For the past few years, the drop-shipping business model has been on the rise and it’s become a popular way to start an eCommerce business. And with the recent pandemic, this trend is only increasing as more people are shopping online for items. As a result, many entrepreneurs are wondering if starting a drop-shipping business is a good idea and if they should set up an LLC for their business.
There are a lot of things to think about when starting a Drop-shipping and one of the most important is deciding what legal structure to use. Here, Limited Liability Company (LLC) is one of the best options to register your business to get benefits like an LLC:
- Protects your personal assets
- Protects your privacy
- Has more tax benefits
- Has growth potential opportunities
- Can create brand awareness
- And much more
The online world has totally changed since the COVID-19 pandemic. Now we access the world through the internet and all kind of businesses and services including clothing and fashion are now crawling on the online landscape.
Can you believe 2.14 billion people bought goods and services online during 2021 across the globe?
What would be a better way to take a deep plunge into the thriving world of Drop-shipping than forming an LLC yourself? An LLC is the best way to protect your Drop-shipping from business liabilities and provide multiple tax benefits.
Is there any Benefit of Drop-shipping ?
Unbelievably, in 2021, the revenue from dropshipping in the USA was around $768 billion. Despite the complete reopening of the economy and higher vaccination rates in 2022, the percentage of business conducted online will remain 29.7% of all business activity compared to 30.8% in 2021.
If you have a great business idea and plan to set foot in the digital world by starting your Drop-shipping , do it now. Start your Drop-shipping before the market gets too crowded.
There are a lot of good reasons to start a Drop-shipping. Here are some compelling reasons why you should start a Drop-shipping:
- More potential for revenue: You can make a lot more money than traditional business as your product reach to more potential customers.
- No geographical limitation: You can work from anywhere and have customers and clients across the globe.
- You can set your own working hours: You have the flexibility to work when you want and how you want.
- You can be your own boss: You call the shots and make all the decisions. You don’t have to answer to anyone else.
- Be in the race: The current pandemic has proven that the maximum businesses will be converting to online in the coming years are.
Despite the increasing trend of Drop-shipping worldwide, many people ask “Should I start a Drop-shipping?“. This reluctance is due to the fear of any potential loss in the strange world of the internet.
Well, starting your Drop-shipping as an LLC makes all your fears go away. Now, you will be wondering what is an LLC and how much does it cost to form an LLC? Or probably, you may be looking for professional LLC services.
Don’t worry; in subsequent sections, you will get all your answers.
What is an LLC?
A Limited Liability Company (LLC) is a legal business structure that protects the personal assets of an LLC owner from business liabilities, lawsuits, and debts.
It means that if your business is sued or has outstanding debts, your personal assets such as your home, car, personal bank account won’t be harmed.
An LLC has a flexible management structure and doesn’t have business formalities like a sole proprietorship. At the same time, an LLC provides you with the limited liability features of a corporation.
There can be one or multiple owners of the company and these owners are referred to as LLC members. Unlike a sole proprietorship or corporation, there is no ownership restriction on an LLC.
Moreover, there is a flexible LLC tax structure that attracts many entrepreneurs to choose this business model. But how an LLC is different from other business entities?
To know this, read our comprehensive guide on LLC vs LLP, S Corp vs C Corp, and LLC vs S Corp.
Pro Tip
So starting a Drop-shipping and protecting it from liabilities through LLC is the need of the hour. We understand filing paperwork and managing time to visit state entities is a difficult task. However, you can hire professionals for your LLC formation online.
You don’t have to worry about searching best LLC company that suits your need. The good news is that we have reviewed some of the top-rated services online for your assistance.
Significance of an LLC for Drop-shipping
Since you have gotten a general idea of what an LLC is, we will move to the next question, “Why do you need an LLC for a Drop-shipping?”
An LLC provides multiple benefits to every new business owner and choosing an LLC for your channel is the right decision.
Important
The limited liability protection is what you need for your Drop-shipping so that no one can harm your personal assets even if your business faces a lawsuit from an unhappy customer.Another big advantage is that you get more tax options with LLCs. You do not get these advantages in sole proprietorships or corporations.
Another great benefit you get by registering an LLC for your Drop-shipping is that you increase your business’ credibility. You can easily open a bank account, get loans from creditors, have sponsors, etc.
LLC is a renowned business structure and by operating your Drop-shipping as an LLC, you create a solid impact on your customer’s mind.
You also get rights to your Drop-shipping name which means that any other Drop-shipping cannot have your LLC’s name in that state where you registered your LLC.
Sole proprietorships, on the other hand, have to register an Assumed Business Name (DBA) to get a business name and protect it from stealing by other business owners. Below we have listed the advantages of registering your Drop-shipping as an LLC.
Major Benefits of Your Drop-shipping as an LLC
By starting a Limited Liability Company for your Drop-shipping, you can:
- Protect your personal assets and savings with LLC’s limited liability protection.
- Protect your privacy by forming an anonymous LLC.
- Have more tax benefits than different business structurs such as S-Corp, C-corp, LLP, and Sole proprietorship.
- Growth potential for your Drop-shipping.
- Brand your business’s credibility and name.
Let us discuss all these important benefits to start an LLC for your Youtube channel as a business.
Important
It is highly important to know what personal expenses qualify as business expenses for your tax write-offs.#1. Personal Asset Protection
There are many reasons why Drop-shipping business owners should form an LLC to protect their personal assets. However, limited liability protection is the most inviting feature of an LLC.
Limited liability protection is important for ensuring that any lawsuits filed against the company won’t affect the owners’ personal assets.
#2. Protect Personal Privacy
By forming an anonymous LLC aka private LLC, you can protect your personal information going in the public record. You can enjoy all the features of an LLC without revealing to the public who owns the LLC.
#3. LLC Tax Benefits
The Internal Revenue Service (IRS) does not have any special category for LLC taxes. Rather, LLCs have many options and flexibility to pay taxes. Moreover, as a small business, LLCs can write off many of the business expenses.
In other words, LLCs have an advantage over informal businesses (sole proprietorship) and formal business structures (LLPs, corporations, LPs, etc).
Read our detailed articles on LLC tax benefits and how LLCs are texed to know more about the specifics.
#4. Easy Maintenance
LLCs do not have to go through business formalities as corporations do. So, there is no need to set up regular shareholders’ meetings, record meeting minutes, strict implementation of the operating agreement, etc.
#5. Growth Potential for Your Business
Since LLC is a legal business structure, your business will have a lot of credibilities. Unlike a sole proprietorship, the business is not registered with the state, and customers or vendors are reluctant to trust such business.
Moreover, to open a business bank account or use a business name, sole proprietorships have to register a Trade name or Doing Business As (DBA).
While, with LLCs, you do not have to go through such filings, and you can easily open a business bank account and get loans.
#6 Branding Your Business
Your Drop-shipping branding is one of the most important things to consider, especially if you plan on growing your business.
Converting your Drop-shipping to LLC helps you improve the impact of your business name. It means that any other business can’t use your company’s name in that state. If someone does, they will be charged with the copyright laws.
LLC also adds a professional impact on your customers and helps you get investors by making your company more reliable in their eyes.
Other Possible Business Structures for Drop-shipping
Sole Proprietorship or General Partnership (Unincorporated Businesses)
A general partnership and sole proprietorship are unincorporated businesses. In other words, to legally operate in the USA, you don’t have to register your business with the state.
Sole proprietorship and general partnership are default business structures. When two or more people go into business with the goal to earn a profit, their business model will be a general partnership by default.
If only one person is the owner of the business and hasn’t registered the business sole proprietorship exists by default.
You can expect the following benefits if you adopt the unincorporated business structure for your Drop-shipping:
- No need to file paperwork
- No business formalities
- Pass through tax options (saved from double taxation)
You can become a sole proprietor for your Drop-shipping by following our simple guidelines.
Except for the hassle of filing paperwork with the states, LLC offers all the benefits of a sole proprietorship or general partnership in addition to limited liability protection and more.
By default, your LLC tax structure is like a sole proprietorship where your profits and losses are passed through your income.
However, in a sole proprietorship, your business is not considered as a separate entity so the business liability will be your liability.
Point to Ponder
If the state paper filing is the only issue for which you are not adopting LLC as your business structure, you can get this done by any reliable LLC company for a fraction of the cost.
We recommend ZenBusiness, which forms your LLC without any hassle for just $39 plus state fee.
You can register your Drop-shipping as a C Corporation. It is a great business type if you plan on making a lot of money through your Drop-shipping. However, you should also be prepared for corporate formalities and higher taxes- as C Corporations are taxed double.
C corp offers the following benefits for your Drop-shipping:
- Limited liability protection
- Unlimited number of shareholders
- No stock restrictions
- Greater chances to raise capital
- Easy transfer of ownership
Important
Setting up the right entity structure can be beneficial to your taxes, as it can eliminate some of the self-employment tax.S Corporation Importance
The S corporation taxation option is relatively more flexible than the C corporation. So, if you plan to make a lot of money through your Drop-shipping, S corp is a good option.
However, with S corp, you have some limitations on citizenship and the number of shareholders (cannot have more than 100 owners) while in C corp there are no such restrictions.
Compared S-Corp with C-Corp to get to know the difference in detail. S corp has the following benefits for business owners:
- Limited liability protection
- Pass-through taxation enables S Corp to avoid double taxation
- Advantage of tax write-offs
- Easy transfer of ownership
However, if you are a startup or owner of a small business, you can set up an LLC and elect to be taxed as an S corporation.
Downsides of Starting an LLC for a Drop-shipping
LLC is not for everyone, especially if you plan on making much money or transferring ownership in the future. Here are the disadvantages of registering your Drop-shipping as an LLC:
- Hard to raise capital for the business
- Difficulty in the transfer of ownership
- Suitable for small businesses
Let’s suppose if you’re a freelancer or running a small business with an annual income of less than $50k, then an LLC is a suitable option. However, if you expect higher revenue, look for LLC alternatives such as corporation.
For startups, it is a good idea to register your business as an LLC. Once you start growing and see the potential of high revenue, change your business structure from LLC to a corporation through LLC Conversion.
So, like successful business owners plan ahead of time and take the right decisions at the right time. Even you can expand your business to another state through LLC making its franchises as Foreign LLC.
How Drop-shipping are Taxed?
If you do not incorporate your Drop-shipping, depending on the number of business owners, you will be taxed on your personal income as a sole proprietorship or general partnership. It means you will be taxed as a pass-through or disregarded entity.
As an example, if you make money through an Instagram page or a Drop-shipping, then the IRS sees it as earned income. Of course, how much taxes you have to pay depends on how much money your business makes.
Depending on your state, you may have to pay franchise tax, sales tax, or any local tax. Moreover, certain states have taxes on specific items such as oyster sale fee, mixed beverages tax, crude oil tax, battery sales tax.
So, depending on your business, check with the state and local authorities for the specific taxes.
Drop-shipping Legal Requirements
Like any traditional business, you need to follow the laws and regulations of federal, state, and local authorities. Obtaining the proper permits or eCommerce business licenses is a vital step in starting and running your Drop-shipping.
Depending on your state, local government, and type of business, the following are some legal requirements for Drop-shipping.
- Seller’s Permit: Required for the businesses that sell goods or services online.
- Home Occupation Permit: Business owners need this permit to operate their companies from their homes.
- Business Operation License: Almost every Drop-shipping need this licence to conduct business in their city, or state.
- Doing Business As (DBA): If you plan to operate under a professional name rather than your birth name, ypu will need a DBA.
- Employer Identification Number (EIN): If your business your business collects payroll tax, you will need federal tax ID number issued by the IRS.
- Sales Tax License: Drop-shipping that sell taxable services and products need this licence.
- Occupational License: If you belong to certain profession and practice online such as accountant, doctor, Drop-shipping appraiser, etc., you are required to get this licence. For specific details, visit National Occupational Licensing Database.
How to Form an LLC for Drop-shipping?
Now you know why LLC is significant and all its benefits for starting a Drop-shipping. Let’s move forward to the process of forming an LLC for a Drop-shipping. Please remember that every state has its own laws in forming an LLC, so you need to check your state’s laws.
We’ll be listing down the major steps to start your LLC for a Drop-shipping but if you want the detailed guideline on LLC, don’t forget to access our free comprehansive guideline.
- Select your state
- Pick a suitable name for your LLC
- Hire an LLC Registered Agent
- Create an LLC Operating Agreement
- File your Article of Organization
- Get an EIN
#1: Select Your State
Choose the state where you want to start and name your LLC. It is wise to start your LLC in a state where you live and will carry out your business.
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
#2: Pick a Name for Your LLC
You need to choose your LLC name carefully. Your LLC name should be attractive to your customers as it will be the first thing any customer will look up to.
Check if your name is available in the state database and no other business has already taken that name.
In some states, you are not even allowed to take an LLC name that is similar or deceptively similar to another LLC’s name.
After checking your name’s availability, you need to secure it as well. Especially, if you plan to start your LLC after some time, an LLC name reservation will allow you to secure that name and no other LLC can take that name.
Many states usually reserve the business name for two months and no one else can grab your name in that period.
#3: Hire an LLC Registered Agent
Every state demands you to have a registered agent. A registered agent is a person (yourself or a colleague), an entity, or a professional service, that accepts tax and legal documents on behalf of your business.
It seems pretty tempting to designate yourself as your business’s registered agent and give your home address. However, it could be bothersome as after nominating yourself, your home address and personal information become public.
ZenBusiness is entrepreneurs’ favorite registered agent service as they charge you only $99 per year. Interestingly, if you incorporate your LLC through them, they provide you with one-year free registered agent services.
You can also look for your town’s top registered agent service provider if nominating a regeterd agent seems complicated to you.
#4: Create an LLC Operating Agreement
An operating agreement highlight your company’s standards and rules. If your business includes more than one member then creating an LLC operating agreement is vital.
It showcases the responsibilities, rights, ownership, and voting power of every LLC member. It outlines the LLC management structure and guides what will happen if you dissolve your LLC or move your LLC to another state.
It also tells how your business’s revenue will be distributed among LLC members which avoids any conflict regarding money.
Many states do not demand you to create an operating agreement but by creating an agreement you can avoid any future conflicts between your company’s members. You can also use an operating agreement tool to create a document for free.
#5: File your Articles of Organization
The Article of Organization or Certificate of Formation is the document that you file with the secretary of state to register your LLC. This document is the principal document that ensures the legal status of your company.
If you are afraid of paperwork or do not have time to go through an extensive filing process, you can hire online LLC services. Many online platforms like Legalzoom offers legal assistance to file your article of organization guide you through technicalities during the filings.
#6: Get an EIN
EIN stands for Employer Identification Number. This 9 digit number is like your social security number required by your LLC for many purposes like opening a bank account, filing company taxes, etc. This number allows the IRS to identify and tax businesses.
Even if you have employees for your Drop-shipping, an EIN will help you stay compliant with federal tax requirements. You can get an EIN for free if you will directly apply to the IRS.
LLC Service Providers for Drop-shipping
Now you have learned about the steps needed to form an LLC but still, if the formation of your LLC seems a hectic job, you should consider hiring LLC service providers.
To save you from any hassle, we have reviewed the best service providers in the market like ZenBusiness and highlighted their salient features, pros, cons, and formation packages in our detailed guides.
You may find many LLC websites that offer LLC services but we’ll be discussing a few of them. We only recommend companies that fit out strict litmus tests. Reas here about how we review LLC formation companies.
1. ZenBusiness Review
If you are looking for a complete LLC formation package, ZenBusiness is the best choice. They have got everything; at just $49, their starter pack includes LLC formation, free registered agent for one year, operating agreement template, and much more.
They have 8,588+ reviews with a 4.7/5 star rating and with positive comments. In their pro-package, they offer free EIN registration and a worry-free guarantee feature. This feature provides good care to the customer’s annual report filing.
If you want to read the full review of ZenBusiness, click here.
2. Northwest Registered Agent Review
If you are looking for a more experienced company, Northwest Registered Agent is an intelligent choice. They have been providing LLC services since 1998 and have established themselves as one of the best LLC service providers.
Northwest has got the best customer support as their team is filled with highly professional staff. They also provide LLC registered agents free for one year.
One major downside of Northwest would be its pricing. Northwest is quite expensive as compared to others. It is mainly because of their experience in providing LLC service.
You can also read the full review of Northwest Registered Agent review to learn about this company in-depth.
3. Incfile Review
If you are looking for a service provider where you don’t have to spend a penny, then Incfile is the best choice.
Incfile is the most affordable LLC service provider if you are looking for a basic LLC service. They literally charge you $0 for their LLC registration services. They have a lot of experience as well; they have started 500,000 businesses in just 16 years.
However, if you are looking for advanced LLC features, Inc File is not for you. There gold package and Platinum package are expensive and do not have any special feature.
If you want to read the complete guide of Incfile, then click here.
