When it comes to starting an online business, one question that comes into people’s minds is: “Do I need an LLC for my online business?”
We’re all aware that an e-commerce store has the potential to make money and grow substantially, but it also carries a moderate amount of risk.
Having an LLC could be the right choice for you and your online business if you want to protect your assets, grow your business, and gain credibility with customers, among several other benefits.
However, let’s not get ahead of ourselves and tell why you should get an LLC for your online business below.
What Is an LLC?
LLC is an acronym for Limited Liability Company.
It is a US business structure offering personal liability protection for a corporation and pass-through sole proprietorship or partnership taxation.
Forming an LLC is considered one of the simplest ways to structure your business to protect your assets if your business gets sued.
LLC’s can be owned either by one or more people.
If more people own it then they are known as LLC “members”.
An LLC with a single owner is referred to as a single-member LLC whereas if there is more than one member, it is called a multi-member LLC.
Do I Need an LLC for My Online Business?
If you plan to start an online business or already own one, you should consider forming an LLC.
You do not need to have a formal business entity to start and run an online business.
Still, forming an LLC provides you with some significant benefits, which we will discuss more in detail below.
Also, forming an LLC for your online business creates credibility and consumer trust, which can benefit your sales.
The Advantages of an LLC Status
Many single-owner e-commerce start-ups choose to register as an LLC instead of operating under a sole proprietorship.
Similarly, several multi-owner online companies with the option to choose partnership status prefer to choose an LLC status instead.
Here are some of the benefits of an LLC that also holds true for several brick-and-mortar comapnies.
- Tax Advantages
Corporations tend to be taxed entities, but LLCs have their losses and profits passed through the business to all its members.
That means every member will pay their taxes on their share of the profits on their personal tax returns.
- Limited Liability
Like a corporation, every member’s personal assets get exempted from any liability for the decisions made for the business, for the most part.
This significantly reduces the risk to the business members if the business is sued or in debt.
- Fewer Fees and Paperwork
Corporations are known for the stacks of paperwork they have to file.
As an LLC, you end up with a fraction of the paperwork, and even the cost to register is lesser compared to registering a corporation.
- More Flexibility
As an LLC, the members are free to split the profits they make in almost any way they want to, typically based on the work contribution and capital.
- More Credibility
As mentioned earlier, when you are a registered business with a state and have the LLC suffix to your business name, it will often make potential customers feel safer when they are buying your products.
- Your Own Company Name
A great thing about being registered as an LLC is that you own rights to the business name, and nobody else can use it.
The Disadvantages of an LLC Status
However, there are a few disadvantages too of being an LLC, and these include:
- Frequent Dissolutions
State laws often dictate that if any of the members choose to withdraw from the agreement, they can dissolve the LLC.
It’s possible to re-register as a new LLC or to put provisions into the original contract that prevents dissolution.
However, all LLC closures need to be registered with the state.
Likewise, all the assets need to be disbursed among its members.
- Higher Personal Taxes
While there aren’t any business taxes if the company is registered as an LLC, it can result in higher personal taxes if it becomes extremely profitable.
- Start-Up Costs
Even though an LLC is cheaper to start than a corporation, they have fees that can make them costlier to initiate than sole proprietorships or partnerships.
How To Form an LLC?
If you are convinced that forming an LLC for your online business is the way to go, you must understand the steps to form an LLC.
States may have minor differences in the process of forming an LLC, but there are some basic steps, which are as follows:
1. Choose a Name for Your Business
When you register your business as an LLC, you cannot have the same business name as some other LLC in the state.
You should also avoid any restricted words and end the name with “Limited Company” or “LLC”.
2. File “Articles of Organization”
Filing “Articles of Organization” basically refers to filling and filing a document that contains all the basic information of your company like the name of the company, location, and if applicable, other members’ names.
3. Establish an “Operating Agreement”
This is an agreement outlining the business structure and finances. While this is something that’s not mandatory, it’s highly recommended.
4. Obtain Licenses
Once you have registered as an LLC, it will need all the permits and licenses that apply to your business type and the locality or state.
5. Make an Announcement
In a couple of states, it is mandatory to make a formal announcement of your new LLC’s existence in your local newspaper.
The Need To Be an LLC
While there isn’t any legal requirement for you to form your online business into an LLC, there are some essential questions you should ask yourself.
- Do you want to be at risk if you are ever sued?
- Do you want all of your personal assets taken away from you?
- Do you want to be spending a lot of money and time building a business that’s always going to be dependent on you?
It’s clear with these questions the answer to the most important question, “Do I need an LLC for my online business?”, is yes because it will just be more beneficial to you in the long run.