Congratulations, if you run a dropshipping business or plan to start one, you’re on the right track.
Dropshipping is becoming a popular way to sell online, as the eCommerce-platforms report shows that around 27% of online retailers are using this method.
Dropshipping is relatively an uncomplicated business model, but you need to consider a few things as a dropshipping business owner. One of the most important things is to select the business structure that protects your personal life from your financial life.
One of the best business structures for small businesses like Dropshipping is a Limited Liability Company. This guide will walk you through an introduction to dropshipping, help you choose the best state to form an LLC for dropshipping, and guide you on how to start an LLC yourself.
If you already run a dropshipping business, you can skip the following two sections since they are some basic information for newcomers.
Which is the Best to Form an LLC for Dropshipping Business? Comprehensive Guide in 2022
- 1 What is Dropshipping?
- 2 How Dropshipping Works with an Example
- 3 Why is an LLC the Best Structure for Dropshipping Business?
- 4 Benefits of forming an LLC for Dropshipping Business
- 5 Which is the Best State to Form an LLC for Dropshipping Business?
- 6 How to Form an LLC for Dropshipping Business
- 7 Another Option
What is Dropshipping?
Dropshipping is an e-commerce model that allows online sellers to sell products without storing any inventory.
In dropshipping, when a customer places an order for a product on a retailer’s website, the retailer places an order for this product with a third-party supplier then the supplier ships the product directly to the customer.
How Dropshipping Works with an Example
Unlike other eCommerce business models, In dropshipping, You don’t have to purchase hundreds of products in advance and store them for a long period of time.
Instead, you have to talk to a supplier with warehouses where your products can be stored, and when someone places an order on your website, your supplier will come into the play and ship the product directly to the customer on your behalf.
Henry has an online store where he sells home appliances using the dropshipping method.
He chooses products from AliExpress and lists them on his website, which is connected to AliExpress.
When someone places an order on Henry’s website, Ali Express sends the product directly to the customer on his behalf.
I hope by now you have understood how the dropshipping business model works.
Why is an LLC the Best Structure for Dropshipping Business?
Let’s talk about a crucial topic of this guide, Why do I need LLC for Dropshipping?
Limited liability companies protect their owners’ assets if the company incurs a liability like debt. They do this by creating a shell or barrier between owner assets and business liabilities.
When it comes to any business, especially one with a lot of work like a dropshipping business, registering your business as a Limited Liability Company is simply the smartest thing you can do.
Benefits of forming an LLC for Dropshipping Business
Limited Liability Company (LLC) offers many features that are beneficial to a dropshipping business, such as:
Limited Liability Protection:
Limited liability protection is one of many benefits of forming an LLC for your dropshipping business.
If you are concerned that a business failure could compromise your assets, an LLC is a safeguard that helps ensure that your creditors or legal pursuers cannot enjoy any compensation from your personal property if things go wrong.
LLC is a pass-through entity, meaning you don’t have to pay corporate income taxes on dropshipping business earnings instead of this you have to pay taxes on individual tax codes.
Boost Consumer Trust:
Having an LLC can give you credibility and make your dropshipping business appear more serious. This can create customer trust and build brand visibility.
Which is the Best State to Form an LLC for Dropshipping Business?
Dropshipping is a low-cost business model that requires little investment compared to other eCommerce business models. We recommend forming an LLC for your dropshipping business in a state with low fees and taxes.
5 Cheapest States to Form an LLC in Term of State Filing and Renewal Fees
- Arizona ($50 state filing fee with no renewal fee)
- Missouri ( $50 state filing fee with no renewal fee)
- Mississippi ($50 state filing fee with no renewal fee)
- New Mexico ($50 state filing fee with no renewal fee)
- Kentucky ($40 state filing fee with an annual renewal fee of $15)
5 Cheapest States to Form an LLC in Term of Tax Burdens
- Alaska (Total tax burden: 5.10%)
- Tennessee (Total tax burden: 5.74%)
- Wyoming (Total tax burden: 6.14%)
- Delaware (Total tax burden: 6.21%)
- New Hampshire (Total tax burden: 6.84%)
9 States that don’t have No Income Tax
- New Hampshire
- South Dakota
5 States that don’t have No Sales Tax
- New Hampshire
Wyoming is the most popular state to form an LLC in the United States. In fact, 80% of our customers, mostly small business owners, prefer Wyoming over other states.
Based on my thorough research, Wyoming is the best state to form an LLC for Dropshipping due to its unmatched benefits for small businesses.
The following is a breakdown of Wyoming LLC’s expenses:
- State Filing Fees: $102
- Wyoming Annual License Tax: $50+
- Total Tax Burden: 6.14%
- Corporate Tax: 0 percent
- Individual Income Tax: 0 percent
- Sales tax rate: 4.00 percent
How to Form an LLC for Dropshipping Business
There are two ways to form an LLC in the United States for your Dropshipping Business: Do it yourself or get a professional formation service to do it for you.
To form an LLC yourself, you have to follow these steps:
- Pick a Name for your LLC
- Appoint a registered agent
- File your Article of Organization (Certificate of Formation)
- Decide on member vs manager management
- Draft your Operating Agreement
- Apply for Business Tax ID
Pick a Name for your LLC
The first step to forming an LLC is to select a name for your LLC. Generally, you will need to follow this naming instruction:
- You must include the word limited liability company or LLC in your company name.
- You have to avoid restricted words such as a bank, trust, Law, Attorney, etc.
- You should not include such words in your company name that confuse your LLC with a government agency.
- I also recommend registering your LLC name’s web domain even if you do not want to create your business website today.
Appoint a Registered Agent
The next step in forming an LLC is to appoint a registered agent. A registered agent is also known as a statutory agent or resident agent.
A registered agent is a person or a company who sends and receives legal papers on behalf of your LLC. These legal papers include official correspondence like legal summons and filing documents.
Your registered agent must be a state resident where you want to start your LLC. If your registered agent is an individual, he will be a member of your LLC and you.
File your Article of Organization (Certificate of Formation)
The next step you have to do is to file the formation documents with your Secretary of State. These documents are known by various names, most commonly this document known as Certificate of Formation. It describes the organizational structure of your business.
Decide on Member vs Manager Management
The next thing you have to do is decide how your company will be managed.
A Limited Liability Company can have one or more owners. If you are a single owner, you don’t have to select between member management or manager management. You are automatically in control of all management decisions.
But if your LLC has multiple owners or investors, your group will need to collectively manage the company or elect a manager.
Learn More: Member vs Manager Managed LLC
Draft your Operating Agreement
An LLC operating agreement is a legally binding business document that entails the ownership of its members, how the company is managed, and the structure of the LLC or limited liability company.
It can provide details such as one meeting naming a registered agent, selecting managers, and adding and dropping members.
An operating agreement is not required in every state, but it is highly recommended to have an operating agreement to avoid internal disagreements between LLC members.
Apply for Business Tax ID
The final step is to apply for your Business Tax ID, also known as Employer Identification Number (EIN) and Federal Tax Identification Number.
What are the Purposes of EIN?
- An EIN is necessary for your business tax purposes.
- It is also required to open a business bank account in the United States.
- It is also needed when you want to hire employees legally.
Applying for an EIN is quite simple and free of cost. You can quickly obtain this by visiting the IRS.gov website.
You’ve come to the right place if you’re thinking about forming an LLC for your Dropshipping Business with the help of a professional incorporation service.
Micahguru Formation is a U.S. incorporation company that helps founders and entrepreneurs globally to launch and manage their U.S. businesses remotely.
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