Forming an LLC for an Online Business
Your online business may start as a hobby or a way to make extra income. Or maybe you want to sell to a larger customer base online. In either case, operating an online business comes with rewards and some risks. As a result, you may consider forming a limited liability company (LLC) for your online business.
An LLC is a formalized business structure that you register with your state, much like a corporation. However, an LLC is more flexible and offers tax benefits to a small business.
But should you form an LLC for your online business?
First, think about the nature of your business and any potential risk of lawsuits. For example, could a customer sue you for negligence, fraud, or personal injury? Or is your business activity something that doesn't have inherent risk?
For example, a blogger writing about beauty products does not have exposure to liability as someone manufacturing and selling beauty products.
Second, think about the growth potential of your venture. If your business becomes successful, you have more to lose. Additionally, an LLC will help secure business loans and credit should you expand.
Consider these issues and other advantages an LLC offers your online business.
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Advantages of an LLC
As with any business, an online business can subject you to liability. For example, suppose you make pottery, and someone claims your vase caused an injury. You could be liable for their personal injury claims. And any judgments against you can put your individual assets at risk.
Many online business owners form an LLC to shield them from personal liability. The LLC is a business entity that keeps business liability separate from the business owner's personal assets.
If you have a home, car, investments, or other assets, it is worth protecting and justifies the cost of forming an LLC.
If you are in an online business for yourself, you are a sole proprietor. Therefore, you report all income and losses on your individual income tax return. The advantage is that you avoid "double taxation."
An LLC still allows pass-through taxation. So you are not taxed on your business profits and then taxed again on revenue received. Therefore an LLC is similar to a sole proprietorship for tax purposes but has the benefit of liability protection.
No Need for Fictitious Name Filing
A sole proprietor operates under their name. However, suppose they want to brand their business with a company name. In that case, they file a DBA or "doing business as" to register that name.
By forming an LLC, you register your business name with the state. Therefore, you do not need to file a fictitious name.
Since your LLC operates under a business name, you can keep your name out of it. High net worth business owners prefer to separate their personal financial life from their business.
Keep Business Accounting Separate
With an LLC, you can open a bank account for your business. You pay your bills and receive income from your online sales into this account.
Keeping your transactions in the business bank account keeps your business profits and expenses from co-mingling with your personal finances.
Flexible Business Structure
As your business grows, you might bring on partners. It is easy to do by adding members to your LLC.
How To Set Up An LLC
Creating an LLC is not overly complicated. But, first, check the LLC requirements with the Secretary of State in your home state or the state where you operate your business.
Choose the Business Name for Your LLC
First, choose the name for your business. When choosing a business name for your LLC, there are many things to consider. Check with your state that the name is available by searching online with your Secretary of State or Department of Corporations.
Make sure the name will not infringe on another brand name or business. You can search the name at the United States Patent and Trademark Office under the Trademark Electronic Search Service (TESS) to see if registered.
Designate a Registered Agent
A registered agent is a person or business that serves as your business representative in that state. The registered agent provides a physical office address to receive mail, accepts paperwork relating to lawsuits (called service of process), and is available during regular business office hours.
You can serve as the registered agent of your LLC if you want to save money and live in the state where LLC is registered. Or you can instead name a third party as your agent.
Draft Articles of Organization
Create your articles of organization. You can use a lawyer, incorporation company, or an online form. You can find the forms at your Secretary of State or Division of Corporation.
Each state has different requisites for the articles of organization but generally follow a similar format:
- Business Name of LLC: As stated above, you need a business name for your organization. At the end of your business name, you add "LLC." For example, if you make Christmas wreaths to sell online and you name your venture Merry Designs. Merry Designs becomes Merry Designs LLC.
- Statement of Purpose: Not all states ask for a business purpose statement. However, if asked, you can use a general statement such as "to conduct any lawful business activities permitted the under the state. Or you can use a specific business purpose statement, for example, "to design and sell Christmas wreaths and decorations." However, do not limit yourself with your business purpose statement. What if you wanted to branch out and sell Halloween decorations? Unless there is a reason to include a single statement of purpose, stick with a general statement.
- Duration: This is the length of time your business will operate. You can use a "perpetual duration statement," meaning the term of the LLC is not limited. Many LLCs opt for a perpetual duration statement. However, some states don't include this question.
- Principal Place of Business: List the address of your base of operations. For example, if you are a home-based Etsy seller, the principal place of business is your home.
- Management: Choose between member-managers or manager-managed. Manager-managed refers to third parties or designated members running the business. Since you are a one-person operation running your business, choose member-manager. Once you have created your articles of organization, file with the state and pay a filing fee. You can file this form online and pay with a credit card. Keep the paperwork, as it is a business expense!
Draft an LLC Operating Agreement
An operating agreement is a list of details about your business, similar to a corporation's by-laws. You outline your business organization and how you manage it. If you have many members, you outline the membership stakes and responsibilities of each member.
California, New York, and Delaware require operating agreements, but not all states do. So, check your state's regulations. Even if not needed, perhaps it is helpful to organize your business with an operating agreement.
Apply for EIN (Employer Identification Number)
An EIN or taxpayer identification number is similar to a Social Security number for the business. You apply for the EIN by filing an online EIN application with the IRS. You use this nine-digit number for filing taxes and opening business bank accounts.
Apply for Business Licenses or Permits
Determine what business licenses or seller's permits you need for your online business. Check the city, state, or federal requirements. They vary depending on your activity.
You may apply for a general business license if your state doesn't have specific business licenses for e-commerce. In addition, you may need a seller's permit or sales permit to sell online in any state where you conduct business.
Finally, small business owners with a home-based business may have to file for a home occupation permit.
Annual LLC Requirements
An LLC is simple to maintain. However, there are annual requirements. You file an annual report to the state and pay an annual franchise tax fee.
Check the requirements in your state regarding annual LLC filing reports and franchise taxes.
Forming Your LLC
When starting an online business, you may not justify the cost and effort of forming an LLC. However, what may begin as a hobby or "side hustle" may become a thriving online business. When you are ready to make your business official, use our simple DIY business formation process to ensure you meet all the legal requirements in your state.
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