Need some legal advice for starting an LLC for an e-Commerce business

[IHeartLaw]

To give some background, I am an aspiring entrepreneur who wants to start an online business specifically in e-commerce i.e. selling on Amazon. I want to get an LLC set up and out of the way so that I can start working on building my business as soon as possible.

I am based out of California. This will be my first business venture as I’ve been a W-2 employee, thus far, so I have not generated any revenue from online business yet.

With that said, these are my questions:

Do I even need an LLC to begin with as I haven’t made any revenue online yet?

Should I create two LLCs for anonymity? One LLC as a holding company and another LLC where I operate business out of? Or is it okay to contribute funds directly to my LLC myself?

If you do recommend creating two LLCs to have an extra layer of protection, do you recommend creating the LLC that I’ll use to fund my operating LLC outside of the state or inside the state? I would like to avoid paying the $800 filing fee twice.

What’s the best strategy on how to structure my business to have absolute anonymity and maximum liability protection? For example, should I create a trust in between two LLCs?

Should I get LLC insurance?

What’s the best way to fund my LLC to avoid double taxation? Should I make personal contributions or do a loan with 0%? For example, if I contribute money to the LLC to get the business going and once it finally becomes profitable, I would like to take the original contribution amount out without getting taxed for it.

Am I overthinking it? Should I just go ahead and file an LLC myself or use a service like LegalZoom and be done with it?

 

[LdiJ]

To give some background, I am an aspiring entrepreneur who wants to start an online business specifically in e-commerce i.e. selling on Amazon. I want to get an LLC set up and out of the way so that I can start working on building my business as soon as possible.

I am based out of California. This will be my first business venture as I’ve been a W-2 employee, thus far, so I have not generated any revenue from online business yet.

With that said, these are my questions:

Do I even need an LLC to begin with as I haven’t made any revenue online yet?

Should I create two LLCs for anonymity? One LLC as a holding company and another LLC where I operate business out of? Or is it okay to contribute funds directly to my LLC myself?

If you do recommend creating two LLCs to have an extra layer of protection, do you recommend creating the LLC that I’ll use to fund my operating LLC outside of the state or inside the state? I would like to avoid paying the $800 filing fee twice.

What’s the best strategy on how to structure my business to have absolute anonymity and maximum liability protection? For example, should I create a trust in between two LLCs?

Should I get LLC insurance?

What’s the best way to fund my LLC to avoid double taxation? Should I make personal contributions or do a loan with 0%? For example, if I contribute money to the LLC to get the business going and once it finally becomes profitable, I would like to take the original contribution amount out without getting taxed for it.

Am I overthinking it? Should I just go ahead and file an LLC myself or use a service like LegalZoom and be done with it?

Where did you get the idea that creating two LLCs was in any way useful? The best way to protect yourself from liability is to get good liability insurance.

Double taxation does not apply to LLCs. A single member LLC defaults to a sole proprietorship for tax purposes and a multiple member LLC defaults to a partnership. In both cases, the income is taxed at the member level not at the LLC level. Even if you were to make an S-Corp election it would still be taxed at the member level. The only time that double taxation comes into play is with a C-corp.

If you contribute money to your LLC that gives you basis, profits and loans also give you basis. You are taxed on profits not distributions. The only way you could be taxed on a distribution is if it is in excess of basis.

These are all simplistic answers to your questions. It sounds very much to me like you need a sit down consult with a business attorney and with a tax professional who specializes in business.

 

[quincy]

Here is a link to information on “starting a business” in California:

https://www.sos.ca.gov/business-programs/business-entities/starting-business

 

[adjusterjack]

Am I overthinking it?

Yes.

Do I even need an LLC to begin with

No reason you can't operate as a sole proprietorship (DBA). LLCs don't provide the "protection" that most people erroneously believe. Especially a one member LLC where the LLC "veil" can be pierced and those you do business with often require personal guarantees.

Should I create two LLCs for anonymity?

There is no anonymity with LLCs. They are public record at the state's corporate and business records.

If you need to be found, you'll be found.

What’s the best strategy on how to structure my business to have absolute anonymity and maximum liability protection? For example, should I create a trust in between two LLCs?

Again, no anonymity with the LLC. Trusts are expensive and generally to hold assets to avoid probate.

maximum liability protection? Should I get LLC insurance?

Yes. Depending on what you are selling include products liability coverage. A commercial independent agent is your best source of insurance information. Buy your insurance on day one. The first thing you sell could result in a costly liability claim if somebody gets injured, or their property gets damaged, using the item. I was 35 years in the insurance industry. Believe me, it happens.

Should I just go ahead and file an LLC myself

Go to your state's website for instructions. It's not difficult.

 

[quincy]

Yes.



No reason you can't operate as a sole proprietorship (DBA). LLCs don't provide the "protection" that most people erroneously believe. Especially a one member LLC where the LLC "veil" can be pierced and those you do business with often require personal guarantees.



There is no anonymity with LLCs. They are public record at the state's corporate and business records.

If you need to be found, you'll be found.



Again, no anonymity with the LLC. Trusts are expensive and generally to hold assets to avoid probate.



Yes. Depending on what you are selling include products liability coverage. A commercial independent agent is your best source of insurance information. Buy your insurance on day one. The first thing you sell could result in a costly liability claim if somebody gets injured, or their property gets damaged, using the item. I was 35 years in the insurance industry. Believe me, it happens.



Go to your state's website for instructions. It's not difficult.

You actually can remain anonymous with your LLC.

 

[adjusterjack]

You actually can remain anonymous with your LLC.

I'm sure that one can find a way, if one plans on engaging in illegal or fraudulent activities and buries his name through several levels of shell companies.

 

[quincy]

I'm sure that one can find a way, if one plans on engaging in illegal or fraudulent activities and buries his name through several levels of shell companies.

Sure. I agree with you that no one should expect to remain completely anonymous. If someone is intent on discovering your identity, there are ways to do that.

 

[Taxing Matters]

Am I overthinking it? Should I just go ahead and file an LLC myself or use a service like LegalZoom and be done with it?

I'll get right into what really matters here: money. A domestic limited liability company (LLC) owned by just one person is treated for federal and CA income taxes as though the LLC doesn't exist. On the federal income tax return you report your income, deductions, and credits on Schedule C of Form 1040, just as sole proprietors do.

However, CA also imposes a franchise tax on any business that is organized by filing through the Secretary of State. The minimum franchise tax is $800/year. That applies even if the business loses buckets of money. You also have to draft a charter and operating agreement for the LLC, and that's best done through an attorney, which will cost you money. Then there is the cost for hiring a registered agent for the LLC unless you are going to do that task yourself, but doing that won't help you achieve any anonymity. Finally, you have the filing fee for the incorporation and you'll pay fees for the annual reports the state requires. If you just operate as a sole proprietor you don't have any of those expenses and additional administrative tasks to deal with.

So what good does the LLC do for you for all the money and extra work required? For most single member LLCs without employees the benefit is very limited or effectively non existent. The main reason people want to use a limited liability entity like a LLC or corporation is so that they won't be held personally liable for the debts of the business. If you do it right you can use the LLC to shield yourself from personal liability for contract debts of the LLC.

However, any knowledgeable creditor who is advancing significant money to the business will know this and insist you sign a personal guarantee for the debt. That personal guarantee is a separate contract between you and the creditor and the LLC doesn't provide any shield for that. You might avoid personal liability on small contracts, though, if the business goes under because you might not be asked to provide the personal guarantee on those.

You are always liable for your own acts of negligence resulting in harm to someone else, too. The injured would sue both you and the LLC for your negligence associated with the business and if the jury finds you negligent you'll personally owe the judgment amount. This is why you need to ensure that your business carries sufficient insurance to cover those sorts of claims.

You may also be personally liable for some other taxes of the business, too, even if you operate a LLC.

If you want to know just how much (or how little) the LLC would do for you given your exact business see a CA business attorney for advice. Many one person businesses can do without using some sort of limited liability entity for the business, but there are some circumstances in which it can make sense for a single owner with no employees.

 

[IHeartLaw]

I want to thank everyone that replied to my questions. I know that it took time to write up those responses. I was hoping that I could do this on my own, but one person suggested getting legal advice. I'm hoping that I don't have to pay for legal advice as they are charging $250/hour for a 45 minute consultation call or $1250 - $1,500 for the full service of setting up my LLC. I'm kind of hoping to go the DIY route because while I have a decent amount of capital saved, but I want to run as lean as possible and keep my start up costs low for now. Right now, this is the blocker before I can start my business. I want to make sure I'm protected, and I want to make sure that suppliers that I'll be reaching out take me seriously.

 

[quincy]

I want to thank everyone that replied to my questions. I know that it took time to write up those responses. I was hoping that I could do this on my own, but one person suggested getting legal advice. I'm hoping that I don't have to pay for legal advice as they are charging $250/hour for a 45 minute consultation call or $1250 - $1,500 for the full service of setting up my LLC. I'm kind of hoping to go the DIY route because while I have a decent amount of capital saved, but I want to run as lean as possible and keep my start up costs low for now. Right now, this is the blocker before I can start my business. I want to make sure I'm protected, and I want to make sure that suppliers that I'll be reaching out take me seriously.

You have taken the first best step for your prospective business by asking questions and seeking information prior to starting it. Many people plunge ahead with a business and realize too late how unprepared they are for handling taxes, insurance and day-to-day operating costs. Selling stuff can be the easy part.

I recommend you sit down with a business law professional in your area to go over your business plans, to better ensure that you won’t run into any future costly legal issues. Yes, seeing a professional is an expense that would be nice to avoid but it can save you unexpected and more costly expenses later.

One topic not covered above by forum members is the name for your business (your trademark). You will want a distinctive name to identify your business, setting it apart from all others. The name should be unique to you so you will want to do a trademark search that includes not only federal and state registered names but also unregistered names being used by businesses. In the U.S., trademarks do not have to be registered to have trademark protection. Trademark protection comes with use of the name in commerce. To avoid the risk of infringing on anyone’s intellectual property rights, you will want a trademark that identifies your business and does not conflict with a trademark already in use by another.

I wish you much success with your business. Good luck.

 

[Mark_A]

One thing you need to decide is whether you will run the business under a separate IRS tax id (EIN) or use your own social security number for tax purposes. You can do the later if you have no employees beside yourself and operate the business as a disregarded entity for tax purposes, and record income and expenses on Schedule C of your personal 1040 tax return. You will still get limited liability legal protection if you run the LLC as a disregarded tax entity. I would forget about trying to be anonymous with multipole LLC's, even if you could do it, because that would likely need a lawyer to set up and get complicated, and you may have to pay someone to be the registered agent, and I don't see what the benefit is.

Generally, an online seller only needs to register the LLC where they have a physical presence, but in certain states they may need to register as a foreign LLC (foreign meaning not physically located in that state) if they meet certain sales online sales volume thresholds or transaction counts in that state. That could get complicated because the name of your LLC may be unique in your state (a search is required when creating the LLC) but that name may be used in another state, so you might have to use another name for the LLC in a different state.

 

[quincy]

Here are two links to information you might find helpful, one to the US Patent and Trademark Office (USPTO) on trademark basics (with additional links, including why a search for similar trademarks is important), and one to a 2023 article written by Rosalie Murphy and published in Nerd Wallet on how to start an e-commerce business (with additional links to further information).

https://www.uspto.gov/trademarks/basics

https://www.nerdwallet.com/article/small-business/how-to-start-an-ecommerce-business

Although an attorney is not necessarily needed to start a business, sitting down with a business law attorney can help to ensure your business is structured properly and that you are not overlooking anything important for the operation of a successful business.

 

[Mark_A]

It is only necessary to have a unique LLC company name within the state the LLC is registered in. I have set up LLC's in three different states, and each one has a way to ensure that your LLC is unique within that state. Visit the Secretary of State website for the state where you want to create the LLC. I wouldn't think that an online retailer would have any another patent or trademark issues other than the company name.

 

[quincy]

The business name for state registration purposes and the trademark for branding purposes countrywide and the domain name for the website all are trademark issues for e-commerce businesses.

 

[Taxing Matters]

Generally, an online seller only needs to register the LLC where they have a physical presence, but in certain states they may need to register as a foreign LLC (foreign meaning not physically located in that state) if they meet certain sales online sales volume thresholds or transaction counts in that state.

One correction to that. A foreign LLC is a LLC that was created/organized outside the state. For example, if I start my business as a LLC in Colorado it is a domestic LLC under Colorado regardless of whether it actually does any business activity in Colorado. If I then wish to register that same LLC to do business in CA, it is a foreign LLC because it wasn't organized under CA law. My CA operations could have a dozen physical locations in CA and it would be still be a foreign LLC and I still would register my CA LLC as a foreign LLC. Whether or not my LLC is required be registered in CA will depend on the extent of activity it has in the state.