If you are reading this article, then you have asked yourself the question almost every entrepreneur asks. Do I need an LLC? And if you wish to sell your products or services online, then you might also be wondering, “Do I need an LLC for my online business?”
Well, the short answer is, No, since there’s no legal requirement that you register for an LLC before you can sell your stuff online. And because they are usually consumer goods and services, they don’t require Government approval. Also, the things you sell through most online sales platforms aren’t federally regulated.
However, there are other aspects of doing business that you need to consider. First, as an online business, you’re not only going to interact with those within your state. Your customer base may cover other states within the country and internationally. Secondly, once you start making a profit, the IRS will be interested in your business. So to avoid running into fines, tax penalties, and other problems, you’ll need an LLC.
Now, let’s see what an LLC is, the reasons you might want to get one, and how you can register for one.
What is a Limited Liability Company (LLC)?
An LLC known as a Limited Liability Company is the registration for small business owners. An LLC license provides the liability protection of a corporation but without the complicated taxation process. A sole business owner, several partners, or businesses can register for an LLC. Generally, anyone who has good legal standing to live and work in the U.S. can form an LLC. Also, as an e-commerce business owner, you might want to register your business as an LLC for the following reasons:
- Your online business has gotten off the ground, and you are making a profit from sales.
- You want to separate your business from your personal assets and avoid risks.
- Having an online business that comprises multiple partners or enterprises.
Yet, not every online business can operate as an LLC. For instance, if your business deals with the banking or insurance sector, registration as an online business LLC will be restricted. Other restrictions may also vary from state to state.
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What does an LLC protect?
An LLC provides its owners with limited liability, which means that as LLC owner, you are not personally responsible for paying LLC business debts, especially those you have not personally guaranteed. The LLC limits the business’s liability to just the business, thereby protecting your personal assets from claims such as lawsuits against the business.
LLCs can insulate you from personal liability for injuries by your LLC’s business activities, for example, if an employee injures someone isolate you from liability. Yet, if you form an LLC, you remain responsible for your wrongdoing, such as fraud or hurting someone through your negligence.
What an LLC allows you to do
Under an LLC, you will not need to file a separate tax return for your business. Also, with an LLC, you avoid double taxation, which is a complication reserved for corporations. In double taxation, taxes are first paid based on the corporation’s net income, and then the individual is taxed again after the distribution of the revenue. An LLC does not pay any taxes itself. Instead, the profits and losses earned through the LLC business are passed to the owner’s tax returns.
If you form an LLC to run an online business, it will qualify you for the 20% pass-through deduction. The deduction allows owners of pass-through business entities to deduct up to 20% of their businesses’ net income for income tax purposes. Therefore, if you earn a profit from your online business, a deduction comes to you. Plus, the LLC at the end, makes your online shop seem and sound more official.
Does forming an LLC cost you too much?
LLCs do not cost much. Usually, the cost of forming one differs from state to state but is at an average of $100. Though forming an LLC does not cost much. It can cost you a little more than a sole proprietorship or partnership would. These costs are in the form of extra state taxes such as a franchise tax, and annual renewal fees. Yet, some states also impose special income taxes on LLCs. So, consider your state before you decide if these extra fees are worth the advantages of an LLC.
Is registering an LLC simple
Registering for an LLC is easy and a simple way of managing your online business. The process is quite simple compared to forming a corporation.
How to Register Your Online Business
Next, we’ll take a look at how you can register your business, get an LLC. But first, if you need some e-commerce marketing tips and how you can go about selling online on sites like Amazon, an excellent place to start is Smartminded. Once the profits start rolling in from your online sells, you need to register your business using these steps:
- Choosing an LLC Name
As an individual who wants to register an LLC for an online business, you need to pick a name. The name should be different from your name since the LLC is separate from you as an individual. It also should be a name that no other LLC within your state is already using. You can conduct a name search online to check if your proposed name is already in existence.
Additionally, the name you pick must end with “LLC.” For example, a paper writing service like Online Writer Rating can use “Online Writers Rating LLC.”
- File Your LLC’s Articles of Organization
You will also need to file organization articles with your state or filling office when creating an LLC. States often use the term “articles of organization,” but a few others refer to it as a certificate of formation. The organization’s articles usually contain the LLC name, address, and names of its members. Once your details have been filled on the form, you can file it alongside the filing fee, if any.
You file articles of organization with the appropriate state office. But if your LLC has other members, you also need to create an LLC operating agreement. An operating agreement is essential if there are more than one owners for the LLC. The contract lists the rights, responsibilities, voting power, and percentage of profit and loss of each LLC owner.
Again it varies from state to state where you are to file your articles of organization. For most states, you file your LLC with your state’s Secretary of State. For places like Massachusetts, Virginia, and Pennsylvania, filing is at the Commonwealth’s Secretary since they don’t have a Secretary of State. There are links on the Small Business Administration website where you can get information on filing.
- Register a DBA Name
LLCs often operate under their business names. But if you wish to run your company using a name different from its business name, then you’ll have to register a DBA (“doing business as”) name. For example, if my online business has its LLC name as Red Plate LLC, its DBA can be RedPlate.com. Again not every state requires the registration of a DBA name. So you’ll have to check your state requirements on the process to follow if you plan to use a DBA name.
- Get a Sale Tax ID
Depending on your state, your e-commerce business must collect sales tax from every state you do business. For example, if writing a service review, Best Writers Online is registered in Texas and provides services to a client in California, they’ll need to collect sales tax and report it to Texas.
- Get a Federal Tax ID
Another LLC for online business registration is that you need to apply for an EIN with the IRS. The Employer Identification Number (EIN) is an LLC social security number. It is required if your company has a bank account and staff. Application for an EIN is free on the IRS website. You can likewise apply for your EIN via fax or mail.
- Select a Registered Agent
Your LLC is required to have a designated registered agent. Companies often select one of their members to act as a registered agent. Your agent must be a resident of the state where the LLC is created. It can likewise be a corporation authorized to carry our business in the state. The agent’s job is to receive Government correspondence, service of process notices, compliance-related documents, and other legal papers on behalf of the LLC.
Filing an LLC for your side business as a full-time employee
Starting a business while holding down your day job is a great way to test out the waters and earn some side income. The day job becomes a fantastic way of helping your business grow in its early days. However, if you want to file for an LLC for that side business while holding on to your job, it is good to ensure it will not lead to negative consequences.
It would be best to go back to your job contract to determine your employer’s policy on employees with a side business. For instance, it is a norm that any invention developed by an employee with company resources or while on the job belongs to the employer. So you have to ensure that your side business has no use of such invention.
Conflict of interest occurs when you start a business that puts you in competition with your employer, and many job contracts prohibit employees from such. Your employee may also get worried about your commitment to the company when you start a side business. This worry is valid if you may be using company resources and time to work on your business.
However, these challenges do not affect your ability to file for an LLC for your side business as state laws on LLC formation do not consider your employment status when submitting an application request. So, if your employment contract does not stop you from filing for an LLC for your side business, you can go ahead to do so. However, remember to do it at your own time, and not to the detriment of your job. Clearly separate your side business’s time and resources from your other job.
How do I get more customers for my LLC business?
After forming an LLC for your online business, you should either continue attracting customers the way you have always done if it has been working, or look for ways to improve. Online advertisements, promotions, and launching a public relations campaign can increase your brand’s awareness and attract new customers. However, most times, what stops one from these active plans is resources. In the absence of unlimited resources, below are ways to generate new sales leads for your online business.
- Understand who your existing customers are
- Listen to their needs
- Find out what value proposition you are offering to the customers
- Use the information to form a target audience
- Use search engine optimization (SEO), advertising, and affiliate marketing to drive new business to your website
And that’s it! Hopefully, I’ve been able to provide some useful information to your question, “do I need an LLC for my online business?” Although there are no legal requirements that you need an LLC to sell online, however, if you have plans of making a profit, then registration becomes a must. It doesn’t matter if you operate your online store from home or office space.