Thinking about starting your own business and determining how you’re going to run it legally while mitigating risks and dealing with taxes? Do you need an LLC for Shopify dropshipping? I came across similar questions when I decided to start my first e-commerce business dropshipping on Shopify from Ali Express. I remember the process seeming intimidating while doing research online, but I assure you it’s very easy and well worth it!
So, do you need an LLC to sell on Shopify?
The answer is no. You don’t need a corporation to sell on Shopify, however you are opening yourself up to many potential risks. So why risk it? The process is simple and cheap, I believe it’s a great idea to set it up from the start to protect yourself and avoid any hassles once you become successful dropshipping.
There are many benefits to creating a Limited Liability Corporation (LLC) to run a business:
- Limits the liability of the owners and the members
- Flexible management that can be changed at any time
- Avoids double taxation by distributing profits to members who are taxed on those profits at their personal tax level
- Privacy protection
- Vehicle for holding appreciating assets such as investments and real estate
- Run multiple businesses under the LLC using fictitious names
I first heard about LLCs while reading “Rich Dad Poor Dad” by Robert Kiyosaki. He describes how rich people make money work for them by utilizing the power of an LLC. I highly recommend his book as it changed my entire perspective about how to handle and grow money.
Should I create an Multi-Member LLC or a Sole Proprietorship?
After speaking with a CPA, I learned that it’s best to have a multi-member LLC as opposed to a sole proprietorship. By having multiple members no individual assumes any personal risks while conducting the business. Whereas if there is only one owner, it is still possible for them to assume personal risk and liability. It’s easy to create a multi-member corporation, for example you can sign a trusted family member to 1% of the company while you maintain 99% ownership. This is an important tip that I never learned about while conducting research online.
Step 1:
Find the website for your states’ Division of Corporations to determine the availability of names for your LLC. You will be able to search the records to determine if the name you’ve chosen is available. You can also search the sites for fictitious names that are available to use for your store or business names. For example, you can have a corporation named “ABC LLC”, but you sell products online through a fictitious name that is your brand or website name. And if you want to run multiple businesses it’s easy to register each one as a fictitious name under your LLC.
Step 2:
Once the LLC is created you will be given a tax id number, which you should use to open a bank account for your business. Having a separate bank account for your business allows you to keep track of all expenses and profits within your business. It’s especially important when determining write-offs come tax season! Using a personal account as your business account might be ok to start out, however once your business starts to grow it becomes hard and harder to keep track of what’s what in the account.
P.S. I love using my business credit card because it allows me to earn a ton of airline miles which I use to travel each month!
Step 3:
Next, it’s a good idea to register your business with the state to receive your sales tax number. This makes things a lot easier when it comes to legally collecting and paying sales tax.
Do I need to collect sales tax on each sale?
If you sell anything to customers within your state, you must collect sales tax. For example, if my business is registered in Florida and I sell an item to someone in Miami we must collect 7% sales tax on that item. A question I hear a lot is do I have to collect sales tax if I sell items to customers in other states? The answer is eventually, yes. According to the Wayfair v. South Dakota case, you must collect sales tax if you do a certain amount of business within each state. Each state has different thresholds so it’s a good idea to keep track of how many items your selling in each state. For example, if you’re just starting out and your completing less than 100 transactions within another state you will be exempt from collecting and paying sales tax for those items. Once again, each state has their own threshold so you should investigate the laws within each state, however the minimum number is usually 100 transactions.
However your choose to create your business model, if you exceed $30,000 in sales within 12 months you will need to pay federal income taxes. For a beginner, don’t worry about paying and remitting federal income taxes just yet. But, it’s a good idea to have everything set up legally once you do reach this threshold.
This Shopify article provides more information on deciding your business structure when choosing to dropship on their platform.
Tanner Planes, a very successful dropshipper, talks more about when it’s the right time to set up an LLC when using Shopify to avoid major problems:
Are you thinking about creating your own business? If you already have, did you do so under using a Shopify LLC or something else? Please comment below your thoughts and whether or not you found this article helpful!
Disclaimer: None of the information I’ve provided should be used as official legal advice, however these are the steps I had to take while creating a legal business for my e-commerce stores. I highly recommend talking with your local accountant to find out the steps you need to take in your area for the type of business you wish to start.