The Best Business Structure for Your Etsy Store
Jul 27, 2020
As an e-commerce business, making the first sale is only half of the battle. Figuring out if you should be an LLC, an S-Corp, or just stick to "Sole Prop" may make your head spin.
Honestly though, it is not as complicated as you think and can actually make or break you come tax time. So get ready for some knowledge.
First things first, let's go over where we are now.
As an e-com entrepreneur, your business structure is really only there to make sure you are legally "free" from your business and if set up the right way, reduce some of those nasty taxes you owe.
How does that happen?
Being legally free from you business. Let's say you just sell under "John Doe", as a single person. You never set up any LLC. And now let's say I get a faulty product and my head blows up. I know unlikely, but hey, things happen. So now I am steaming mad, literally, and I want to sue you for everything you have! Since you never set up an LLC I can take everything you have AS A PERSON. I can take your house, your dog, your car, whatever the court allows. Now let's say though that you were smart AND DID set yourself up as an LLC. When I go to sue you, I can ONLY take whatever your business has. Think about it like this, you and your business, while basically the same thing, are in fact TWO SEPARATE entities in the eyes of the law.
Saving those nasty taxes. With the different types of structures there are different tax "loopholes" you can take and avoid paying uncle sam your hard earned dollars....legally. We can go more into detail on these later, but in short, the loopholes come down to HOW YOU PAY YOURSELF.
Here are some common tips to consider when figuring out what structure will work best for you.
In my opinion, it always makes sense to register as an LLC, at a minimum.
Here are the different types of structures you can have...
You know how I said, it makes sense to be an LLC? Well yeah, if you are a sole proprietor, you are NOT an LLC and this means YOU are responsible for all of your business debts and litigation friendly customers. The only good part about being a sole prop (as we call it in the biz) is you can pretty much run wild and do whatever you want without any federal, state or local restrictions.
Here is the advantages of a Sole Prop
1. You can do this instantly, without any money and easily, boom your a sole prop
2. You really do not report to ANYONE but yourself, no one really knows you exist
3. You do not need to pay unemployment tax
Here are the disadvantages
1 . You have UNLIMITED exposure to liabilities, you know me suing you, I can TAKE EVERYTHING
2. You can not SELL the business, because there IS no business
Now were moving, once you get out of the sole prop stage, it's time to in my opinion to become a "real business" and designate yourself as an LLC. At this point, you and your business are separate in the eyes of the law. Your business is responsible for it's debts and your debts, well you still owe those, but moving forward no one can take YOUR stuff if you get sued. There are a lot of different kind of LLC's including single member, multi member, S-Corps, Partnerships etc....Me personally, I am a Single Member LLC and I used nolo.com to set up my structure, but Legal Zoom works just as well! This is where is does get more confusing though! And it all comes down to taxes!
Single Member LLC
Ok, so if you are a single member LLC, when you go to file your taxes, it actually "rolls" up to your personal tax return. So let's say you get a W2 and normally you get a $2,000 refund from the IRS. Now let's say April comes and your business owes $2,000. Both of these are reported on your personal income tax return. Make sense? So at the end of the day you actually do not owe anything, EVEN THOUGH YOUR BUSINESS DID!
Multi Member LLC
Ok, so let's just say you have a partner in crime and your both on the legal docs of the LLC. When you go to file taxes, EACH OF YOU are responsible for your fair share of the income...or loss. Again, both of these will "roll up" into your personal tax returns.
Ok, so here is where things get good. An S-Corp is JUST A TAX designation. Meaning, this ONLY matters to the IRS and here's why. Under their eyes, if you are being taxes as an S-Corp, you can actually be considered an employee of the company, BUT YOU MUST PAY YOURSELF A REASONABLE SALARY.
Here's the main difference between being a Single Member LLC and an S-Corp and how their taxed differently..
Let's say you are an LLC owner taxed as a single member LLC and your business makes $100,00 profit, not sales, but profits. You will report $100,000 of income, and you will pay Social Security tax and Medicare tax on the entire $100,000. A pretty big amount...
Now let's say you have elected to be taxed as an S corp. and have determined that your reasonable salary is $50,000. Your salary is a business expense, so the business now has a $50,000 profit, since you know, you did pay yourself. You will still report $100,000 of income ($50,000 of salary plus $50,000 of profit), but you and your business will only pay Social Security and Medicare taxes on your $50,000 salary.
I know, it DOES get tricky, but here is what I would suggest...
1. Talk to a lawyer
2. Talk to a CPA
Both of these people will lead you in the right direction for YOUR business.
Keep it simple, for now....just set yourself up so that you legally are not liable for your business. Go to legal zoom and start a single member LLC. As you continue to grow, it may be time to consider an S-Corp.