Consumers spent $1.12 trillion online with U.S. merchants in 2024, up 16.2% from the year before, according to eMarketer. With online sales sure to increase in the coming years, it’s prime time to get moving on the ecommerce idea you’ve been itching to start. However, just like brick-and-mortar businesses, ecommerce companies also have legal and tax issues to consider when choosing a business entity type. Which business structure will offer the most advantages depends on a number of factors.
Disclaimer: This content should not be construed as legal or financial advice. Always consult an attorney or financial advisor regarding your specific legal or financial situation.
Should I start an LLC for my ecommerce store?
An LLC (Limited Liability Company) is a business structure that provides legal separation between a business and its owner, offering liability protection and tax advantages. While an LLC is not legally required to sell products online, it can be beneficial depending on factors like business size, financial risk, and long-term growth plans.
One of the biggest reasons ecommerce sellers choose to form an LLC is liability protection. Without an LLC, your personal assets (like your savings or home) could be at risk if someone sues your business or if you run into debt. An LLC creates a legal separation between you and your business, shielding your personal finances.
Business size also plays a role in this decision. If you’re just testing the waters with a small side hustle, you might be fine operating as a sole proprietor at first. But if you’re making consistent sales, working with suppliers, or handling customer data, an LLC can help establish credibility and protect you from potential legal issues.
State regulations matter, too. Some states have lower filing fees and simpler requirements, making it easier to form an LLC, while others have higher costs and more paperwork. It’s important to check your state’s requirements before making a decision.
But do you need an LLC to sell something online? Since every business is different, it’s always a good idea to consult a legal professional to ensure you’re making the best choice for your situation.
What business entities can I choose for my ecommerce company?
Here are the options available to you and what to think about when structuring your new ecommerce business. There are also some insights on where to turn for help when making that all-important decision.
- Sole proprietor.
- Partnerships.
- Corporations.
- S Corps.
- Limited liability companies (LLCs).
Sole proprietor
The least expensive and easiest entity to form for an online business is a sole proprietorship — it’s also the most prevalent legal structure in the U.S. With less fees and paperwork, the proprietor is completely in control of the business and all profits and losses pass directly through to the owner.
When it comes to taxes, business income and expenses are reported on the sole proprietor’s personal tax return, and income tax rates are based on personal tax brackets. Sole proprietors still pay Social Security and contribute to Medicaid.
The biggest thing to consider when setting up your ecommerce business as a sole proprietorship is the personal liability the owner has — including incurred debts and lawsuits brought from employees and/or customers.
There is no legal separation between the owner of the business and the business itself.
Therefore, the owner is at risk when the business is at risk. It’s also more difficult to secure funding as a sole proprietor.
Partnerships
With at least two owners you can form a partnership, but like sole proprietorships owners are wholly responsible for the business’s liabilities and debts and retain pass-through taxation.
It’s recommended that partners have a written legal agreement stating each owners’ responsibilities, decision-making rights and how the business survives if one partner wants out.
Corporations
The Tax Cuts and Jobs Act of 2017 reduced the corporate tax rate from 35% to 21%, which makes the C corp legal structure more attractive to ecommerce entrepreneurs.
The most appealing reason entrepreneurs choose the C corp is because the business is considered a separate legal entity from the owner. The personal assets of the owner or owners are protected from all actions of the corporation.
For an ecommerce business, the personal protection offered by setting up a corporation is an enormous benefit.
If you plan to sell shares in your ecommerce business someday, you’ll need to structure as a corporation. The downside includes required filing fees, deadlines, bylaws and annual corporate meetings, but the personal protection from lawsuits and more can be worth it.
S corps
Another option for your ecommerce business is to elect S corp status. The S corp is not a separate legal structure in and of itself, but instead an option for the LLC or C corp to have pass-through taxation while still retaining limited liability protection.
An S corp has the potential to income split, meaning owners can decide on a smaller salary and then pay income taxes, Social Security, and Medicare taxes on the smaller salary.
Then, owners can take dividend distributions on the remainder and only pay income taxes. Something to consider: high-earning companies might not benefit from an S corp because the profits are passed through. A startup, however, would likely benefit from the losses incurred in the early years.
Limited liability companies (LLCs)
Like corporations, LLCs offer protection from personal liability but have less rigorous filing requirements than corporations. Owners are called “members” and have the benefit of choosing whether they want to be taxed as a sole proprietorship, partnership, S corp or C corp.
Ecommerce LLCs that choose to be taxed as an S corp do so to be taxed as a pass-through tax structure and to avoid the double taxation of a C corp.
If you don’t intend to seek investment money for your ecommerce business but do want asset protection, flexible management requirements, and tax choices, forming an LLC can be a strong choice.
Benefits of LLC for ecommerce business
Forming an LLC for your ecommerce business comes with several advantages, making it a popular choice among online sellers.
One of the biggest benefits of an LLC is liability protection. Unlike a sole proprietorship, an LLC separates your personal assets from your business. If your store faces a lawsuit or debt, your savings, home, and personal belongings remain protected.
Another key advantage is pass-through taxation, which allows business profits to be taxed only once — at the owner’s individual tax rate — rather than facing double taxation like corporations.
LLCs also offer management flexibility, letting you operate as a single-member entity or with multiple owners while avoiding the strict corporate structure. In some states, LLCs provide privacy benefits by allowing business owners to keep personal details off public records, too.
Beyond legal and tax perks, an LLC enhances credibility, making your business appear more established to customers, suppliers, and potential partners. It also allows for flexible profit distribution so members can divide earnings in a way that best suits their agreement.
For ecommerce businesses looking to secure funding, an LLC can improve access to capital, making it easier to apply for business loans and attract investors. Be sure to weigh the pros and cons of an LLC before committing to setting up one for your business.
Is an LLC always required for selling online?
No, an LLC is not required to sell online. Many ecommerce sellers operate as sole proprietors without forming a business entity. However, an LLC can offer liability protection, tax benefits, and increased credibility. Whether you need one depends on your business size, risk level, and long-term goals.
Risks and considerations of not having an LLC for an ecommerce business
Not having an LLC for an ecommerce business can expose your personal assets to lawsuits and business debts. Without legal separation, you’re personally liable for any financial or legal issues. Operating without an LLC may also limit your company’s credibility, tax flexibility, and funding opportunities, making it harder to scale or secure business loans.
Can you change your mind later?
There are a few reasons for switching entities once you’ve started your ecommerce business.
Sometimes, entrepreneurs start an ecommerce business while still holding a full-time job and don't have the time or money to get the appropriate legal structure.
Or you might discover you want more protection than that offered by a sole proprietorship, or you want to take your business public.
Depending on the industry of your ecommerce business, you’ll be faced with a number of legal rules and regulations. That’s why we recommend knowing the differences between different business entities. Choosing the right legal structure from the start is paramount to protecting your business and your personal assets.
Make sure you consult with legal and finance experts before you make decisions for the future of your business.
FAQs about LLC and ecommerce:
Can you have a website without an LLC?
Yes, you can have a website without an LLC. Anyone can create and run a website as an individual or sole proprietor without forming a business entity. However, if you’re selling products or services, an LLC can provide liability protection and tax benefits.
Do I need an LLC to sell on Etsy?
No, you don’t need an LLC to sell on Etsy. Many sellers operate as sole proprietors without forming a business entity. However, an LLC can provide liability protection and tax advantages. Before starting, it’s helpful to understand how to sell on Etsy successfully by following platform guidelines and best practices.
Do I need an LLC to sell on Amazon?
You don’t need an LLC to sell on Amazon, but having one can safeguard your personal assets and simplify tax management. Amazon allows individuals and businesses to sell on its platform, so choosing the right structure depends on your goals. Learn more about how to sell on Amazon effectively, including account setup and fulfillment options.
Do I need an LLC to start dropshipping?
Dropshipping doesn’t require an LLC, but forming one can reduce personal liability and make your business appear more credible to suppliers. Since you won’t be holding inventory, understanding everything you need to know about dropshipping, from sourcing products to managing customer service, is key to long-term success.
