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Do You Need An LLC For Shopify

Whether you are planning to launch already-sell products through your Shopify store or are planning to launch one, you must have an understanding of the different types of legal entities to structure your eCommerce business.

That’s because each of the legal entities offers particular advantages to Shopify Store owners in terms of filing and payment of taxes, protection of owner’s personal assets, convenience in setting up, costs involved in setting up a particular legal entity type, and much more.

Though, you can run your store on Shopify without an LLC. But, you must consider setting up an LLC if you want to avail the tax benefits of having an LLC as a Shopify store owner as well as other benefits.

Thus, what type of business structure you must choose for your Shopify business will depend upon a number of factors specific to you as an eCommerce business owner, your co-partners, and the goals you and your co-partners have for your business.

For instance, how will the tax treatment of your chosen legal entity type impact your business taxes and personal taxes? Do you see any outside investment coming into your business either now or in the future? Will you hire employees or independent contractors? All such factors play an important role in deciding whether you must form an LLC for your Shopify business or not.

In this article, we will answer the question do you need an LLC for Shopify? Besides this, we will also guide you on whether to form an LLC for your Shopify business or run it as a Sole Proprietor. So let’s get started.

Do You Need an LLC for Shopify?

No, you do not mandatorily need an LLC to sell on your Shopify store. You can run your Shopify Store as a Sole Proprietor, as a Partner in case you choose to run your Shopify business in Partnership form, or as a C-Corporation owner.

As mentioned earlier, what business structure you choose for your Shopify business will depend upon a host of factors including protection of owner’s assets against external obligations, tax treatment, involvement of owners in the day-to-day business decisions, convenience and costs of setting up, and much more.

Considering all these factors, the most preferred form of business structure to run your Shopify store is an LLC. This is because an LLC possesses both corporate characteristics and characteristics associated with a partnership. That is, it offers investors the protection of limited liability as well as the flow-through tax status of partnerships.

The protection of limited liability means that the investors of an LLC will not be personally liable, directly or indirectly, for any debts, obligations, or liabilities of either the LLC or of the other investors. Whereas, the flow-through or pass-through tax status means that a business entity with such a status does not pay tax at the entity level.

Who Needs an LLC?

Note that a business entity (typically a Partnership and a C-Corporation) pays tax twice – first at the entity level and then at the investor or the owner level. At the entity level, a business entity pays corporate tax at the prevailing rates applicable to corporate earnings. Whereas, at the owner level, the investors or owners pay taxes at whatever rate is applicable to the income generated by them in the form of dividends.

If a firm desires to distribute income in the form of dividends and have owners who fall in the high-tax slab, then it must have a business structure that allows the firm to distribute income from the organizational level to the investors without being taxed at the organizational level.

LLC allows a firm to get the advantage of pass-through tax treatment and avoid double taxation. Other business structures that give the benefit of pass-through tax treatment to avoid double taxation include Partnerships, S-Corps, and Sole Proprietorships.

LLCs provide both the corporate-form benefits of centralized management and limited liability and the partnership-form benefits of pass-through tax treatment and organizational flexibility. That’s why it is the most preferred form of business structure for eCommerce businesses.

Now, before we explain what is LLC and why it is the most preferred form of business structure for your Shopify store, we must know the legal requirements to sell products on Shopify.

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Before setting up a Shopify Store, you must be aware of the eCommerce laws to ensure that your business complies with all the local, state, and federal laws governing eCommerce businesses. The following section lays out, in brief, the legal requirements to start an eCommerce business.

1. Type of Business Structure

The first decision that you need to make as a Shopify store owner is regarding the legal structure of your eCommerce business. The basic legal structures include Sole Proprietorship, Partnership (General or Limited), Corporation (C and S), and Limited Liability Company (LLC).

Note that each of these business structures has its own set of advantages and disadvantages. The business structure that you choose for your Shopify business affects how much you pay in taxes, your ability to raise funds, the legal paperwork you need to file, and your personal liability.

Since there are many laws and regulations that apply to eCommerce business owners, it is always wise to consult a Certified Public Accountant (CPA) to understand your legal responsibilities.

Having said this, no one business structure is the best for any given situation. You must consider all the options carefully before deciding to start your Shopify business.

2. Business Regulations

As an owner of a Shopify business, there are many regulations that you have to comply with at local, state, federal, and international levels. The following section lays out the regulations that are critical for starting a Shopify Business.

A. Federal Regulations

a. Employee Identification Number (EIN)

Your Shopify business must have a business identification number in order to receive the credit for tax payments. This number is called the Employer Identification Number (EIN) and it is issued by the Internal Revenue Service (IRS).

EIN is the Federal Tax ID of your business. You need to use it to pay for your federal taxes, hire employees, open a bank account, and apply for business licenses and permits. Thus, whenever you file your tax returns and other documentation to IRS, you must include your EIN.

To get EIN for your Shopify Business, you must file an Application for Employer Identification Number through IRS Form SS-4.

b. Employer Verification Form I9

In case your Shopify business has employees, you must also file Employment Verification Form I-9. This is to verify that each employee is eligible to work in the United States.

B. State Regulations

To know what the state business requirements are that your Shopify Business must comply with, you need to check out the Secretary of State’s website. For visiting the website of your State, do not forget to add your two-letter state postal
code identification in the Secretary of State website URL. The following are some of the general state obligations that you need to meet before starting your Shopify business.

a. Shopify Business Registration

The location and the business structure of your Shopify Business will determine how you need to register your business. In certain cases, there is no need to register your business.

For instance, if you conduct your Shopify Business as a Sole Proprietor, you need not register anywhere. However, if your Shopify Business is a limited liability company (LLC), corporation, partnership, or nonprofit corporation, you need to register with the state where you conduct business activities.

To register your Shopify Business in a state, you must contact your State’s Secretary of State for a Business Registration Form. There is a minimal fee that you have to pay for the registration of your Shopify Business. Note that this fee is renewed each year.

b. Shopify Sales Tax License

Besides Federal Tax ID, you also need a State Tax ID number for paying State Taxes if you sell retail products on your Shopify Store and your state imposes sales tax on these products.

Note that the tax obligations differ at the state and local levels. So you need to understand your state’s laws regarding income taxes and employment taxes to know whether your Shopify Business needs a State Tax ID.

To apply for Sales Tax License, you must contact the Department of Revenue for the State in which you are conducting business.

c. Articles of Organization (LLC Business Structure)

In case your Shopify Business is an LLC, you must file the Articles of Organization with your State’s Secretary of State (SOS) Office. There is usually a minimal fee for the filing process. This document is also called a Certificate of Organization or Certificate of Formation.

Each state has its own form that you must file in order to form an LLC for your Shopify Business. Some states may also have a Limited Liability Company Application to be completed and filed.

C. Local Regulations

The following are the regulations that you need to comply with for your Shopify Business at the county or local level.

a. Shopify Business Registration

Typically, there is no need to register your Shopify Business with county or city governments. However, you might need to file for licenses and permits from the county or the City if you run your Shopify Business as an LLC, Corporation, Partnership, or Non-Profit Corporation.

Some counties and cities may also require you to register your DBA (Doing Business As) if you run your Shopify Business as Sole Proprietorship or General Partnership under an assumed name.

Since, the local governments determine registration, licensing, and permitting requirements, you must visit the local government websites to find out what you need to do.

b. Shopify Licenses and Permits

The type of business activity, the products that you offer, and the location of your Shopify Business will determine whether it needs any Licenses and Permits.

Requirements regarding licenses and permits vary from state to state and county to county. Therefore, you need to visit your City and County website or Clerk’s Office to find out which permits and licenses your Shopify Business needs. Note that your business license fees will also vary.

3. Taxes

The legal structure of your Shopify Business as well as the products or services you offer will determine what taxes you need to pay and how you can pay them. Typically, there are five types of business taxes that you need to pay as a Shopify business owner. These include income tax, self-employment tax, employment tax, sales tax, and excise tax.

a. Income Tax

As a Shopify Business, you must file an annual income tax return with the IRS and also with the state or states where you operate your business. Most businesses file a quarterly Estimated Tax Payment through Form 941 during the year. This means they deposit estimated tax payments as they earn or receive income during the year. Whatever differences exist, they reconcile them while filing their annual tax returns.

b. Self-Employment Tax

If you run your Shopify business as a self-employed, you must pay Self-employment Tax through Schedule SE of Form 1040. Self-employment tax or SE tax is a social security and Medicare tax for those individuals who work for themselves.

The payment towards the SE tax contributes to coverage under the social security system. Social security coverage provides you as a Self-Employed with retirement benefits, disability benefits, survivor benefits, and hospital insurance or Medicare benefits.

c. Employment Tax

If your Shopify Business has employees, then you must pay certain employment taxes. Employment taxes include Social Security and Medicare Taxes, Federal Income Tax Withholding, and Federal Unemployment (FUTA) Tax.

Under the Federal Insurance Contributions Act (FICA), you as a Shopify business owner need to withhold the appropriate amounts from employee paychecks for Social Security and Medicare. You must ensure that all your employees complete the Form-W4 to determine the amount of employment taxes you need to withhold from your employee’s wages.

Besides collecting and depositing employment taxes from employees’ wages or salaries, you also need to pay your share of FICA taxes as an employer.

You can file quarterly returns using Form 941. In addition to the Social Security and Medicare Taxes, and Federal Income Tax Withholding, you also need to pay Federal Unemployment (FUTA) Tax as a Shopify Owner by filing Form -940. As per IRS, the FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs.

d. Sales Tax

You must collect and pay sales tax imposed by your State on the retail products that you sell through your Shopify store. The sales tax levied on the products’ sale price must be collected and forwarded to the State either on a monthly or quarterly basis. This will depend on the volume of sales that you make on your Shopify Store. You must check with your State’s Department of Revenue to determine the sales tax requirements and payment process.

e. Excise Tax

You are liable to pay excise tax in case you manufacture or sell certain products, operate certain types of businesses, or use certain types of equipment, facilities, or products. Check out the local IRS office for the current list of those categories.

Also Read: Shopify Sales Tax: The Ultimate Guide In 2023

4. Intellectual Property

All businesses have intellectual property no matter what type of business they conduct. The term intellectual property includes a broad range of rights including inventions, trade secrets, patents, trademarks, copyrights, etc. Every Shopify Business must take measures to protect its intellectual property.

There are two reasons why a Shopify business needs to protect its intellectual property. First is to ensure that you do not infringe on the intellectual property of others. The second is to ensure that employees do not take your ideas with them once they decide to leave your company.

5. Data Protection

To protect certain rights and personal data of consumers, the General Data Protection Regulation or “GDPR” came into effect on May 25, 2018. The GDPR was enacted by the European Union in 2016 to set standards for acquiring, managing, and processing the personal data of EU citizens and their residents.

As per the regulation, “Personal Data” means any information relating to an identified or identifiable natural person and includes name, email address, location data, and online identifiers such as IP addresses.

Though GDPR is an EU data privacy law, it also requires companies outside the European Union to comply with the regulation to safeguard the personal data of EU citizens, residents, and even visitors. Thus, the GDPR has global implications.

As a Shopify Business owner, you must check whether your business needs to comply with GDPR laws. In case your business qualifies for GDPR, you must take the consent of your customers ​​that you are using their personal data.

Besides this, you also need to justify why you are using the personal data of your customers. For this, you need to provide clear and transparent information about your activities to your data subjects within the Privacy Policy of your Shopify business.

What is the US Equivalent of the GDPR?

Though the US does not have a GDPR equivalent regulation at the federal level, individual states within the US, for instance, California, have implemented similar policies such as California Consumer Privacy Act or “CCPA”. The CCPA is implemented to protect the use of the personal information of California residents.

Just like GDPR, the CCPA provides certain rights to the residents of California including the right to know what personal data is collected and how that data is shared. Your Shopify Business must provide a notice regarding the personal data collection, use, and disclosure to California residents at or before the time of collection.

Shopify LLC or Sole Proprietorship (Sole Proprietrship Vs LLC)

One of the critical decisions when starting your eCommerce business is to choose the type of business structure that is right for you.

This is because your choice of business structure affects everything right from the amount of capital you can raise, taxes you’ll be liable to pay, and the extent to which your personal assets would be liable, to paperwork, management, and your business’s day-to-day operations.

Therefore, you must choose a business structure for your Shopify store that offers a good mix of advantages and legal safeguards. The majority of small businesses choose a business structure that offers the benefits of pass-through taxation.

Both sole-proprietorship and Limited Liability Companies (LLCs) are types of business structures that offer pass-through taxation benefits helping businesses to avoid double taxation. Still, it is important to understand the differences between the two to know which business structure is right for your Shopify store.

Shopify LLC Vs Sole Proprietorship

What is Sole Proprietorship?

Wondering how to run your Shopify store as a sole proprietor? One of the fastest, simplest, and easiest ways of starting your business is via a sole proprietorship.

A sole proprietorship business is not a legal entity but a business fully owned by a single individual who is personally liable for all its debts.

Thus, a single person is entirely responsible for all the business decisions and has complete control over his business decisions and income.

Since no separate legal entity is created in a sole proprietorship, the owner has full control over income and is personally liable for all the losses and liabilities.

Additionally, sole proprietorship has the advantage of pass-through taxation. In other words, income earned from the sole proprietor business is taxed only once as the personal income of the proprietor unlike C corporations where the business entities are liable to pay corporate tax and the income distributed to the owners is taxed separately under income tax.

Thus, where sole proprietors pay tax only once, C corporations bear double taxation in the form of corporate tax on the corporation as well as personal income tax on the income distributed to its owners.

In addition to the tax advantage, the ease of its creation, nominal cost, and simplicity make sole proprietorship the most popular choice of business structure among self-employed individuals.

The sole proprietors do not have to file any federal or state tax forms and have fewer regulatory formalities to fulfill. Further, the sole proprietor business begins from the time the proprietor begins selling goods or services.

However, sole proprietors have less legal protection as compared to other forms of business structures. This is because, in case of losses or liabilities exceeding the assets, proprietors’ personal assets become liable to pay for such losses and liabilities.

Pros and Cons of Sole Proprietorship

Pros
1. Simple and Easy Set-Up

Unlike other forms of business structure, the tax process is easy as you don’t need to obtain an Employee Identification Number (EIN) from the IRS for tax filing.

You can simply use your Social Security Number (SSN) and file your taxes. Additionally, you can use your personal account to undertake all your business transactions, unlike other forms of business structure which require a separate checking account.

2. Pass-through Tax Benefits

Since there is no distinction between the owner and the business, the income generated from a sole proprietorship is taxed as the personal income of the proprietor.

It has the pass-through tax benefit in which the business passes all its income to the owner (sole proprietor in this case) which is taxed only as the owner’s personal income tax.

The business does not pay any corporate tax. This saves the sole proprietors from double taxation unlike a C corporation where a business entity pays corporate tax on its profits and the owners of the entity pay personal income tax on the income allocated to them by the business entity.

3. Less Regulatory Requirements

There’s not much paperwork and legal formalities that a sole proprietor has to fulfill. As a sole proprietor, all you may need is a permit based on your location and type of business. Likewise, a sole proprietor does not Accordingly, fewer formalities and paperwork help you start your business within no time.

Cons
1. Unlimited Liability

Since there is no distinction between the owner and the entity, the sole proprietor is personally liable for all the losses and liabilities. In other words, in case of losses or liabilities exceeding the assets, the sole proprietor’s personal assets would be used to pay off losses or debt.

2. Difficulty in Raising Capital

Sole proprietors find it challenging to raise funds through organized channels like banks, equity, and other lines of credit. This is because banks extend loans to businesses with a good credit history and consider small businesses just initiating as risky borrowers.

What is an LLC?

A Limited Liability Company (LLC) is a hybrid form of business structure that has chosen features of both company and partnership forms of business.

It enjoys the advantages of pass-through taxation and flexibility in routine operations and management of a partnership together with a limited liability advantage available to owners in the case of a C corporation.

An LLC is formulated with two or more persons and is governed by the laws of the state in which it is formulated. The LLC must file ‘articles of organization’ with the authorized state department, generally, the Secretary of State, for it to exist legally. Each state has its own filing requirements and may typically require owners to provide the name of the potential LLC, the period of the proposed duration of the LLC, and the resident agent for the service of the process.

Also, a single-member LLC is a separate legal entity considered a disregarded entity because it has more non-corporate characteristics than corporate characteristics.

This is what qualifies it for the pass-through tax benefit. As per the US treasury rules, an LLC must have more non-corporate characteristics to qualify for the pass-through tax benefit. The four characteristics that lend corporate status to an entity include:

a. Continuity of life
b. Free transferability of interest
c. Centralization of management
d. Limited liability

A single-member LLC is a separate legal entity that protects the personal liability of the owner. However, it lacks corporate characteristics of continuity of life and free transferability of interest, making it eligible for pass-through tax benefits.

Pros and Cons of LLC

Pros

a. Limited Liability

A single-member LLC enjoys the benefit of limited liability of the owner much like C corporations. Accordingly, in the event of losses or liabilities exceeding the assets, creditors can claim the money owed from the company but have no right to the owner’s personal assets.

b. Pass-through Tax Benefits

A single-member LLC is not taxed like a C corporation and does not pay corporate tax since it is treated as a disregarded entity. The income generated by a single-member LLC is passed to the owner and is taxed as the personal income of the owner, avoiding double taxation.

c. Less Regulatory Requirements

LLCs require less paperwork and fewer legal formalities compared to other business structures. All they need to do is file ‘Articles of Organization’, a document containing details of the business such as name, address, and members.

Once the articles are filed, the LLC needs to prepare an ‘Operating Agreement’, which is required only by some states. Likewise, LLCs involve fewer compliance and bookkeeping challenges.

Unlike C corporations, LLCs also don’t need to hold annual meetings, maintain firm books of accounts, or appoint a board of directors. The owners have other ways of operating and managing the business. This provides flexibility to the management, saving time, effort, and cost.

d. Flexibility in Investing and Profit Distribution

LLCs offer latitude in terms of investing and profit sharing between the owners. The owners of an LLC can choose to invest an amount different from the percentage they own in the LLC.

Accordingly, if a person owns 15% of an LLC, he may invest more or less than his percentage share of ownership via the Operating Agreement.

This is a document that defines the percentage share of profits or losses of owners in the LLC irrespective of the amount they invested at the beginning.

Similarly, owners can get profits different from their share of ownership. This may be done via mutual consensus which may allocate more profits to a specific person considering the effort put in by him.

Cons

1. Relatively Higher Fee

LLCs pay an initial fee which is more compared to the sole proprietor and general partnership forms of business. States charge initial LLC formation fees. Likewise, some states also demand ongoing charges such as annual report fees, franchise tax, etc. Therefore, it is better to consult with the Secretary of State’s office to know the amount that needs to be paid towards fees.

2. Limited Life

Unlike C corporations that continue to exist regardless of their members, LLCs cease to exist the moment a member exits. In such a case, the remaining members of the LLC are required to meet legal and business obligations to close the LLC. The remaining members can either choose to form a new LLC or exit. This limitation of the LLC can be made good by including some specific provisions in the Operating Agreement.

3. Self-Employment Tax

The members of the LLC are taken as self-employed individuals. Therefore, they are required to pay self-employment tax towards Social Security and Medicare. This can turn out to be higher than the corporation tax. Therefore, it’s better to consult an accountant before deciding on the type of business structure.

Other FAQs

1. How Much Does it Cost to Open an LLC?

When starting an LLC in the state you wish to, you will be required to pay fees which may vary by state. These may include fees for reserving an LLC name, filing Articles of Organization, and additional LLC costs like publishing LLC formation notification in an approved newspaper. Typically, it costs between $50 – $300 + to open an LLC in the state of your choice. You can check the fees with your local State of the Secretary website.

2. How To Get An LLC For Your Shopify Store?

There are a number of steps involved to obtain an LLC for your Shopify Store. These include;

  1. Choosing a business name for your LLC.
  2. Appointing a registered agent for your LLC
  3. Filing LLC formation documents like Certificate of Formation with the Secretary of State and paying the requisite charges
  4. Preparing the Operating Agreement for your LLC which is a document containing the rights and obligations of the members of the LLC
  5. Obtaining the Employer Identification Number (EIN) from IRS for tax filing

3. Do You Need an LLC for Shopify Dropshipping?

No, you do not require an LLC for Shopify Dropshipping. As you may know, Dropshipping is an order fulfillment method whereas as an eCommerce business owner, you do not carry any stock of the products you sell on your online store. Thus, whenever you receive an order from your customers, you contact the supplier, who will then ship the products directly to the customer to fulfill the order. Dropshipping is a great way to start an eCommerce business.

Though you do not need an LLC to start Shopify Dropshipping, an LLC offers the protection of limited liability as well as the flow-through tax status of partnerships to the business owners.

As stated earlier, limited liability means that the investors of an LLC will not be personally liable, directly or indirectly, for any debts, obligations, or liabilities of either the LLC or of the other investors. Whereas, the flow-through or pass-through tax status means that a business entity with such a status does not pay tax at the entity level.

Thus, if you want to obtain such advantages, you must definitely consider forming an LLC for your Shopify Dropshipping.

Also Read: Shopify Dropshipping Accounting: All You Need To Know

4. Do I Need A Business License To Sell On Shopify?

No, you do not require a business license to sell on Shopify. You can sell on Shopify even without a business license.

A business license is a legal document that the state or the federal government issues to allow your eCommerce business to operate its business activity in a specific area or location.

Your Shopify Business may require a combination of federal and state licenses. The requirements as well as the fees for State and Federal Business Licenses would depend upon a number of factors including type of business activity, location, and government rules. You must check with the license issuing agency for details on the business license cost.

5. Is an LLC the Same as a Business License?

No, LLC is not the same as a business license. As mentioned in the article, LLC is a type of business structure that you can choose to undertake business. A business license, on the other hand, is a document issued by the government giving you the right to undertake and operate the business in the jurisdiction for which you have obtained the license.

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