Step-by-Step LLC Formation for eCommerce

Oct 21, 2023
Alice Pham

Any time you launch a new company, there are countless decisions to make. What will you name the company? What colors will you use for your logo and branding? Will you base the business out of your home, or do you need to find office space?

ECommerce companies also face their share of decisions, including important choices about what to sell, how to price, how to market, and beyond. And then there’s the decision about how to structure the business, legally.

For most eCommerce businesses, the best choice is the Limited Liability Company, or LLC. Foremost among the reasons for this is that the LLC is incredibly easy to form. In fact, you can typically start an LLC in as little as a day’s time, following just a few simple steps.

The Benefits of the LLC Structure

Taking the time to establish an LLC can yield a number of advantages for your eCommerce business. Some of the primary benefits include:

  • Personal wealth protection. By establishing a separate legal entity, keeping your personal and business liabilities distinct, you minimize your exposure to creditors and to lawsuits.
  • Tax flexibility. While most eCommerce companies choose to be taxed on a pass-through basis, it’s also possible to elect for corporate tax status. This flexibility can accommodate a wide range of tax strategies. An LLC owner will likely encounter a variety of tax forms. This can include form 1099K, form 1065 for partnerships, and form 1120 for S-Corps.
  • Management flexibility. The LLC structure also provides plenty of wiggle room with regard to how you manage your business. You can run things yourself, allocate responsibilities among multiple partners, or hire a third-party manager.
  • Administrative ease. There’s fairly little required of you to form an LLC. You’ll also have minimal burdens for annual reporting.
  • Confidentiality. While Corporations require you to disclose a lot of personal and financial information to the public, LLCs allow you to maintain a much higher level of privacy.

The bottom line: Structuring your eCommerce company as an LLC provides you with the flexibility, the security, and the peace of mind you need for long-term, scalable growth.

The Steps for Starting an LLC

For eCommerce merchants eager to form an LLC, it’s important to note that the requirements can vary from state to state. Generally speaking, however, the trajectory looks like this:

Decide Which State to Register In

You are technically allowed to start your eCommerce LLC in any state, and some entrepreneurs try to determine which state is most advantageous from a tax perspective. The long and short of it is that it’s always more advantageous to start your LLC in the state where you live and run your business. The only situation in which you should “shop around” for the best state is if you’re not a U.S. resident, and thus don’t have a home state to fall back on.

Choose a Name

One of the first things you’ll need to do is to choose the legal name that you register with your state. There are a couple of stipulations here:

  • It’s mandatory that you pick a name that isn’t already claimed by an LLC in your state. Most states will offer an online directory where you can easily check that the name you want is available.
  • Most states require you to choose a name that includes either “Limited Liability Company” or “LLC.” You can also pick a DBA (“doing business as”), allowing you to do business under a name better aligned with your marketing or branding goals.

Select a Registered Agent

The next step in the process is to name someone to serve as your eCommerce LLC’s Registered Agent. This person is designated to receive business and tax documents on the company’s behalf. 

Some states will allow you to serve as your own Registered Agent, but most don’t. Besides, it’s actually advantageous to have an external vendor who keeps up with your paperwork and documentation for you. You can easily Google LLC and Registered Agents in your state; for instance, if you’re in the Golden State, a quick search for the best LLC services in CA can be fruitful.

Draft an Operating Agreement

While it’s not legally necessary to create an Operating Agreement, doing so can be incredibly advantageous for the day-to-day efficiency of your eCommerce LLC.

An Operating Agreement is basically a blueprint for how your company is run. It might detail such information as:

  • Management and leadership roles within the company.
  • How profits are divided between your partners.
  • The process for admitting new members or dealing with members who want to exit.

This is strictly an internal document, and it’s not anything you need to file with the state. However, it can provide a lot of clarity about how you want your business to be run.

File Articles of Organization

You do need to file Articles of Organization with your state. This is the legal document that officially establishes your LLC. Different states may require different pieces of information, but usually your Articles of Organization will entail:

  • The name of your eCommerce LLC
  • The address of your office or headquarters
  • The purpose of your LLC
  • The names of the members who manage the LLC
  • The name and contact information for your Registered Agent

When you file your Articles of Organization, you’ll also need to pay a nominal LLC filing fee. The cost varies by state, but usually falls somewhere between $50 and $200.

Get Your Banking Set Up

There are a couple of important banking steps to take.

  • First, it’s important to have an employer identification number, or EIN. This number is critical when you file your taxes or when you handle payroll. You can claim one for free, simply by visiting the IRS website.
  • It’s also recommended that you establish a business bank account, completely separate from your personal banking and checking accounts.

By following these steps, you’ll be better able to benefit from the personal liability protections offered by the LLC structure.

Obtain Licenses and Permits

Finally, keep in mind that you may need a license or a permit to conduct commercial activity in your state. Requirements can vary from state to state, so make sure you seek advice from a business coach, attorney, or simply the local Chamber of Commerce.

Keep Up with Annual Responsibilities

While LLCs are famously low on administrative obligations, there are a few things you’ll need to keep on your radar in order to maintain your LLC structure.

  • First, keep in mind that most states require you to pay annual LLC fees, simply in order to maintain your registry with the state. These fees are usually quite minor but the consequences of missing them can be dire, including the dissolution of your business. Some states offer automated payment reminders, but don’t take this for granted!
  • Also note that some states will require you to provide an annual report. Thankfully, the information required is usually very minimal, often involving a simple affirmation of your name, Registered Agent, and contact information.

Set Up Shop for eCommerce Success

To lay the foundation for long-term eCommerce success, choosing the right legal structure is essential. Generally speaking, the LLC structure is optimal, offering the best possible balance of tax and managerial flexibility. Follow these steps to make sure your LLC is properly established, and with any questions, consult with a business coach or attorney.