How to Start an LLC for Dropshipping (Step-by-Step Guide)

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by LLC.org Team
Last updated: July 21st, 2024
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Starting an LLC for your dropshipping business can provide the legal protection and credibility needed to thrive in the competitive online business landscape. By establishing a Limited Liability Company (LLC) for your operations, you not only safeguard your personal assets, you also enhance your trustworthiness among suppliers and customers. 

How to start an LLC for Dropshipping

1
Choose a business name

Before you can complete any paperwork, you will need to know the name of your LLC. It should reflect your brand and vision, but you will also need to adhere to certain naming regulations in your state. This usually includes:

  • Choosing a name that is not in use already. You can check the state’s business registry to confirm this.
  • Using a designator like “LLC” or “Limited Liability Company” in the name.
  • Avoiding certain terms that may be misleading.

Many states will allow you to reserve a name for a set period of time if you are not ready to file for LLC formation yet. You can also look into a “Doing Business As” or DBA name if you’d like to operate under a name different than the legal name you chose.

2
Appoint a registered agent

A registered agent receives legal documents and government notices on behalf of your LLC and is required in all states. The agent can be a person or a company authorized to conduct business in your state. You can also appoint yourself, provided you have a physical address in the state.

If you operate your dropshipping business from home, it’s likely that you will be available during business hours and don’t need to engage a formal registered agent service. But if it does feel necessary, you can find some agencies that focus on e-commerce specifically. 

3
Register your LLC

To officially form your LLC, you need to file the necessary documents. This is typically called an Articles of Organization or Certificate of Formation and will be submitted to your state’s business filing office.

The formation paperwork usually includes essential details like your LLC’s name, address, and the names of its members. You may also need to provide a business purpose, which you can classify as e-commerce or online sales. There is a filing fee ranging from $50 to $300, depending on your state.

4
Obtain an Employer Identification Number (EIN)

An EIN, or Employer Identification Number, is a federal tax ID number used to identify your business for tax purposes. Think of it like a Social Security Number (SSN) for your business. An EIN is required if your LLC has employees, operates as a corporation or partnership, or needs to file certain tax returns. 

Even if you don’t fit those criteria, it can help you get a business bank account and other financial access more easily. Some platforms that you are using to dropship may also require an EIN as a part of your account setup.

LLC owners can apply for an EIN through the IRS website, by mail, or via fax. The process is straightforward and free. 

5
Draft an operating agreement

An operating agreement is a document that specifies the roles and responsibilities of the members, profit distribution, and procedures for adding or removing members in an LLC. While it’s not required, multi-member LLCs should have one to express responsibilities and how profits and losses are handled.

There are many templates available online for simple operating agreements, or you can seek legal advice for help.

6
Obtain business permits and licenses

The exact licenses you need for a dropshipping business will depend on both local and state regulations, as well as the type of business, type of of goods sold and the volume of sales. Though dropshipping is done online, the state may have specific laws about online stores and when a license is necessary.

Be sure to also consider other licensing, such as:

  • Sales tax permits that allow you to collect and remit sales tax to the state where your LLC exists.
  • Local licensing and permits for sales, home offices, or zoning.
  • Occupational licenses for those who work in specific professional capacities.

Other considerations for dropshipping LLC owners

Dropshipping can vary depending on where and how you conduct your business, but there are some things every business owner should consider before forming an LLC. 

Dropshipping platforms

Many e-commerce business platforms, like Shopify stores and WooCommerce, offer built-in protections and features to support dropshipping businesses. These platforms often provide fraud detection tools, secure payment processing, and user-friendly interfaces that streamline operations, making it easier to manage your LLC and protect your assets.

Be sure to read any terms of service carefully to understand what is covered and what you are responsible for covering on your own. Platforms often have specific guidelines and policies regarding product listings, customer data handling, and advertising practices, which you will also need to take into consideration.

Business bank account

Legally, you can use your personal bank account to operate a business, but it is not recommended once an LLC has been formed. The limited liability protection available to business owners relies on keeping business and personal finance separate, and failing to do this can lead to a dissolution of that protection. The best way to keep your accounting segregated is through a dedicated business bank account.

In addition to the protection it offers, having a business bank account can give you access to other benefits like credit cards and investors if you are planning to grow your business or transition to product production. 

Insurance requirements

LLCs offer protection for your personal assets, but insurance protects your business assets from potential problems and most platforms will not offer any. There are many types available, but the insurance most common for dropshippers includes:

  • General liability insurance: Covers third-party claims related to bodily injury, property damage, and advertising injury.
  • Product liability insurance: Protects against claims arising from defective products sold through your dropshipping business.

LLCs for non-residents

Non-US residents can also set up an LLC for dropshipping in the United States, even if they don’t live here. This structure provides similar benefits, including liability protection and tax advantages. Non-residents will need an EIN (Employer Identification Number) and may need to hire a registered agent to comply with state legal requirements.

Having a US-based LLC can be particularly helpful if you work with vendors and customers in the country. 

Annual compliance

Maintaining an LLC requires adherence to annual compliance requirements, which vary by state. These typically include:

  • Filing an annual report or statement of information.
  • Paying annual state fees or taxes.
  • Keeping accurate records of business activities and financial transactions.

It can be helpful to set up calendar reminders for the due date every year, so you never miss a requirement.

Hiring employees

Because dropshipping is often based on outsourcing tasks to third parties, most people will not have employees or subcontractors. However, some of these businesses do expand or evolve into larger operations that require more support.

If your dropshipping business grows to the point where you need to hire employees, an LLC can make this easier. Ensure you comply with employment laws, including:

  • Registering for state and federal employer identification numbers.
  • Setting up payroll systems and withholding taxes properly.
  • Providing worker’s compensation insurance and other employee benefits, which state laws may require.

Pros and cons of an LLC

Pros

  • An LLC provides a shield for your personal assets, protecting them from business debts and legal claims. This could be helpful for things like supplier disputes and customer complaints that may be levied against the business.
  • LLCs are able to avoid double taxation by operating as a pass-through entity, in which owners report profit and loss on their personal tax returns.
  • Forming an LLC is relatively straightforward and involves less paperwork and lower costs compared to a corporation.
  • Operating as an LLC can enhance your business’s credibility with suppliers, customers, and financial institutions. As some people aren’t familiar with dropshipping or feel uncomfortable with it, this additional legitimacy can be helpful.

Cons

  • The available asset protection is limited, so there are situations where an owner can be held responsible for business obligations. If you engage in fraudulent activities or don’t maintain separate personal and business finances, you could lose that protection and become personally liable.
  • Some states impose higher fees and additional taxes on LLCs, which can be a consideration depending on where you operate. Because dropshipping is done remotely, you may need to take multiple state laws into account to operate properly.

What is the best business structure for Dropshipping businesses?

Choosing the right business structure is crucial as it affects everything from daily operations to taxes and personal liability. There are a number of options, but the most common are sole proprietorships, corporations, and LLCs.

  • Sole proprietorships are the most common option and treat the owner (or sole proprietor) as the same legal entity as the business, making them simple to maintain.
  • Corporations are much more complex but are completely separate entities from any individuals, offering more protections.
  • An LLC combines the simplicity of a sole proprietorship with the personal liability protection of a corporation. It offers flexibility in management and tax options, making it an attractive choice.

FAQs

What are the benefits of an LLC for dropshipping?

An LLC offers liability protection, shielding your personal assets from business debts and legal claims. It can also be a pass-through business entity, which avoids double taxation and corporate tax rates. Additionally, it enhances your business credibility and has fewer compliance requirements compared to corporations, making it a popular choice for dropshipping entrepreneurs.

Are there any downsides to forming an LLC for dropshipping?

While an LLC provides liability protection and tax benefits, there are also limits to the liability protection provided. Some states also impose additional fees and taxes on LLCs. And the administrative requirements, though simpler than a corporation’s, still demand proper record-keeping and compliance with state regulations.

Can I convert my existing dropshipping business to an LLC?

Yes, you can convert your existing dropshipping business to an LLC. The process typically involves filing the necessary formation documents with your state’s business registration office and obtaining an EIN from the IRS. You’ll also need to update your business licenses, bank accounts, and contracts to reflect the new LLC status.

How does liability protection work for a dropshipping LLC?

Liability protection for an LLC means that your personal assets, such as your home and personal bank accounts, are generally protected from business debts and legal claims like supplier disputes, contract issues, or customer suits. If your dropshipping business faces a lawsuit or owes money, only the assets owned by the LLC are at risk, safeguarding your personal financial security.

Can I have business partners in my dropshipping LLC?

Yes, an LLC can have multiple members, allowing you to have business partners. In a multi-member LLC, profits, losses, and management responsibilities are typically outlined in an operating agreement. This agreement helps define each member’s role and ensures smooth operation and conflict resolution within your dropshipping business.

What are the best states to form an LLC for dropshipping?

The best states to form an LLC for dropshipping are typically Delaware, Wyoming, and Nevada due to their business-friendly laws, low fees, and favorable tax environments. Delaware offers strong legal protections, while Wyoming has no state income tax and low annual fees. Nevada is also attractive for its lack of corporate taxes and privacy protections for LLC owners.

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