The dropshipping market size was valued at over $149.1 billion in 2021, with projections showing that by 2025, it’ll be worth more than $557.9 billion.
In order to get a part of this enormous pie, you’ll need to make a critical decision whether to operate as an LLC, an individual (sole proprietorship), or any other business model.
But wait, what is an LLC, actually? Do you really need an LLC for your dropshipping business?
By the end of this article, you’ll have answers to all these questions.
Now, let’s get started!
What is LLC?
An LLC (Limited Liability Company) is a type of business structure commonly used in the US. It refers to the act of forming up your dropshipping company as a liability that is detached from you. It’s the most preferable and safest form of business, particularly for beginners.
Simply put, if any customer raises a complaint about your product quality or feels you cheated them financially and takes further legal action against you, the court will not bound you to pay for a return using your personal properties.
In terms of safety, it’s better when you tend to invest a small amount, but it is not guaranteed. You’ll need a separate tax returns file for your business and pay current charges. A fee for your company setup is also applicable here.
LLCs can be seen as a hybrid structure combining features of both a partnership and a corporation. Like a partnership, LLCs “pass-through” profits, so they’re taxed as part of the owners’ personal income. Like a corporation, LLCs provide owners with limited liability in the event the business fails.
LLC owners are often called members. Many states do not restrict ownership, which means anyone can be a member, including individuals, foreigners, foreign entities, corporations, and even other LLCs. However, some entities, including banks and insurance companies, cannot form LLCs.
Do you need an LLC for dropshipping?
The answer is simply yes.
If you want to do business while protecting your dropshipping company and personal assets, you’ll need an LLC. It’s such a system to lawfully build your online store. It’ll help you stand on the safe side.
Any dropshipper that pursues to minimize their obligation for business arrears and proceedings should go with an LLC. Plus, the dropshipping business that doesn’t need any external venture is good in tax time when choosing LLC.
LLCs are actually more common than many realize. Some typical examples of LLCs include Alphabet (the parent company of Google), PepsiCo Inc., Johnson & Johnson, and Exxon Mobil Corp.
Why do you need an LLC for dropshipping?
As we’ve mentioned above, it is a way to legally form your dropshipping business. It blends the partial obligation of your company with the flexibility and minimum procedures.
If you want to do business without an outside investor and meanwhile with minimum personal liabilities, nothing but an LLC would be the single option for you.
Let’s see how you can benefit from forming an LLC for your dropshipping business!
- Personal asset protection. This is considered the topmost reason to form an LLC when you’re about to dropshipping. It prevents you from being held personally responsible for the debts of your company. If your business, unfortunately, goes bankrupt or is sued, your personal assets like a house, land, bank deposit, car, etc., cannot be pursued.
- Tax benefits. LLCs allow all profits to be passed directly to owners to be taxed as personal income. That’ll avoid “double taxation” of both the company and individual owners.
- Trustworthiness and brand awareness. LLCs can improve your business’s trustworthiness. At the same time, you can raise brand awareness when building customers’ trust. Unlike other casual business forms, like a sole proprietorship, it often grabs further trust from both customers and financial institutions (i.e., banks). So, it increases the opportunity to take out credits from banks, which can positively affect your dropshipping business.
In short, starting your dropshipping business with an LLC can:
- Protect your assets, such as bank deposits, house, land, car, etc.
- Help you enjoy tax benefits
- Help you grab the chance to get more profit
- Raise your trustworthiness & brand awareness
- Protect your secrecy
- Improve your business uniqueness
- Let you sleep in a peaceful mind
How much does an LLC cost?
LLC costs and requirements vary between different states. However, there are two common LLC fees, including your initial filing fee and an annual/biennial fee.
- LLC filing fee. You pay this one-time fee to the state of formation to create your LLC. It is not monthly.
- LLC annual/biennial fee. This is an ongoing mandatory fee, which is often paid every 1 or 2 years to keep your business in compliance and in good operation. Late fees are applied if filed after the deadline. In 90% of states, they’ll shut down your LLC if you ignore this requirement.
LLC filing fees often range from $40 to $500. As of 2022, the average fee to get an LLC in the UD is $132.
To know more about LLC costs by state, you should read right here.
6 steps to get an LLC for your dropshipping business
The best time to create an LLC is as soon as you start your dropshipping business, as it ensures that you enjoy all the benefits associated with an LLC right from the start.
But if that is not possible, you can start small as a sole proprietorship, then register an LLC later, once your business is up and running.
Below are 6 steps to form an LLC for your dropshipping business.
Step 1: Choose your business name
Choose a name for your dropshipping company that is marketable and can attract customers. If you find it hard to choose one, you can use the following business name generators for more ideas:
Once you’ve picked one business name, you must ensure it is available. If another business is using the name, your state may prohibit you from registering it, while you may be infringing on another company’s trademark.
So, how do you know if a business name is available?
You should conduct an online search to see if another company is using the name. If a company on the other side of the country offers products and services that are entirely different from yours, you might be able to use the same name without infringing on their trademark. But you’ll find many exceptions to this rule; as a result, it’s best to look for an original name.
Many states offer an online search tool for company names, but your search will only show businesses registered in your state. Besides, you should search the US Patent and Trademark Office database to determine if another business has national trademark protection.
Step 2: Select your registered agent
A registered agent takes charge of accepting official documents (e.g., correspondence from the government and notices of lawsuits filed against the company) on behalf of the LLC. And every LLC must have a registered agent.
Generally, the agent must have a physical address in the state where your LLC is incorporated. Some states allow a company to serve as a registered agent, as opposed to an individual. You’ll list your agent’s contact information on your business formation documents.
Step 3: File LLC formation paperwork
You must file the appropriate paperwork to legally form an LLC. Your state may refer to the LLC paperwork as the “certificate of formation,” “articles of incorporation,” or “certification of organization.”
In addition to your LLC filing fee and annual/biennial fee, you’ll face additional costs if you hire a professional registered agent, or apply for additional licenses (i.e., liquor licenses or health permits).
On the filing paperwork, you’ll list whether your LLC is member-managed or manager-managed. Member-managed actually means the owners are responsible for the daily operations of the company. Meanwhile, manager-managed means the LLC brings in a 3rd-party to handle the affairs of the company, while the business owners take a more passive role.
You’ll have the option to form your LLC in a different state than where you live or do business. Some people elect states that have lower filing fees and tax rates, such as Wyoming or Delaware. To do so, you’ll need a registered agent to provide services in the selected state.
Note: Just because some specific states have lower fees doesn’t mean you should form there. It could end up costing you much more money. You could end up doing business illegally in your home state and having to file two LLCs (a Domestic and a Foreign LLC).
Step 4: Apply for an EIN
When opening a bank account for your dropshipping company, you can choose to open it under an LLC with your EIN (Employer Identification Number). As a unique nine-digit number, the EIN is assigned by the IRS (Internal Revenue Service) to business entities operating in the US for identification purposes.
The EIN works along the same lines as an SSN (Social Security Number), and the IRS only issues it to legally registered businesses. You have to ensure all your sales, contracts, agreements, purchases, payments, and other activities relate to your entity through the EIN.
The application for your EIN is free and straightforward to complete. You can submit it electronically on the IRS website.
The question here is: Do you really need an EIN?
If your LLC has employees or more than one owner, you need an EIN. If not, you don’t need an EIN. However, many business owners choose an EIN in order to protect their own identity, so they don’t have to use their SSN on their business accounts.
Step 5: Draft your operating agreement
An operating agreement is used to provide the guidelines for how business owners will run and manage the LLC. It should cover some issues like:
- how the owners can dissolve the business
- how the owners will share profits and losses
- whether the owners can transfer their interests to third parties
Some states require an operating agreement, while it’s optional in other areas. But most LLCs can benefit from an operating agreement because:
- It helps resolve conflicts between or among business owners
- If an LLC isn’t treated as a separate business, the business owners might lose their liability protection. By forming an LLC, following business formalities, and keeping your personal assets separate, you’re creating a clear line between the business assets and your personal assets. So, you’ll not be personally responsible for the business debts.
When drafting and following an operating agreement, you are demonstrating to anyone who is interested that the LLC is separate from your own assets.
You can create your own operating agreement. You can find a number of online tools and templates to help you generate an agreement tailored to your business needs. Reach out to an attorney if you have questions or need assistance.
Step 6: Apply for licenses and permits
Depending on your state and business type, you’ll be required to obtain additional licenses and permits. Some areas require all businesses to obtain a license to do business locally. Some specific industries, such as food and alcohol, require a number of different licenses and permits from government agencies.
Conclusion
An LLC could be the safeguard for your dropshipping company regardless of the state you’re living or operating your business. It could protect you from losing personal assets while giving you tax benefits.
We hope this LLC guide has helped you a lot. The decision is yours, so think about it carefully. Thanks for reading!
