Form an LLC for Online Businesses (Step-by-Step Guide)

Do you need a Limited Liability Company (LLC) as an online business owner and wondering how to go about it?

Is it worth it for you right now?

And at what point should you form an online business LLC?

Well, the answers to these questions aren’t as straightforward as you might think.

I started my online business in 2017 but never created an LLC until 2020, when I needed to integrate Stripe into my payment gateway. That’s one of the reasons I formed an LLC.

So what’s yours?

Besides the obvious, setting up an LLC for your online businesses can provide personal liability protection, credibility, and tax flexibility benefits.

This guide will break down every myth and fact you might have heard about starting an LLC too early or too late.

First things first…

Should I Start an LLC for My Online Business?

Deciding whether to start an LLC for your online business could be a BIG positive step or a TRAP. This is why it’s worth taking the time to think it through. Forming one has some great benefits, but there are also a few challenges to remember.

One major advantage of an LLC is limited liability protection.

This means your personal assets, like your home or car, are generally protected if your online business faces lawsuits or debt. For example, if you sell or promote products online and a customer, client, or reader sues you, your personal savings are less likely to be at risk.

Forming an online business LLC also boosts credibility.

Let’s say you’re offering freelance services or running an e-commerce store. Bigger clients may feel more comfortable working with you if your business is officially structured, making you appear more professional.

On the downside, there are costs involved. Some states charge over $200 for registration; maintaining an LLC can come with ongoing fees. There’s also paperwork to handle, like filing your articles of organization and keeping detailed records.

So, what’s the best move?

Well, if you’re still testing your business idea or running something small on the side, you could wait and see how things go before forming an online business LLC. Also, you do not need an LLC if you’re a new business owner who does not need a payment gateway like Stripe, which requires LLC documents for signup and approval.

On the other hand, if you aim for long-term growth, need Stripe or payment systems, and want to protect your assets, an LLC might be the best choice for your business right now.

Why is Starting an LLC for Your Online Business Important?

Starting an LLC for your online business offers several key benefits that enhance your operations and address potential risks.

Personal Asset Protection

When you form an LLC, you create a separate legal entity for your business. This means your personal assets, like your home or car, are generally protected from business debts and legal actions. If your online business faces a lawsuit or owes creditors, they usually cannot go after your personal belongings.

Pass-through Taxation

An LLC offers pass-through taxation, a vital benefit for many business owners. This means that the business itself does not pay federal income taxes. Instead, profits and losses “pass through” to your personal tax return.

You report this income on your Form 1040, simplifying your tax obligations.

This structure can lead to lower overall tax rates compared to traditional corporations. Additionally, you avoid double taxation that C-corporations often face, making it easier to manage your finances.

Enhanced Credibility and Professionalism

Having an LLC can enhance your business’s credibility. Customers and clients often view registered businesses as more legitimate than sole proprietors or informal ventures. This can lead to increased trust and potentially higher sales.

Displaying your LLC status on your website, payment invoices, and marketing materials shows that you take your business seriously.

Potential for Growth

Forming an LLC positions your online business for growth. Attracting investors or applying for business loans will be easier as you expand. Banks and investors typically prefer to work with registered entities rather than individuals.

Moreover, an LLC allows for multiple owners or members. With an LLC structure, bringing in partners or expanding your team is straightforward.

How to Start an LLC for Your Online Business (Step-by-Step)

Following the steps below would help establish your LLC for an online business correctly:

1. Choose a State to Register Your Online Business LLC

Choosing the right state to register your online business LLC is as critical as working with the right partner. It impacts your taxes, legal protections, and business rules.

When forming an LLC for your online business, it’s best to register in your home state—the state where you live and work. Even if your business operates primarily online, registering your LLC in the state where you conduct business is the most straightforward and beneficial approach.

This ensures you comply with local laws and reduces the complexity of managing your LLC.

While some states, like Delaware, Wyoming, Nevada, and New Mexico, are often mentioned as business-friendly for their privacy, low fees, and tax advantages, they’re typically better suited LLC states for non-US residents or foreigners looking for favorable conditions.

These states offer benefits like no state income tax (Wyoming and Nevada) or strong privacy laws (Delaware and New Mexico), but if you’re a resident of the U.S., forming your online business LLC in your home state will save you from unnecessary legal complexities.

2. Choose a business name for your Online Business LLC

Start by ensuring your name is unique. You don’t want to end up with a name already taken by another business in your state. Use your state’s name/entity search portal to check availability and avoid legal headaches.

Your online business LLC name must follow specific rules set by the state. Your LLC name must include one of these phrases:

• Limited Liability Company
• LLC
• L.L.C.

Also, check your state’s legal requirements—some names or words might be restricted or require special approval.

Next, make sure your name is relevant to your business. It should give potential customers a clear idea of what you offer. Keep it clear and simple; a straightforward name is easier to remember and say.

3. Designate a registered agent

A registered agent is a person or business responsible for receiving legal documents on behalf of your LLC. This includes important documents like lawsuits and official state communications.

When forming your LLC, you must appoint a registered agent in your chosen state. While you can be your own registered agent, I highly recommend hiring a service due to the nature of your business—an online business.

This keeps your address off public records and ensures your privacy.

4. File Articles of Organization/Certificate of Formation for your selected state

Filing the Articles of Organization is a key step in forming your LLC. Depending on your state, this document may also be called the Certificate of Formation or Certificate of Organization.

To file, follow these steps:

1. Visit your state’s business registration website.
2. Complete the Articles of Organization form. You must provide your LLC name, address, and other basic information.
3. Check for specific state requirements. Some states have additional forms or details you must include.

Most states let you file online, by mail, or in person, and LLC filing fees vary by state.

After submitting, you might receive confirmation by mail or email. Some states offer expedited processing for an extra fee, so check if you need to speed things up.

5. Obtain an Employer Identification Number (EIN)

Getting an Employer Identification Number (EIN) is essential for your online business LLC. This federal tax ID number helps identify your business for tax purposes and other official matters.

Why do You Need an EIN?

• Tax Reporting: It’s necessary to file your business taxes.
• Hiring Employees: If you plan to expand and hire employees, you’ll need an EIN.
• Opening a Bank Account: Most banks require an EIN to open a business account for your LLC.

How to Apply for an EIN?

First, ensure your business is registered in the U.S. or its territories. Then, go to the IRS website to apply for free.

6. Create an operating agreement (optional)

Creating an operating agreement for your online business LLC is an optional but highly recommended step. This internal document outlines how your LLC will be run, including the roles and responsibilities of its members.

Here are a few elements to Include:

• Member Roles: Outline the duties and responsibilities of each member.
• Management Structure: Specify how the LLC will be managed by members or appointed managers.
• Financial Arrangements: Detail how profits and losses will be allocated and how contributions will be handled.
• Dispute Resolution: Include a plan for resolving any disputes among members.
• Voting rights: Specify how votes will be counted and what constitutes a majority.

Read more: Operating Agreement Guide for LLC

7. Obtain business permits and licenses (if necessary)

I’ve been running my online business for over a half-decade, and I’ve never encountered a scenario where a license was required. It is the same with my friends and colleagues in online marketing.

So I don’t think this is necessary.

However, certain activities or online business niches might still require permits or licenses. For instance, if you’re selling and shipping physical products, you might need a sales tax permit. Additional requirements could be specific to your industry if your business involves specialized services or health products.

8. Open a Business Bank Account for Your Online Business LLC

Once your online business LLC is set up, it’s time to open a business bank account. This is a crucial step for keeping your personal and business finances separate, which helps with both organization and legal protection.

Requirements to Open an Account:

You will need a few documents to get started:

• LLC formation documents: These prove that your business is registered.
• Employer Identification Number (EIN): This unique number identifies your business for tax purposes.
• Personal identification: A government-issued ID like a driver’s license or passport.

Next, compare different banks to find the one that offers the best features for your business. Look for benefits like low fees, online banking options, and good customer service. I used Mercury Bank as a non-US resident LLC for almost 4years before they banned accounts in certain countries.

These days, I use Brex Bank and Wise business accounts for my online business.

So, I recommend you do some research and find one that suits your needs.

Additional Resources and Other Considerations for Online Business LLC Owners

Get an LLC Formation Service to Ease the Entire Process (Northwest is the Best)

Starting an LLC can be overwhelming with all the paperwork and legalities involved. That’s where an LLC formation service can make your life a lot easier. They handle the heavy lifting so you can focus on running your business.

One service that stands out is Northwest Registered Agent. They’re not just good; they’re exceptional.

Here’s why:

• Free Business Formation: Northwest offers a free LLC formation discount when you sign up for their registered agent service.
• One Free Year of Registered Agent Service: Northwest offers a free registered agent service with your LLC formation. You’ll have a professional handling your legal documents and keeping your address off public records, all at no extra cost for the first year.
• Transparent Pricing: There are no hidden fees. The pricing is clear and straightforward, so you know exactly what you’re paying for.
• Top-Notch Support: Their customer service is highly praised. If you have any questions or issues, their friendly and knowledgeable team is there to help.
• Privacy Protection: They also provide services to keep your address off public records, which is especially useful for online business owners who want to maintain privacy.

Understand Maintenance Requirements (Annual Reports, Franchise Taxes, etc.)

After setting up your online business LLC, you must maintain it regularly to stay compliant.

Here’s what to watch for:

• Annual Reports: Most states require LLCs to file an annual or biennial report to update business information. This usually involves a simple form and a fee. Missing the deadline can lead to penalties.

• Franchise Taxes: Some states charge an annual franchise tax for doing business there. The amount and method of calculation vary by state.

• State-Specific Requirements: Each state has its rules for maintaining an LLC, like renewing business licenses or updating your registered agent. Check your state’s requirements to stay on track.

File a Beneficial Ownership Information Report (BOI)

You may need to file a Beneficial Ownership Information Report (BOI) in certain states. This report identifies the individuals who ultimately own or control your LLC.

You May Need to Get Insurance for Your LLC

Even though forming an LLC offers valuable legal protections, it doesn’t cover everything. That’s where insurance comes in. It’s a smart way to add an extra layer of security for your business.

Insurance helps protect your LLC from various risks.

For example, liability insurance covers you if someone sues you for injury or property damage related to your business. Property insurance can protect against loss or damage if you have valuable assets or equipment. And if your business provides professional services, professional liability insurance can safeguard you from claims of mistakes or negligence.

Again, Get Expert Advice When Needed

Navigating the requirements of running an LLC can be complex. When unsure about any aspect of your business, seeking professional advice is essential.

Consider these experts:

• Accountants: They can guide you on tax implications and financial planning.
• Attorneys: A lawyer can help with legal compliance and contracts.

What is the best state to open an LLC for an online business?

As I explained earlier, your home state is often the best choice if you live in the United States.

Here’s why:

• Easy Filing: It’s simpler to file annual reports and taxes.
• Registered Agent: You can easily have a local registered agent.

Some people suggest states like Delaware, Wyoming, Nevada, and New Mexico for their benefits. While these states have attractive features, filing in your home state usually offers more direct advantages.

If you are not a U.S. resident or a foreigner, consider forming your LLC in Wyoming, New Mexico, or Delaware. These states provide various benefits:

• No State Income Tax: Keeps more money in your business.
• Strong Asset Protection: Helps secure your personal assets.
• Anonymous Ownership: Your name may not be publicly disclosed.

As a non-resident, you can choose any state for your LLC. You don’t need to worry about local regulations in your home state. This makes it easier to select the best options based on your needs.

Can I Live in a State Different from My LLC?

Yes, you can live in one state while your LLC is registered in another. This is quite common and often done to benefit from favorable business laws or tax advantages in a different state. Just be aware that your LLC will need a registered agent in the state where it’s registered who will handle legal documents for you.

Additionally, you must comply with the state regulations where your LLC is registered, including filing annual reports and paying any necessary fees.

If you also plan to operate in the state where you live, you may need to register your LLC as a foreign entity there to ensure you meet local requirements.

LLC or Sole Proprietorship or Corporations for Online Businesses – What is the Best Business Structure?

Choosing the right business structure for your online business is crucial and can impact everything from your taxes to your liability. Three common options are sole Proprietorship, LLC, and Corporation.

Here’s a quick rundown of the options:

Feature	Sole Proprietorship	LLC	Corporation
Personal Liability:	Unlimited	Limited	Limited
Setup Complexity:	Low	Medium	High
Tax Benefits:	Personal Taxes	Flexible Pass-Through	Double Taxation
Control:	Complete	Shared Ownership	Managed by Board

Sole Proprietorship: This is the simplest and most cost-effective structure, ideal for solo entrepreneurs starting out. It’s easy to set up, but it offers no liability protection. This means your personal assets are at risk if your business faces legal issues or debts.

LLC (Limited Liability Company): An LLC is a popular choice for online businesses because it provides liability protection for your personal assets while offering flexibility in management and tax options. You can choose how you want to be taxed (as a sole proprietor, partnership, or corporation), and it’s generally easier to set up and maintain than a corporation.

Corporations: Corporations offer the most robust liability protection and can be beneficial if you plan to seek investment or go public. However, they come with more regulatory requirements and higher costs.

Frequently Asked Questions

Do I Need a Foreign LLC for My Online Business?

No, you don’t; however, if your online business operates in a state different from where your LLC is registered, you may need to register as a foreign LLC. This ensures that you comply with local laws and regulations, such as paying state taxes and obtaining necessary licenses.

What Type of LLC Is Best for an Online Business?

For most online businesses, a Single-Member LLC is the best option if you’re running the business on your own. It offers liability protection, keeping your personal assets separate from your business, and provides tax flexibility. If you have business partners, a Multi-Member LLC would be the right choice.

Is it necessary for an Online Business to have several members before it can form an LLC?

No, it is not necessary. You can form a single-member LLC, which means you will be the sole owner. Many people choose this option for their online businesses.

What annual fees are associated with an Online Business LLC?

Annual fees vary by state and can include franchise taxes or renewal fees. Be sure to check the specific requirements and costs for maintaining your LLC in your state to stay compliant.

Can I form an LLC in a state different from where my Online Business is located?

Yes, you can form an LLC in a different state, known as “foreign LLC registration.” However, if your business operates primarily in another state, you may need to register there, too.

Can I use my bank account for my Online Business LLC?

It’s best to open a separate business bank account for your LLC. This will keep your personal and business finances separate, simplify accounting, and protect your personal assets.

What are the tax benefits of forming an LLC for an Online Business?

LLCs offer pass-through taxation, meaning profits are taxed at the owner’s personal tax rate, avoiding double taxation. Additionally, you can deduct business expenses directly from your income.

Can I hire employees for my Online Business LLC?

Yes, you can hire employees for your LLC. Make sure to follow local employment laws and regulations. You’ll also need to obtain an Employer Identification Number (EIN) for tax purposes.

Can I serve as my LLC’s registered agent?

Yes, you can be your LLC’s registered agent as long as you have a physical address in the state where your LLC is registered. The registered agent receives legal documents on behalf of the LLC.

Why should I hire an LLC service when I can form my own LLC?

Hiring an LLC service can save you time and reduce the risk of errors. These services often provide guides and support for filing paperwork correctly and ensuring compliance with local laws.

Are permits or licenses required for an Online Business?

It depends on your business type and location. Some online businesses may require specific permits or licenses to operate legally. Check local regulations to ensure you have all necessary permits before launching your business.