-day operations will improve dramatically.

Taxes: Due to the fact that LLCs aren't taxed like regular corporations, you save both time and money on taxes compared to a traditional S Corporation. Plus, you'll enjoy lower rates than standard C Corporations.

Cons

Costly: Starting an LLC can cost hundreds of dollars per year depending upon the size of the business. Fees include registration fees, professional services costs, and attorney and accountant expenses. And, remember that you'll need to hire a qualified attorney and bookkeeper to help administer your new business.

Lack of Transparency: Unlike a corporation, an LLC does not provide much transparency regarding its finances. While you probably wouldn't mind keeping your financial records private, others involved in the organization may feel differently. A lawsuit involving one member of the LLC could cause other members to lose confidence in the management team. Also, while an LLC is treated as a distinct legal entity, it operates just like a partnership. Therefore, each partner is equally accountable for decisions made during the course of operation.

Tax Problems: Even after paying off the initial startup costs, maintaining an LLC often ends up costing more than a sole proprietorship. The main reason behind this situation is that LLCs don't pay federal taxes until they earn $50,000 or more in gross receipts annually. This threshold varies according to your location. Meanwhile, sole proprietorships can deduct losses immediately.

Additionally, the Internal Revenue Service uses your yearly income statement to calculate your LLC's profitability. So, if you owe money to the IRS, then it's unlikely that the IRS will use the LLC's numbers to collect payment.

Although these drawbacks sound serious enough to warrant reconsidering your options, they shouldn't dissuade you from creating an LLC. After all, your business will likely grow well past the point of earning $50,000 in revenue annually. At that stage, you'll certainly have plenty of funds available to cover any outstanding obligations.

Furthermore, as long as you follow the rules for structuring your LLC correctly, you can avoid the worst consequences of failing to meet the minimum payout requirement.

What are the tax disadvantages of an LLC?

While an LLC gives you the opportunity to shield yourself from personal liability, it also limits your ability to claim any deductions. This means you won't be eligible to write off any losses incurred while operating your business. Remember that you'll have to declare your LLC's income and loss as "passive" income. Consequently, you'll always have to pay taxes on it regardless of how profitable the enterprise happens to be. Additionally, since LLCs generally generate fewer expenses than conventional businesses, they produce lower incomes. These reduced revenues lead to higher tax bills.

For instance, suppose you own two identical businesses that each bring in $100,000 in total sales each year. Assume further that you want to offset half of the loss from one of your enterprises. In order to achieve this goal, you'll have to spend $10,000 on advertising and marketing efforts. The remaining balance ($90,000) will be used to purchase inventory. Now assume that you invest $20,000 in each venture. Finally, let's say that your expenses come to $70,000 for both ventures. By subtracting the latter from the former, you arrive at a gain of $30,000.

Now compare this scenario with the following: Suppose you owned a sole proprietorship that brought in $200,000 in annual sales and spent $60,000 on expenses. Then again, imagine that you invested $40,000 in each venture. Subtracting these figures from the original totals results in a net loss of $140,000. The difference between the scenarios is that, although you could write off all of the expenses you incur while working for your LLC, you'll never be able to write off losses from your sole proprietorship.

In short, the upside of incorporating outweighs the negative aspects. Still, it pays to check with a certified public accountancy to ensure that you understand the implications of adopting a particular business model.

What are the steps involved in establishing an LLC?

To establish an LLC, you'll need to complete three basic tasks:

1. Choose an appropriate name

2. Register the business in your home state

3. Obtain a domestic or foreign registered agent