Do I need an LLC for dropshipping?
Yes, an LLC is required for your dropshipping operation. It would help if you always were on the safe side when it comes to preserving your business and personal assets. We’ve laid out some pointers for launching a dropshipping business, as well as when you should form an LLC.
Business Structure
If you want to establish a dropshipping business, you must first choose a business structure. It is recommended that you set up your business as a legal entity if you intend to make a significant profit from it. There are many other types of companies, but online sellers often choose one of the three.
Sole Proprietorship
You can register as a sole proprietorship, which is the most basic business structure. However, you should be aware that the type does not provide you with any liability protection. As a result, you may be on the verge of losing your personal assets if a customer sues you.
The tax filing necessary for this, on the other hand, is simple, and you only need to record the earnings when submitting personal tax.
Limited Liability Company (LLC)
The act of forming an LLC, or Limited Liability Company, is simply the act of establishing your internet store as a separate corporate entity from yourself. This means that if a customer decides to sue you in court over a misunderstanding about the quality of the goods or believes you have defrauded them financially, the court will not be able to force you to pay restitution using your personal assets.
We can’t say that the LLC is failsafe, but it offers more security than a sole proprietorship. You’ll have to file separate tax returns for your business and pay recurring expenses. You’ll also have to pay a charge to start the business. Because LLCs vary by state, it’s a good idea to examine our information on incorporating an LLC in each one.
C Corporation
If you intend to start a dropshipping business with a large investment and hope to make a significant profit, you should consider forming a C Corporation first. Many companies prefer this option because it appears to provide the most liability protection.
The cost of forming a company is more than creating an LLC, and the tax filing is doubled. If your company is ordinary in size, LLC may be the best solution for you. We propose forming an LLC from the beginning if you have the funds to cover the costs of incorporation and continuing expenses.
If that isn’t the case, start with a sole proprietorship and work your way up to an LLC. But how can you determine when it’s time to go with an LLC? There are a few things you should think about.
The Scale of Your Business
If you’ve just launched a business and aren’t sure if it will succeed, an LLC isn’t necessary. If, on the other hand, your store has been open for a while and you’ve noticed a continuous increase in consumers, you should think about it.
However, having a lot of traffic isn’t enough to qualify for an LLC. Your company should be successful in some way. A monthly profit margin you can count on so that even after you’ve done your taxes and paid your recurring LLC expenses, you still have money left over for more investments and personal needs.
You could have a fantastic month if you decide to go with LLC. But, don’t make a hasty decision. Check to see if the streak lasts a few months and the profit margin remains above the line.
The Time of Establishment
If your company has just been operational for a month or two, forming an LLC may seem hasty. This is directly related to the first point. Before starting an LLC, keep track of your company’s success and check if it continues to expand or at least maintains the same rate.
Risk Assessment
What types of goods do you offer? Is there a level of danger associated with your product? For example, let’s say you’re selling electronic devices, and one of them is defective, resulting in injury to the consumer or, in the worst-case situation, a house fire.
Your customer is very likely to sue you in this case. If you don’t win the case, you’ll be forced to live with the nightmare of having to surrender your personal belongings if the damage is too significant.
If your company sells dangerous goods, you should form an LLC as soon as possible. The preceding two points are unimportant in determining whether or not your firm is successful, even if it is just a month old. In this scenario, relying on sole proprietorship means putting your home, car, jewelry, or other personal items on the line.
EIN Number
Prospective dropshippers often ask the question, “Do I require an EIN to begin dropshipping?” The answer to this question can be complicated as with many tax-related queries, but here’s the quick version:
Dropshippers do not need an EIN in order to operate. It’s still a good idea to have one.
It depends on the type of business you have whether or not you require an EIN for dropshipping.
A Employer Identification Number (or EIN) is similar to your social security number. Dropshipping is a business that you start by yourself. This is called a “sole proprietorship”. A sole proprietorship does not technically require an EIN to be able to operate. Instead of paying separate taxes for your business (which requires an EIN), you will pay taxes on your personal tax returns based on your profit.
Dropshipping is a business that operates solely, and it is the most popular type of dropshipping business model. However, dropshipping businesses don’t need an EIN to operate legally. If your dropshipping company is a partnership or LLC, an EIN will be required.
It’s a good idea to obtain an EIN even if your dropshipping business is run entirely by yourself.
Dropshippers can reap the benefits of an EIN
- Dropshipping companies and wholesalers often require your EIN to order products.
- Your EIN is required for many permits and licenses that you will need to legally operate your business.
- An EIN is required to open a bank account for your company.
- You will eventually need an EIN as your business grows.
- If you want to hire employees, an EIN is required.
- Dropshipping via Amazon FBA will likely require an EIN to tax your business.
- It protects you from identity theft and tax theft.
How to obtain an EIN for your dropshipping business
It is simple and free to register for an EIN online. Visit the IRS website and fill out an application for your EIN. The process takes only 15 minutes and you will receive an EIN you can use immediately. All you’ll need to complete your application is a name for your business (we recommend choosing a name with an available domain), a social security number or Truncated Taxpayer Identification Number (TTIN), and some basic information about yourself such as your name and address.
You should get an EIN as soon as possible if you plan to start a dropshipping company. It takes only a few minutes to get an EIN, which will save you time and hassle later. You can find more information on starting a dropshipping business by reading our guide to high-ticket dropshipping and our beginner’s guide.
Finances
This should go without saying, but if you’re beginning a dropshipping business, don’t use your bank account or cash to fund it. Whether you require a PayPal account, a bank account, or a credit card, all of these accounts should be opened in the name of your company rather than your own. The business account should be used for all transactions.
Although starting a dropshipping business isn’t as simple as some people make it out to be, companies like Shopify provide several services to their customers, such as automatic tax computation, that make the process go much more smoothly. However, before you put your toes into the business, be sure you’ve considered all of the advantages and disadvantages.
