Cost controls are important for any business. To ensure nice, beefy profit margins, you’ve got to do more than just bring in sales. Keeping your expenses in check is just as important.
There are countless ways to keep those costs under control, starting with some basic budgeting. But there are also some important things your company can do at a foundational level. Even the type of legal structure you choose for the business can have a big impact on your expenses and overall profitability.
So which legal structure is best-suited for cost savings? There’s no one right answer, of course, but for many e-commerce companies, the best bet is the Limited Liability Company, or LLC. It may be helpful to learn more about how LLCs function, and about how they can help your e-commerce company achieve cost savings.
A Quick Guide to LLCs
Let’s start with some basics: What is an LLC, and what distinguishes it from other types of business structures?
Any time you start making money on a self-employed basis, the government automatically classifies you as a Sole Proprietor. This is very common among novice e-commerce merchants, including folks who set up Etsy shops or Amazon stores as a side hustle.
When you’re a Sole Proprietor, it basically means that you and your business are one and the same. There’s no legal distinction or separation. So, your business assets and your personal assets are interchangeable. Same with your liabilities.
Operating as a Sole Proprietor can be fine for a while, but it also has some significant drawbacks. You’re much more exposed to lawsuits and other forms of legal liability. It can be hard to hire employees and administer payroll. You have limited wiggle-room in terms of taxes. Basically, not a ton of built-in options for containing costs.
How LLCs Work
Enter the LLC.
When you start an LLC, you actually do create a new legal entity. Your personal assets are kept separate from your business assets, and vice versa. The same holds true for liabilities. In the eyes of the government, your LLC is its own thing, not just an extension of you.
There are plenty of ways in which the LLC can benefit your e-commerce store, from tax flexibility to administrative ease. In fact, it might be worth going into greater detail about all the ways in which an LLC can help you control costs.
LLCs and Cost Controls
Consider just a few of the ways in which e-commerce companies can reduce their expenses by choosing the LLC format.
First and foremost, starting an LLC costs very little money, particularly when compared with incorporation. You’ll need to file a registration fee, which can vary by the state you’re in, but often it’s under $100 total.
It’s usually not necessary to hire an attorney to launch your LLC. Most states make the registration process quite simple, allowing your e-commerce company to get registered quickly and easily. And if you do need help, finding the best LLC formation service in your state is usually not too onerous from a financial perspective.
Also be aware that every LLC is legally required to have a Registered Agent, someone who receives legal correspondence on your company’s behalf. In some states, you can serve as your own Registered Agent, which obviously doesn’t cost a thing. And even if you are required to hire someone, third-party Registered Agent services often run as little as $50 annually.
An LLC may also help your e-commerce company save money come tax time.
First of all, most states do not leverage any kind of LLC-specific tax. The only exception is California, which imposes an annual LLC tax of $800, flat rate.
Also note that, when you register your business as an LLC, it allows you to choose how you report to the IRS. You can choose to be taxed on a pass-through basis, only paying taxes on the profits you declare on your personal return. You can also elect for a corporate tax rate if that’s more advantageous. Bottom line: LLCs provide tax flexibility that can often yield some cost savings.
True AI to engage shoppers in conversational eCommerce. Create happy customers while growing your business!
5% to 35% Increase in AOV*
20% to 40% Increase in Revenue*
25% to 45% Reduction in Support Tickets
WE GUARANTEE RESULTS!
*When shoppers engage with Ochatbot®
For e-commerce companies and other digital businesses, lawsuits can be significant sources of expenses. In fact, litigation can sometimes cause fledgling companies to capsize, falling apart before they really have a chance to get started.
This is another area where the LLC format can yield significant cost savings. Because LLCs allow you to separate your business and personal liabilities, you are effectively shielded from personal liability. The money that you and your family have in personal banking or savings accounts is off the table for lawsuits as well as creditors.
Not only can this minimize costly legal burdens, but it can also give you a certain freedom to invest in the business, knowing that your personal wealth is reasonably safe and secure.
Other LLC Advantages
There are plenty of other ways in which the LLC structure can benefit your e-commerce business, including potential cost savings. Some further examples include:
- LLCs allow you to choose the management structure you want for your company, specifically letting you choose an allocation of duties that is convenient and cost-effective.
- LLCs have very minimal annual reporting requirements, which means legal compliance is not as taxing as it is with Corporations.
Clearly, there’s ample reason to consider the LLC format for your e-commerce company. And thankfully, registering your business as an LLC is pretty easy, requiring just a few simple steps.
How to Register Your E-Commerce Company as an LLC
The steps required to register your LLC can vary from state to state, but you’re usually looking at a process something like this:
1) Choose a name.
Your e-commerce brand probably has a name already, and that’s great! For legal reasons, you’ll need to choose an “official” name that isn’t already in use by another LLC in your state. Chances are, your state has an online directory you can consult to ensure the name you want is still available.
Also note that you can choose any number of DBA (“doing business as”) names, brand names that can exist under your main LLC umbrella.
2) Select a Registered Agent.
You’re also required to choose someone to be your Registered Agent, as mentioned above. This can be a person or an organization, and again, depending on the state you’re in, it may or may not be permissible to serve as your own Agent. If you do select a third party to serve as your Agent, the important thing is choosing someone with a local mailing address (not a P.O. Box).
3) File your paperwork.
It probably goes without saying that launching a new legal entity involves completing some documents. The main document to know about is called the Articles of Organization, which summarizes the name, scope, and purpose of your LLC. You’ll also need to supply contact information for yourself and your Registered Agent.
When you file the paperwork with your state, that’s also when you pay the filing fee. Again, this is usually a manageable cost, likely under $100 though in some states it may be as much as $300.
4) Create a constitution.
This step isn’t legally mandated, but it can nevertheless be prudent. By creating a document known as the Operating Agreement, you can specify how you and your business partners share managerial duties, and how you distribute profits. An Operating Agreement functions as a kind of constitution for your e-commerce LLC, and it can be a powerful tool to ward off legal conflicts down the line.
5) Claim an EIN.
Your employer identification number, or EIN, is necessary before you can process payroll or file income taxes. You can get one for free simply by requesting it from the IRS website.
6) Set up a business bank account.
Your e-commerce store naturally needs a bank account so that it can handle transactions. It’s best to set up an account that isn’t in any way connected to a personal checking or savings account. Important rule of thumb with LLCs: Always keep your business assets totally separate from your personal assets, and vice versa. A business bank account helps with this.
Conclusion: LLCs Can Yield Cost Savings
To ensure the long-term success of your e-commerce store, you’ll be well-served by the LLC structure. With your LLC, you can minimize administrative costs, contain your reporting needs, enjoy tax flexibility, and shield yourself from legal liability.
Registering your LLC is usually a straightforward process, and in most states the approval process takes three or four weeks. Expedited approvals are often available for an increased cost. Take the first steps toward registering your e-commerce store as an LLC today.
Amanda E. Clark
Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about content and social media marketing. She also writes regularly on subjects related to small business ownership and LLC formation.