This post is for information only. Requirements are updated frequently and you should make sure to do your own research and reach out to a professional legal and tax advisors, if needed. Businesses outside of the United States will have different steps and requirements.
What is an LLC?
LLC stands for limited liability company and is a business type which separates the individual from the business entity. This separation offers personal liability protection to business owners. An LLC is a hybrid business type because it combines tax and structure flexibility of a sole proprietorship with the liability and asset protection of a corporation.
When it comes to sole proprietorships vs. LLCs, sole proprietorships, have an advantage of simpler tax filing over other business structures—owners pass business taxes through as part of their personal tax return, and income is only taxed once. The downside of a sole prop is that since the business and its owner are legally considered the same entity, owners are 100% responsible for any debts or lawsuits incurred by the business, potentially putting personal assets at risk. Establishing an LLC creates a legal separation between business and owner similar to a corporation—offering business owners a layer of personal asset protection.
- Single-Member LLC/Sole Proprietorship: Single-member LLCs and sole proprietorships have one owner. Single-member LLCs can hire employees but sole proprietors can’t. Owners can avoid double taxation by passing business taxes through as part of their personal tax return. Sole proprietorships don’t offer any personal liability protection.
- General Partnership: A general partnership is an informal business arrangement where two or more people agree to own and operate the LLC equally. This means they evenly divide all profits and losses. Each partner is legally considered the same entity as the business, meaning there’s no personal liability protection in a general partnership—but partners can pass business through on their personal tax return.
- Family Limited Partnership: Family limited partnerships, or FLPs, are formed by family members who combine resources to establish and operate a business. FLPs typically have two different types of owners—general partners and limited partners. General partners are responsible for operation, whereas limited partners don't have any management responsibility, but can still buy into the business to get income. These are a popular choice for families who want to pass down generational wealth.
- Series LLC: A series LLC is a type of business structure that allows an owner to separate business assets and operations into different subsets, called series. A series LLC allows each subset to function as a regular LLC while also protecting the individual series from any liabilities that another one might incur. Not all states allow series LLCs, so be sure to check with your local legislature.
- L3C Company: An L3C, or low-profit limited liability company, is a hybrid structure that combines elements of an LLC and a nonprofit business. While L3Cs are allowed to generate a profit, this income must be used to benefit a charitable cause. Not all states recognize this business structure.
- Member-Managed LLC or Manager-Managed LLC: Member-managed and manager-managed LLCs, unsurprisingly, refer to how an LLC is managed. A member-managed LLC is when all owners, also called members, share responsibility for day-to-day operations. Member-managed LLCs are common with small to midsize businesses. Manager-managed LLC structures are more common for larger-sized business, or with owners who want a less active management role. In this case, members might either designate one or more members to handle day-to-day activities—or hire employees to take on these responsibilities.
Why form an LLC?
There are many benefits to forming an LLC. For starters, it’s a relatively simple and inexpensive process, making it a great first step to making your ecommerce venture “official.” This validation can impact you as an entrepreneur, as well as build trust in your “legit” brand in the eyes of potential customers. Legitimizing your business can also boost your ability to secure outside funding, such as loans or investors—and even business partners down the line.
How to form an LLC
1. Choose your name
Naming your LLC is important administratively and also in the eyes of your customers. Your business name is the first impression many get of your brand, and you want to make the right one.
Naming your online store may take some time—the perfect name doesn’t come to everyone overnight. Sometimes it requires lots of brainstorming and even collaboration. There are also lots of free tools, like Shopify’s business name generator, that can get your creativity flowing.
Once you’ve landed on a name, do a thorough check to ensure someone else hasn’t claimed it first. Many states have business directories where you can search. You’ll also want to look outside your state, especially if you plan to sell to a wide audience. Scan Google, social media, and available domain names to see what’s out there.
2. Get an EIN
Your employer identification number (EIN) separates your personal identity from your business identity. It acts like your business’s social security number (SSN), so to speak. In other words, it’s a unique numerical combination the government uses to identify your LLC.
To get an EIN, you need to go to the IRS website and fill out an application via online form. The process is free, but you’ll need your personal Taxpayer Identification Number. The process takes under 15 minutes and is completely online—and you’ll get your EIN immediately upon completion.
3. Register your business
Once you have your EIN and business name, it’s time to officially register everything. Registering your business is a fairly straightforward process, though there may be extra steps required for merchants operating in certain industries, like food and beverage or CBD. You may also need to get a business license, depending on your niche and location.
4. Open a bank account
It’s easier to keep personal and business finances separate. Separating your finances also provides more protection to your personal assets. You’ll need your business information, including EIN, to open a business bank account.
5. Build and launch your website
When you’re ready to share your new business with the world, you can launch and promote your online store. We’ve created a handy online store launch checklist to help you remember everything from marketing to inventory to fulfillment. Drive traffic to your site to make your first sale, and invest in small business loans to grow your business.
Moving forward with your LLC
Starting an LLC unlocks financial and even mental benefits for your ecommerce business. Once you’ve incorporated your LLC, you can focus on the important parts of your business—and taking it where you want to go.