Last Updated: May 10, 2024, 8:01 am by TRUiC Team

Should I Start an LLC for My eBay Business?

Starting a limited liability company (LLC) for your eBay business can provide several benefits. 

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For an eBay business, lawsuits can arise from things like accidentally leaking your customers’ sensitive information as a result of a data breach, false advertising allegations, and fraud claims. 

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your eBay business seem more credible. 

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

A person logging into ebay on a tablet

Do I Need an LLC for an eBay Store?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for an eBay Business

By starting an LLC for your eBay store, you can:

  • Protect your savings, car, and house with limited liability protection
  • Have more tax benefits and options
  • Increase your business’s credibility

Limited Liability Protection

LLCs provide personal liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your eBay business is sued or if it defaults on a debt.

Many eBay businesses will benefit from liability protection—especially when selling products that might carry the risk of personal injury.

Example 1: In the description of an item listed for sale by your eBay business, an employee makes a derogatory remark about a competitor in jest. The competitor hears about this and sues your business for libel, arguing that your comments have severely negatively affected their business’s reputation. Limited liability would protect against damages being levied against your personal assets.

Example 2: Your work computer suffers a devastating hack that reveals the personal and financial information of a number of your customers. This prompted one of the affected individuals to sue your eBay business for this data breach, arguing that its negligence led to this. In the court case that follows, any liability to pay damages will be limited to the assets of your business.

Example 3: After your eBay business sold an iPhone to a customer that you believed to be legitimate, the customer alerted you that it was a fake. You ignore the customer’s complaint, which leads them to bring a misrepresentation lawsuit against your business after he had no success with eBay’s buyer protection program. If the court finds you liable to pay the plaintiff damages for this misrepresentation, the liability would be limited to your business’s assets.

Example 4: Some examples of liability include faulty products or contaminated food or supplements.

LLC Tax Benefits and Options for an eBay Business

eBay businesses can have relatively high revenue compared to expenses, and that can make an LLC attractive for tax purposes.

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return. The net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

If an eBay business owner believes they'll be paying themselves a reasonable salary and at least $10,000 in distributions each year, they might benefit from another LLC tax option, the S corporation (S corp) tax status.

S corp tax status for an LLC can help reduce self-employment and overall tax burden under the right circumstances.

For questions about tax solutions for your eBay business, we recommend scheduling a free tax consultation.

Credibility and Consumer Trust

eBay sellers rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses that form LLCs gain a level of consumer trust and credibility simply by forming an LLC.

Northwest will start an LLC for you for just $29 (plus state fees).

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

  • You can hire a dependable LLC formation service to set up your LLC for a small fee
  • Or, choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

You will need to acquire insurance for your LLC, as is the case for all other businesses. This is because eBay businesses face unique liabilities they need to protect their assets from.

Limited liability is often confused with insurance, but the distinction is simple: limited liability provides protection for personal assets, while insurance provides protection for business assets.

Common Situations Business Insurance May Cover for an eBay Business

Example 1: While you take a potential investor on a tour of your business, she trips on some uneven flooring, breaks a wrist in the resulting fall, and decides to sue your business. General liability insurance would pay for your legal defense and any required settlement.

Example 2: The owner of a business similar to yours files a lawsuit against you, claiming you libeled his company in your advertising. General liability insurance would cover your legal defense costs.

Example 3: A customer parks outside your place of business to pick up a large order. As you transport the order to his vehicle, you lose control of the hand truck and it slams into the customer’s car. General liability insurance would cover the customer’s vehicle repair costs.

Other Types of Coverage eBay Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all tow truck companies should obtain.

Product Liability Insurance

While you strive to ensure eBay customer service standards are met with every purchase, there’s always a chance someone might claim your product caused them harm. In the event of a lawsuit, product liability insurance would cover your legal fees and any required settlement.

Data Breach Insurance

Also known as cyber liabiltiy insurance, this coverage protects you from liabilities related to compromised customer data. If a cybercriminal hacks your system and your customers sue you over the damage caused by the stolen data, data breach insurance would cover your legal fees and any required settlement.

Home-Based Business Insurance

If you run your business from your home, you may need a home-based business insurance policy to safeguard your equipment and space in your home devoted to your business. A typical homeowners insurance policy may not cover business-related items or customer injuries in your home if you don’t disclose you use your home for business purposes.

Commercial Umbrella Insurance

While your general liability insurance policy covers most claims, some accidents or lawsuits may be so catastrophic that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for any legal fees and awarded damages that exceed your primary policy.

Should I Start an LLC FAQ

The better business structure depends on your business’s unique circumstances and needs. However, unless your business is low profit and low risk, an LLC is likely the better option.

At a minimum, you will need general liability insurance and product liability insurance. If you have employees, you will also need workers' compensation insurance.

Read our Business Insurance for eBay Businesses article for more info.

The beauty of running an eBay business is the minimal startup cost associated with it. Naturally, you will need to pay for the products you intend to sell.

In addition to this, eBay charges fees per listing, so if you sell more than 50 products a month, it is more worthwhile to pay for one of the website’s subscriptions.

Visit our How to Start an eBay Business guide to learn more about the costs of starting and maintaining this business.

The most significant ongoing expense is the fee that must be paid to eBay for the use and sale of products on their platform.

Selling products through eBay’s platform is a great way to enter a niche or specialized market and can be a great side gig or full-time job if the items you sell end up being successful.

Visit our How to Start an eBay Business guide to learn more.

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Article Sources

IRS: Limited Liability Company

IRS: S Corporations


SBA: Small Business Guide

SBA: Choose a Business Structure Guide

US Census Bureau: Small Business Statistics

SBA Office of Advocacy: Data on Small Business

FRED: SBA Data for Small Business