No law requires you to form an LLC just to sell online. Without one, you are generally a sole proprietor, which is the simplest setup but leaves your personal assets exposed. An LLC adds liability protection and costs a state filing. This is general information, so check your state’s rules before you decide.
What is the difference between a sole proprietorship and an LLC?
The SBA describes the main differences this way:
- Liability. A sole proprietorship has no separate legal existence from its owner, so the owner can be held personally responsible for business debts. An LLC generally protects personal assets such as a car, home or savings, “in most instances,” in the SBA’s wording.
- Taxes. A sole proprietor reports profit on a personal return and pays self-employment tax. LLC members are generally treated the same way, and profit passes through to their personal returns.
- Paperwork. If you operate under your own legal name, a sole proprietor generally doesn’t register anywhere, though a trade name (DBA) may be needed depending on your state. An LLC must register with the state, usually through the Secretary of State, and name a registered agent.
How is an LLC taxed?
By default, according to the IRS, a one-member LLC is disregarded as separate from its owner for income tax, so the profit is reported on the owner’s return. For employment tax and certain excise taxes, it is still treated as a separate entity. An LLC with two or more members is classified as a partnership unless it elects to be taxed as a corporation.
To change that classification, an LLC files Form 8832, the entity classification election. The IRS publishes Publication 3402 on LLC taxation. Our takeaway: for most one-person online shops, the LLC does not lower your income tax by default. What it changes is liability.
What does it cost to form an LLC?
The SBA says total state registration costs are typically under $300, and the amount varies by state. Many LLCs also need an operating agreement, which the SBA says is widely recommended even where not required. The SBA also notes that many LLCs must file beneficial ownership information reports with FinCEN, a rule that has changed over time, so check the current requirement. Ask your state about ongoing annual fees, which this page does not cover.
When does a sole proprietorship make sense?
The SBA says it suits low-risk businesses and people testing an idea. In our view, that fits a new seller who:
- is testing a product with a small first order;
- sells items with little risk of injury or damage;
- has little personal property to protect;
- wants to learn the numbers before paying for a filing.
When does an LLC make sense?
The SBA says an LLC fits medium- or higher-risk businesses, and owners with significant personal assets. A hypothetical example: you sell a space heater and a customer claims it caused a fire. As a sole proprietor, a lawsuit could reach personal assets. An LLC is meant to separate those, though protection isn’t absolute and depends on how you run the company.
We would think harder about an LLC when:
- you sell products where a defect could hurt someone, such as heaters, children’s items or supplements;
- you have a business partner;
- sales are steady and growing;
- you want a business bank account and a clear line between personal and business money.
Does Amazon, Etsy or eBay require an LLC?
We did not confirm any marketplace’s current rule on this, so check the seller terms of the platform you use. What we can say from the SBA is that choosing a structure is your decision, not a platform rule.
What are the downsides of an LLC?
The SBA lists more formation and filing requirements, self-employment tax for members, and, in many states, a limited life. Changes in membership may require dissolving and re-forming the LLC unless an internal agreement covers transfers.
What should you do next?
- Estimate your risk: what could go wrong with the product you sell?
- List your personal assets that you want to protect.
- Look up your state’s LLC fees and annual requirements.
- Talk to a tax professional about your situation.
- Whatever you choose, track income and expenses from day one. Our guides on Form 1099-K for online sellers and freelancer taxes explain related paperwork, and how to price products to sell online shows how to build costs into your price.
Frequently asked questions
Do I need an LLC to sell on Etsy or Amazon?
The sources we used don’t confirm any marketplace requirement. Check the seller terms of the platform. The SBA says choosing a structure is your decision.
Does an LLC save me taxes?
Not by default. The IRS treats a one-member LLC as part of the owner’s tax return, and the SBA says members pay self-employment tax.
How much does it cost to form an LLC?
The SBA says state registration is typically under $300, varying by state.
Can I start as a sole proprietor and form an LLC later?
Nothing in the SBA guidance prevents it. Many sellers start small and form an LLC as risk and sales grow, but talk to a tax professional about how the switch affects your situation.
