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 risks and rewards. Before opening your online business, form a limited liability company (LLC formation).

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What Is An LLC?

An LLC is a formal business structure you register with your state. It's more flexible and offers tax benefits to a small business that a corporation does not.

But should you form an LLC for your online business?

First, consider 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 doesn't have exposure to liability as someone manufacturing and selling beauty products.

Second, consider your venture's growth potential. If your business becomes successful, you have more to lose. Additionally, an LLC will help secure business loans and credit should you expand.

Advantages of an LLC

If you have a home, car, investments, or other assets, forming an LLC can protect them from seizure in a lawsuit.

Liability Protection

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. Any judgments against you can put your individual assets at risk—unless you operate as an LLC.

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.

Tax Benefits

If you operate an online business as yourself, you're a sole proprietor. So, 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. This means you aren't taxed on your business profits and then taxed again on revenue received. So, an LLC is like a sole proprietorship for tax purposes. It just has the benefit of liability protection.

No Need for Fictitious Name Filing

A sole proprietor operates under their name. But suppose they want to brand their business with a company name. They file a DBA or "doing business as" to register that name.

By forming an LLC, you register your business name with the state. You don't then need to file a fictitious name.

Privacy

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. You often see holding companies formed as LLCs.

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's easy to do by adding members to your LLC.

How To Set Up An LLC

Creating an LLC is not overly complicated for an entrepreneur. 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 Online LLC

There are many things to consider when choosing a business name for your LLC. Check with your secretary of state to see if the name is available. You can do this by searching online with your secretary of state or department of corporations.

Make sure the name doesn't infringe on another brand name or business. You can search for the name online at the United States Patent and Trademark Office. Before committing to your new business's name, check the social media handles and web domains available.

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)
• Is available during regular business office hours

You can serve as the registered agent of your LLC if you want to save money. Most states require that the agent live in the state where the LLC is registered. If you don't live there, you can name a third party as your agent.

Draft Articles of Organization

Create your articles of organization.

Each state has different requirements for the articles of organization but generally follows 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, say you make Christmas wreaths to sell online and name your venture Merry Designs. Merry Designs becomes Merry Designs LLC.

• Statement of purpose: Not all states ask for a business purpose statement. But 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." But don't limit yourself with your business purpose statement. What if you wanted to branch out and sell Halloween decorations? Unless there's 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. But 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're 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.

You can use a lawyer, third-party company, or create it for yourself online.

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, outline the membership stakes and responsibilities of each member.

California, New York, and Delaware require operating agreements. Not all states do. Even if not needed, it's helpful to organize your business with an operating agreement.

Apply for EIN (Employer Identification Number)

An EIN or taxpayer identification number is like a business' Social Security number. 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 city, state, or federal requirements. They vary depending on your business activity.

You may apply for a general business license if your state doesn't have specific business licenses for e-commerce. You may also 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. But 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

What may begin as a hobby or "side hustle" may become a thriving online business. When you're ready to make your business official, use our simple DIY business formation process to ensure you meet all the legal requirements in your state.

Meet with a business lawyer to help you understand your options.