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

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by LLC.org Team
Last updated: July 21st, 2024
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Most online shoppers don’t realize they are using Shopify, but for small business owners, it is a crucial tool. This e-commerce platform has enabled millions to reach global audiences and manage online stores efficiently. Turning your Shopify store into a formal business entity can unlock new opportunities and provide legal protections. One effective way to do this is by forming a Limited Liability Company (LLC). 

How to start an LLC for Shopify

1
Choose a business name

Selecting a unique and compliant business name for your LLC is the first thing you will need to do before you can complete any paperwork. You will need to consider both of the following:

  • Check availability: Ensure the name is not already in use by checking your state’s business name database. This avoids legal issues and confusion.
  • Compliance: Verify that the name complies with your state’s LLC naming requirements, such as including “LLC” or “Limited Liability Company” in the name.

If you want to reserve your name, most states will let you do this for a period of time until you file for formation.

Your name does not have to be the same one you use for your storefront. However, if you are using different names for your paperwork and your customer-facing branding, you may consider a Doing-Business-As (DBA) name to show you are operating under two titles.

2
Appoint a registered agent

A registered agent is a person or service that receives official legal and tax documents on behalf of your LLC. This can be yourself, another member of your LLC, or a professional registered agent service; for most Shopify owners, working from home means it’s simple to act as your own registered agent. But if you want to use a registered agent service, there are e-commerce-specific companies that may be a good fit.

As a part of forming an LLC, you will need to provide the name of your agent and their address, which will need to be within the state where you register your LLC. 

3
Register your LLC

Registering your LLC involves filing a document, usually called the Articles of Organization or Certificate of Formation, with your state’s business filing office. This document includes basic information about your business, such as the LLC’s name, address, and the names of its members.  Always check your state’s specific requirements and filing fees, as these can vary.

4
Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a unique identifier issued by the IRS for your business, similar to a personal social security number (SSN). An EIN is not always required for an LLC, but it can be helpful for things like opening financial accounts, and is required if you have employees. Your EIN can also be used to set up Shopify Payments and other payment gateways or checkout features. 

You can obtain an EIN for free through the IRS website. The application process is straightforward and can be completed online in a few minutes.

5
Draft an operating agreement

An operating agreement outlines the ownership LLC structure and operating procedures of your LLC. While not required, if you have multiple owners, it can prevent disputes among members and provides a clear framework for managing your business. It should detail the roles and responsibilities of each member, profit distribution, and procedures for adding or removing members.

For a single-member LLC, where there is a single owner, this may not be needed. But if it is a joint venture, an operating agreement becomes more important.

You can find templates available online to help you get started.

6
Obtain business permits and licenses

Depending on your location and the type of business you have on Shopify, you may need various permits and licenses. These can include:

  • General business licenses: Required by some states to legally operate your business.
  • Occupational licenses: Necessary if your business involves specific professions or trades that require special permits.
  • Sales tax permits: If you sell taxable goods or services, you’ll need to collect sales tax and remit it to your state. A sales tax permit allows you to do this legally. Each state has different rules for e-commerce businesses, so pay special attention to those.
  • Local permits: Depending on your city or county, you may need additional permits such as zoning permits or permits to allow production in your home.

Contact your local government offices or check online resources to determine the specific permits and licenses required for your business. Ensuring compliance helps avoid fines and legal issues.

Other considerations for Shopify LLC owners

Forming an LLC is a crucial step towards establishing your Shopify business, but there are additional factors to consider so that your business runs smoothly and complies with all necessary regulations. 

Shopify’s business structure

Shopify itself provides a solid infrastructure to help store owners succeed. By offering various tools such as payment processing, marketing solutions, and inventory management, Shopify can streamline many aspects of running an online store. 

The platform also has a number of tools in place to ensure safety and prevent legal issues. For example, they provide:

  • Fraud analysis software and chargeback management services.
  • Secure payment processing and integrated payments.
  • Free SSL certification for data security.
  • Regular security updates and content protection.

For LLC owners, these tools can be particularly beneficial in maintaining organized and efficient accounting. But they are not a substitute for your own accounting advice, legal counsel, or decision-making.

Business bank account

A large part of starting your Shopify store involves setting up payment gateways through Shopify, including their own platform and any third-party providers you would like to use. You can then configure your payment options and create a payout schedule, where you can direct income to your bank account.

Opening a separate business bank account for your LLC is not legally required, but it is highly recommended for any business owner, including those who use Shopify. This account helps maintain clear financial records, simplifies tax preparation, and underscores the separation between your personal and business finances. This separation is a part of maintaining your LLC status without putting your personal assets at risk.

Insurance requirements

While Shopify provides a secure and reliable platform for running your online store, it does not offer insurance. As an LLC owner, it’s crucial to have the right insurance coverage to safeguard your business. Here are several types of insurance to consider:

  • General liability insurance: Covers claims related to third-party bodily injury, property damage, and advertising injuries. Shopify’s terms of service typically do not cover these incidents, making this insurance essential for protecting your business from unexpected claims.
  • Product liability insurance: Protects against claims arising from products that cause harm or injury to consumers. Although Shopify provides tools for managing and selling your products, it doesn’t cover liability for any issues resulting from product defects or safety concerns.
  • Professional liability insurance: Also known as errors and omissions (E&O) insurance, this covers claims related to professional services or advice that result in financial loss for a client. If your Shopify store offers consulting or other services, this insurance is vital since Shopify’s platform does not cover professional liability.
  • Commercial property insurance: Covers damage to your business property, including inventory and equipment. Shopify doesn’t provide protection for physical property damage, making this insurance important to ensure your assets are safeguarded against risks like fire, theft, or natural disasters.

Annual compliance

Maintaining your LLC’s status requires adherence to annual compliance requirements, which can vary widely by state. These typically include filing an annual report, paying associated fees, and keeping accurate records of business activities and finances. Staying on top of these obligations helps avoid penalties and ensures your LLC remains in good standing.

Hiring employees

If your Shopify store grows to the point where you need to hire employees, there are several important steps to follow:

  • Obtain an EIN: Ensure you have an Employer Identification Number for tax purposes.
  • Register with your state: Comply with state requirements for hiring employees, including unemployment insurance and workers’ compensation.
  • Understand labor laws: Familiarize yourself with federal and state labor laws to ensure compliance with regulations related to wages, overtime, and workplace safety.

Pros and cons of an LLC

Pros

  • Asset protection: Your personal assets are protected from business debts and liabilities, reducing personal risk. For example, if a product you sell causes harm or injury to customers, the business would be held liable rather than the owner.
  • Pass-through taxation: As a pass-through entity, profits and losses pass through to your personal income tax, avoiding double taxation faced by corporations.
  • Credibility and professionalism: Having an LLC can enhance your business’s credibility with customers, suppliers, and investors.
  • Ease of formation and maintenance: Compared to corporations, LLCs are relatively easy to set up and maintain, with fewer formalities and ongoing compliance and legal requirements. Shopify even offers integration with tax filing tools like Quickbooks to make this simpler.

Cons

  • Initial setup and fees: There can be higher initial setup costs and filing fees compared to what a sole proprietor would face.
  • State variability: LLC regulations and benefits can vary significantly from state to state, requiring careful consideration of state-specific laws and fees. Since most Shopify stores will sell across state lines, you may need to consider any variations in things like sales tax.

What is the best business structure for Shopify creators?

When starting a Shopify store, choosing the right business structure is a crucial decision that can impact your operations, taxes, and personal liability. While there are other options, here are the most common business structures for Shopify creators: sole proprietorships, corporations, and Limited Liability Companies (LLCs).

  • A sole proprietorship is the simplest business structure where the owner and the business are considered the same legal entity.
  • A corporation is a more complex business structure that creates a separate legal entity from its owners.
  • An LLC minimizes personal risk and administrative overhead. It also offers flexibility in management and avoids double taxation, as profits and losses pass through to the owners’ personal tax returns.

While sole proprietorships offer simplicity and corporations provide robust protection, an LLC typically offers the best of both worlds for Shopify creators. This option allows you to focus on growing your online business, knowing that your personal assets are protected and your tax obligations are manageable.

FAQs

What is the difference between a sole proprietorship and an LLC for my Shopify store?

A sole proprietorship is owned by one person and offers no personal liability protection. A single-member LLC, however, provides liability protection, separating personal and business assets. Additionally, LLCs can offer tax advantages and enhanced credibility compared to sole proprietorships, making them a better choice for many growing businesses.

Can I form an LLC if I’m not a U.S. resident but want to sell on Shopify?

Yes, non-U.S. residents can form an LLC to sell on Shopify. You’ll need to select a state to register your LLC, obtain a registered agent in that state, and apply for an Employer Identification Number (EIN) from the IRS. This allows you to legally operate and manage your Shopify store from abroad.

What state should I choose to form my LLC for my Shopify store?

The best state to form your LLC depends on various factors, including tax implications and filing fees. Many business owners choose their home state for simplicity. Delaware, Nevada, and Wyoming are popular due to business-friendly laws and low fees.

How do I protect my Shopify store’s intellectual property with an LLC?

Forming an LLC helps protect your intellectual property by formalizing your business structure. To further safeguard your assets, consider trademarking your business name and logo, securing copyrights for original content, and using non-disclosure agreements (NDAs) for business partners and employees. These steps ensure your brand and creations remain legally protected.

How do I manage multiple Shopify stores under one LLC?

You can manage multiple Shopify stores under one LLC by setting up different “Doing Business As” (DBA) names for each store. This allows you to operate various brands while maintaining a single legal entity. Ensure each store’s financials are tracked separately for accurate accounting and compliance with tax regulations.

Find out how to start an LLC in your state

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