Starting an LLC for Shopify (Free Guide)
This guide will look at the benefits and protections offered when selling on Shopify, why an LLC makes sense for those who use the platform and a step-by-step guide on forming an LLC.
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Shopify is one of the most popular e-commerce platforms around. Its ease of use and popularity make it a favored starting point for those looking to launch an online business. To protect your long-term success, consider forming a Limited Liability Company (LLC).
Benefits of opening a Shopify store
Shopify is an all-in-one solution for entrepreneurs and small businesses who are looking at selling online. There are countless benefits to opening a Shopify store:
- Shopify Protect: Shopify has a built-in fraud protection system that detects suspicious transactions. This free service protects owners from potential scams and is included when you sign up for the platform.
- Shopify Payments: This built-in payment processing system allows you to accept a range of payment methods. Credit cards, debit cards and mobile wallet payments can be easily accepted through your online store. Shopify Payments can also manage all your transactions, making it easier to track sales and manage your business finances.
- Chargeback coverage: If a fraudulent chargeback occurs through a Shopify Payment order, Shopify will cover the cost of the order and chargeback. This means no money will be lost on the sale.
- Multi-channel protection: Shopify protection extends beyond its own platform. Any sales you make through Facebook, Instagram, and other social media platforms are covered by the same protections. This allows you to expand your reach into other digital platforms while still benefitting from Shopify’s fraud protection.
Why you need an LLC for Shopify
When you start selling anything informally, online or in-person, you are acting as a sole proprietor. This means if you make any mistakes or come under any type of dispute, your personal assets will be at risk. The next step up in the world of business entities is an LLC. These are particularly popular with new businesses and small business owners who want asset protection without becoming a corporation. Shopify store owners should consider a few key reasons.
Personal liability protection
An LLC separates your personal assets from your business debts. This shields your personal property, like your house or savings accounts, from lawsuits or claims should they arise.
Imagine you sell homemade scented candles on your Shopify store. A customer claims a faulty candle caused a fire in their home and decides to sue. If you were a sole proprietorship then your personal assets would be at risk. If you have formed your LLC, only your business assets would be at risk, and your personal property would be protected.
Tax advantages
As an LLC, you can choose how your business is taxed. You can elect to be taxed as a sole proprietorship or as a corporation. This flexibility can lead to lower tax rates.
If you are the sole owner of a successful tie-dye t-shirt online store, you can choose to be taxed as a sole proprietor. This means your business income passes through to your personal income tax return. If you and some friends have developed a custom phone case store and all work for the business, you could form a corporation. This may lead to benefits like lower self-employment taxes.
Credibility
Running an LLC is much more professional than just operating under your own name as a sole proprietor. This can demonstrate to suppliers and customers that you are serious about venture and it is more than just a side hustle.
Let’s say your Shopify store sells eco-friendly cleaning products. Forming an LLC and giving yourself the business name “Eco Cleaning Solutions LLC” feels professional. Much more than “John Smith,” as under a sole proprietor, you must operate under your name unless you file a DBA (Doing Business As). Suppliers may be more willing to work with you, knowing you are a serious outfit and business structure in place.
Step-by-step guide to opening an LLC for Shopify
1
Choose a business name
Think of a name that is memorable and related to what you sell. If you use keywords related to what you sell, you may help customers find your store quickly. Check if the name is available by searching the Secretary of State’s website or business registry.
2
Select a registered agent
A registered agent is an individual or company that receives legal documents on your LLC’s behalf. They serve as the main point of contact between you and the state.
You can act as your own registered agent if you have a physical address in the state where you are forming your LLC. However, there are benefits to using a professional service, as they add a layer of privacy as your address is then kept off public records.
3
File formation documents
To officially establish your LLC, you’ll need to file Articles of Organization with the state. These documents typically include your LLC name, registered agent information, and a brief description of your business. You may have to state that your LLC is engaged in e-commerce business.
4
Obtain an Employer Identification Number (EIN)
An EIN is essentially a Social Security Number (SSN) for your LLC. It is used for tax purposes and, if often needed, to open a business bank account. You can obtain an EIN for free online on the IRS website. Having an EIN can add an extra layer of privacy as your SSN would not then need to be used for business purposes.
5
Open a business bank account
Keeping your personal and Shopify business finances separate is essential. It makes bookkeeping easier and will simplify tax season to no end. Open a business bank account using your LLC name and EIN.
Shopify taxes
By default, LLCs are considered pass-through entities for tax purposes. This means that the business itself does not pay taxes on its income. Instead, the profits and losses are passed through to the members, who report it on their personal income tax returns. This simplifies tax filing for single-member LLCs.
Say your Shopify business earns a net profit of $50,000 this year. As a single-member LLC, you would report this income on your personal tax return, and the LLC itself would not pay federal taxes on this income.
LLCs with multiple members may choose to be taxed as an S-corp. In an S-corp, members are treated as employees and receive a salary that is subject to employment taxes. The remaining profits can be distributed as dividends, which are not subject to self-employment taxes.
Suppose your 4-member LLC earns a net profit of $100,000. By electing to be taxed as an S-corp, you and your fellow three members could each receive a reasonable salary of $20,000, which would be subject to employment taxes. The remaining $20,000 could then be distributed as dividends, which are not subject to self-employment taxes. This structure can potentially save you money on your overall tax bill.
As a Shopify seller, there are several tax deductions you may be able to claim for your LLC, including:
- Shopify subscription fees and transaction costs
- Advertising and marketing expenses
- Shipping and packaging materials
- Home office expenses
- Equipment and software used for your business
- Professional fees (e.g., accounting, legal)
- Business travel expenses
- Being able to deduct these expenses from your taxable income may save you money in the long term.
Potential drawbacks of forming an LLC for Shopify
- Costs: There are upfront costs to form an LLC. For a Shopify business starting out, these costs could be significant in the grand scheme of your business. Some states also require annual fees or taxes to maintain your LLC status.
- Increased paperwork: LLCs require more paperwork than a sole proprietorship. You’ll need to maintain separate financial records for your Shopify business and may need to file additional forms and reports.
- Complexity: Managing an LLC can be complex. You may need to learn new business skills or seek professional help for bookkeeping or tax filing.
- Potential tax implications: Depending on your Shopify business’s profits, the tax benefits of an LLC might not outweigh the costs. It’s important to consult with a tax professional to understand how an LLC structure would impact your specific situation.
FAQs
Do I need to form an LLC in the same state where I live, or can I choose another state?
You can form an LLC in any state. It may even be beneficial to form in a state other than your own for tax reasons or startup costs.
How does having an LLC affect my ability to collect sales tax on my Shopify sales?
Having an LLC does not directly impact your obligation to collect and remit sales tax on your Shopify sales. However, forming an LLC may make it easier to register for a sales tax permit.
How much does it cost to form an LLC for my Shopify business?
The cost of forming an LLC varies by state, typically ranging from $50 to $500; this includes registered agent fees and filing fees for formation documents.
Do I need an operating agreement for my single-member Shopify LLC?
While not required in most states, having an operating agreement is recommended, even for single-member LLCs. An operating agreement outlines the ownership structure, responsibilities, and operational procedures, helping prevent misunderstandings.
Do I need a business license for my Shopify LLC?
Business license requirements vary by state and type of business. Contact your state’s Secretary of State office and local government agencies to work out what licenses you may need.
What is the difference between a Shopify store and a dropshipping business?
A Shopify store is an e-commerce platform that allows you to sell products online. A dropshipping business is a method of fulfilling orders where the seller does not keep the products in stock.
What is a DBA, and do I need one?
A DBA (Doing Business As) is a fictitious business name that allows you to operate under a name different from your legal business name. You might want a DBA if you want to market your Shopify business in a particular way.
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