Should I Start an LLC for My Ecommerce Store?

Starting a limited liability company (LLC) for your ecommerce store 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 ecommerce store, lawsuits can arise from things like not disclosing an affiliate partner on your ecommerce website, contract law disputes, and trademark infringements.

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

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

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Do I Need an LLC for an Ecommerce 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 Ecommerce Store

By starting an LLC for your ecommerce 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 limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Ecommerce stores will benefit from liability protection because of the relatively high risk involved regarding potential intellectual property claims and product liability.

Example 1: One of the engineers you hired to launch your ecommerce website has been continually missing deadlines. This prompts you to fire him without paying the last week of his salary. As a consequence, this engineer brings a wrongful dismissal lawsuit against your company, claiming the manner in which he was fired breached his contract. In this instance, your personal assets are protected from any liability damages that might be imposed on your business.

Example 2: One of the products your ecommerce business shipped to a customer contained a large shard of glass that left a deep cut on their hand after they opened it. This led to the customer suing your business for the bodily harm they claim was caused due to its negligence. In the ensuing court case, your personal assets would be protected by limited liability from any requirement levied against your business to pay compensation.

Example 3: In order to launch the website for your ecommerce business, you take out a large loan. However, after your business fails to gain traction and make a significant profit, you begin to realize that you will not be able to repay this loan. This leads the creditor to sue your business for defaulting. Limited liability would ensure that any responsibility to pay damages is limited purely to the assets owned by your business.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for an Ecommerce Store

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 business’s 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

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if an ecommerce store owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

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

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

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

Get Started

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, you can 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 in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

Of course, you will need to acquire insurance for your LLC to protect your business assets. This is important for ecommerce businesses, in particular, due to the value of their assets.

In this way, the purpose of insurance is to protect a business’s assets from its liabilities, whereas limited liability protects an owner’s personal assets from the business’s liabilities.

Common Situations Business Insurance May Cover for an Ecommerce Business

Example 1: To gain further exposure for your business, you sign up to sell merchandise at a local convention. The convention requires all vendors to carry $1 million of liability insurance, and a general liability policy would fulfill that requirement.

Example 2: Your new website features a copyrighted photo, and the photo’s owner sues you for copyright infringement. General liability insurance would cover your legal fees and any payment awarded to the claimant (up to the limits of the policy).

Example 3: You plan to expand your business by offering additional items but need a bank loan to move forward. Your bank requires evidence of liability insurance as part of its loan terms, and a general liability policy would fulfill that requirement.

Other Types of Coverage Ecommerce 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 ecommerce businesses should obtain.

Product Liability Insurance

While your ecommerce business doesn’t accept visitors to a physical office, you still face a number of liability risks. If someone claims a product you sell caused them injury or illness, product liability insurance would cover your legal fees and any awarded damages in the event of a lawsuit.

You can purchase product liability coverage — tailored to your business’s specific needs — as part of a business owner's policy (BOP).

Data Breach Insurance

Studies indicate retailers face the greatest risk of a cyberattack — particularly those running ecommerce sites. Data breach insurance covers damages resulting from stolen customer information, and most general liability policies specifically exclude this type of coverage.

Commercial Property Insurance

As an ecommerce business, your company property is vital to your revenue stream. Commercial property insurance covers the cost of repairing or replacing any business-related property in the event of a fire, burglary, or natural disaster. This includes the items you sell and any business-owned buildings. Because an e-commerce company differs from brick-and-mortar retailers, owners should discuss the intricacies of their business with an insurance professional to ensure no coverage gaps.

You can purchase commercial property insurance as part of a BOP.

Business Interruption Insurance

If your company suffers a significant accident and loses inventory, you could be out of business for days, weeks, or months. Business interruption insurance can help cover some of your lost revenue while you make repairs and restock, ensuring your company doesn’t fail before you’re back up and running.

You can also purchase business interruption insurance as part of a BOP.

Workers’ Compensation Insurance

Most states require businesses to carry workers’ compensation insurance for their part-time and full-time employees. This coverage protects your employees if they become injured at work or fall ill after a work-related accident. It not only covers an employee’s medical bills and lost wages if they need time to recover but also any disability or death benefits stemming from a work-related accident. These policies also cover your legal fees if an injured employee names your business in a lawsuit.

While many states allow business owners to exclude themselves from their workers’ compensation policy, consider skipping this option if you plan to participate in your business’s daily operations.

You can purchase this coverage as a standalone policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance.

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

To get your ecommerce business off the ground, a small amount of capital is required upfront. This should be used to cover the cost of creating your website and marketing.

The largest cost of getting your ecommerce business is likely to be the salaries of the experts you hire to launch your store, such as web developers and marketing professionals.

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

Some of the ongoing expenses will include costs associated with computer maintenance, high-speed web connection, employee wages, insurance, and inventory space.

Learn more about running an ecommerce store.

Ecommerce stores make money by selling products through a website.

Learn more about starting an ecommerce store.

Ecommerce has been integrated into most retail spaces allowing customers the ease and convenience of purchasing products online rather than through brick and mortar locations.

Some of the large ecommerce platforms include eBay and Shopify which leverage online platforms to connect product sellers and buyers through online marketplaces.

Ecommerce stores range in profitability from a few thousand dollars to millions of dollars per year.

Learn more about starting an ecommerce store.