For US online sellers, choosing the right business structure isn’t just a formality—it’s a decision that affects everything from taxes to liability and credibility. Many ecommerce business owners find themselves debating between forming a Limited Liability Company (LLC) or operating as a Sole Proprietor.
Each option offers its own advantages and drawbacks. Your choice can impact how you manage risk, handle compliance, and approach your accounting services. Whether you’re launching your first online store or reevaluating your setup, this guide breaks down what you need to know.
A sole proprietorship is the simplest form of business ownership. It requires no formal registration beyond a business license in most states, and it’s automatically assigned when you start selling goods or services under your own name.
There’s no legal separation between you and your business
You’re personally responsible for all business debts and obligations
All profits are taxed as personal income
It’s easy and inexpensive to set up and maintain
Great for low-risk, low-volume ecommerce sellers
This structure is a common starting point for side hustles and small-scale online operations. But as your business grows, the lack of personal liability protection can become a serious concern.
A Limited Liability Company (LLC) is a formal business structure that offers liability protection while maintaining pass-through taxation. For many US online sellers, it offers the right balance of simplicity and security.
Personal assets are typically protected from business liabilities
You can choose how you’re taxed (default is pass-through, but you can elect S corp treatment)
Boosts business credibility with customers and partners
Makes it easier to bring on partners or scale operations
Helps separate personal and business finances more clearly
Forming an LLC does come with state-specific costs and ongoing compliance, like annual filings and fees. But many online sellers find it worthwhile as their business becomes more established.
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Operating as a sole proprietor could be right if:
You’re just testing your product or selling casually
You have minimal liability exposure
You’re keeping costs and complexity to a minimum
You’re managing the business alone and using basic accounting services
You don’t plan to scale quickly
It’s a flexible option when you’re still figuring things out, but it might not support long-term growth or protect your personal assets.
An LLC may be a smarter choice for:
Protecting your personal finances and property
Establishing long-term credibility and trust
Taking advantage of flexible tax options as your profits grow
Working with multiple owners or team members
Planning for scale and more advanced accounting services
If you’re serious about turning your online store into a sustainable business, an LLC gives you a solid legal and financial foundation to build on.
Tax Filing Differences: Sole proprietors file business income on their personal tax return (Schedule C). LLCs have more flexibility, especially if you later elect to be taxed as an S corporation. Advanced accounting services can help determine which structure is most tax-efficient.
State Regulations: LLC formation rules vary by state. Be sure to check your state’s Secretary of State website for specific requirements and fees.
Ecommerce Platform Rules: Some online selling platforms may require or prefer that you operate under a registered business name or entity for seller accounts, payment processing, or vendor agreements.
Growth Plans: If you’re planning to hire, enter contracts, or take on larger orders, an LLC can offer the protection and professionalism your business needs.
The decision between sole proprietorship and LLC boils down to risk, growth, and how you manage your finances. Sole proprietorships are quick and easy to set up, ideal for low-risk ventures. But as your ecommerce business grows, the liability protection and flexibility of an LLC may be worth the extra effort.
Counto is the trusted outsourced provider of accounting, tax preparation and CFO services for SMEs and ecommerce businesses. Get accounting plans that combine bookkeeping with corporate tax filing to help you stay compliant at an affordable price. To learn more, speak to us directly on our chatbot, email [email protected], or use our contact form. to get started.
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