Do You Need an LLC to Sell on Etsy, Amazon or Shopify?

Do I need an LLC to sell on Etsy, Amazon or Shopify?

No. No federal tax rule requires an online seller to form an LLC. You can sell as a sole proprietor and report the profit on Schedule C. An LLC is an entity created under state law (IRS); its main use is limiting your personal liability for business debts. California's tax agency, for example, says an LLC protects its members against personal liabilities (FTB). State law sets how far that protection reaches. It does not shield whoever runs payroll: a person responsible for paying over tax withheld from employees who willfully fails to do so is personally liable for the full amount (26 U.S.C. 6672; IRS).

For federal income tax, a one-owner LLC changes almost nothing; your state may add a yearly fee or tax. A second owner or an S corporation election is what changes the federal return.

Sources: single-member LLCs, LLC returns, information return instructions, S corporation pay and Texas Comptroller.

A case stops being simple when:

• A partner joins, or you sell with your spouse. The LLC then files a partnership return by default.
• Your two-owner LLC has been selling but never filed a partnership return.
• Profit has grown enough to ask whether an S corporation election pays.
• You store inventory in other states, or sell from your own website into many states.
• You live outside the US. The rules for foreign owners are different.
• The LLC exists but the seller account, payouts and sales tax permit are still in your personal name.

Gather: the seller account's tax-information page, last year's Forms 1099-K, your net profit for last year, your state's sales tax permit, and the cost of inventory on hand.

Does a single-member LLC lower my income tax or self-employment tax?

No. For income tax the IRS treats a one-owner LLC as part of its owner (a "disregarded entity") unless it elects to be taxed as a corporation, so its sales and costs go on the owner's Schedule C. The owner pays self-employment tax in the same way as a sole proprietor (IRS).

Self-employment tax is 15.3%: 12.4% for Social Security and 2.9% for Medicare. The Social Security part stops once your wages and net earnings together reach $184,500; the Medicare part has no cap. It is owed once net earnings from self-employment reach $400, and you deduct the employer-equivalent half in figuring adjusted gross income (IRS). An LLC adds no deduction a sole proprietor lacks.

What an LLC can add is a state charge. California charges an annual tax of $800 to every LLC organized or doing business there, due even in a year with no sales (FTB). For your state's yearly fee and report, see LLC annual fees and reports by state.

How to report sales, fees and cost of goods sold is in income tax for online sellers. For the general choice, see LLC or sole proprietorship.

What changes on my Form 1099-K if I form an LLC?

If you form a one-owner LLC, usually only the name lines on your Form 1099-K change; the tax number stays yours. A disregarded LLC gives the owner's SSN or the owner's EIN on Form W-9, not the LLC's EIN (IRS). The IRS tells filers of information returns to put the owner's name on the first name line, the LLC's name on the second, and the owner's number in the TIN box. An LLC taxed as a partnership or corporation is reported under its own EIN (IRS).

When a platform must send one:

Source: IRS. All sales income is reported on your return whether or not a form arrives.

In the year you switch, the number on file decides how many forms you get. If the LLC is disregarded and you keep your own number on the account, one form usually covers the year. If the LLC files its own return (two owners or an S election), you may get one form under your number for sales before the change and one under the LLC's EIN after it. Update the seller account's legal name, tax information and payout bank on the date the LLC takes over. If the platform does not have a correct taxpayer number for you, it may have to withhold 24% of payouts (backup withholding) until you fix it (IRS).

A form under the wrong number is handled in a wrong or corrected platform tax form. For the threshold itself, see the payment platform reporting threshold.

Do I need an EIN for my LLC?

A one-owner LLC with no employees and no excise tax does not need an EIN for federal tax; it uses the owner's name and number. It may still get one if a bank needs it to open an account or state law requires it (IRS).

Once it pays wages or registers for certain excise taxes, the LLC must use its own name and EIN for those payroll and excise filings. An LLC with two or more owners operates as a partnership and needs an EIN (IRS), and an LLC electing S corporation status needs one for Form 2553 (Form 2553 instructions). Form the LLC with the state first, then apply; the IRS charges no fee. Having an EIN does not change the W-9 rule above: a disregarded LLC still certifies with the owner's number. More in EIN for a single-member LLC.

Does an LLC change sales tax for an online store?

Forming an LLC does not change who collects sales tax on marketplace sales; it can change who holds the permit and add a state business tax. Where state law makes a marketplace collect, it does so whether you sell as a person or an LLC. Texas, for example, requires marketplace providers to collect on all sales made through the marketplace and to certify that to sellers; it names Amazon, eBay and Etsy among its examples (Texas Comptroller). Rules differ by state. Sales on your own website stay your job; where you must collect is covered in when you must collect sales tax and sales tax settings by state for an online store.

Two traps, both set by state rules:

• Marketplace-only sellers may still need a permit. A Texas seller who sells only through a marketplace must still hold a Texas permit and file returns (Texas Comptroller). Other states differ.
• The LLC can be a new permit holder. Texas treats forming an LLC from a sole proprietorship as a change of ownership: the LLC gets its own permit, and the old one is closed if no longer needed (Texas FAQ). Washington treats a change of structure like starting a new business, with a new business license and account number (Washington DOR).

An LLC can also bring a state business tax. Texas applies its franchise tax to an LLC, even one the IRS disregards, but not to a sole proprietor (Texas Comptroller). An LLC organized in Texas or with nexus there (enough connection to be taxed) files a Public Information Report or Ownership Information Report each year; at or below $2,650,000 of annualized total revenue it files no franchise tax report (Texas Comptroller). See Texas franchise tax.

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

Usually the state where you live and run the store. Forming in another state does not take the LLC out of your home state's rules. California, for example, charges its annual tax to an LLC doing business in California even if it was organized elsewhere (FTB). An out-of-state LLC run from home can mean two sets of filings and fees.

For the comparison, see which state to form in; for registering an outside LLC at home, see registering in another state.

When does an LLC start to matter for tax?

When profit is well above what your work would earn as a salary, and you weigh an S corporation election. An LLC alone changes no federal tax; the election is the decision worth pricing.

With the election, the LLC files Form 1120-S and runs payroll. It must pay the owner a reasonable salary for the work before other distributions, and the IRS can reclassify distributions as wages (IRS). Payroll tax then applies to the salary, not to the rest of the profit. The election is not open if any owner is a nonresident alien, which can rule it out when a partner or spouse is a foreign national living abroad (IRS). The LLC elects on Form 2553, with every owner's consent, no more than 2 months and 15 days after the start of the tax year it is for, or at any time in the year before. It adds yearly costs, and once it ends, IRS consent is generally needed to elect again before the fifth tax year after the first tax year in which termination took effect (Form 2553 instructions). Whether it pays, and how to elect: when an S corporation election pays off.

Selling with a partner: what does a two-owner LLC file?

A partnership return. An LLC with two or more owners is taxed as a partnership unless it elects otherwise. It files Form 1065 and gives each owner a Schedule K-1 showing their share; members generally pay self-employment tax on their share (IRS). The partnership itself pays no federal income tax; each owner reports their share on their own return (IRS).

Form 1065 is due March 15 for a calendar-year partnership (Form 1065 instructions). A late return costs $260 per partner for each month or part of a month, up to 12 months, unless the partnership shows reasonable cause (Rev. Proc. 2025-32; section 6698). A clean filing history for the prior 3 years can also remove it; for returns for tax year 2025 and later the IRS checks that without a request (IRS). A partnership of 10 partners or fewer that meets the conditions of Rev. Proc. 84-35, such as every partner reporting their share on a timely return, may have the penalty removed (IRS); see late partnership return penalty relief.

Spouses usually count as two owners. An LLC owned by a married couple in a state without community property should file as a partnership; if the couple alone own it as community property in a community property state, they may treat it as disregarded (IRS). See spouse and family LLCs. Two sellers splitting profit with no LLC may already be a partnership: see business partners without an LLC. Bringing a partner into your existing LLC is covered in adding a member to your LLC.

Switching mid-year: what changes on the day the LLC takes over?

Pick one start date and move everything to the LLC on it. The trap is forming the LLC but leaving the seller account and payouts in your personal name and bank, which blurs the books and the line between the LLC's debts and yours.

1. Form the LLC, then get an EIN if it needs one.
2. Open a bank account in the LLC's name. The IRS advises a business checking account kept apart from personal money (Publication 583). See a business bank account for an LLC.
3. Update each seller account: legal name, tax information and payout bank. Save a copy of the tax-information page with its date.
4. Get the LLC's own sales tax permit where your state requires one, and close your personal permit once you no longer sell under it.
5. Count inventory on hand and record it at cost as moved into the LLC on that date. See starting inventory you already owned.
6. Split the books at the date. For a one-owner LLC the whole year still goes on your Schedule C; the split ties each bank, permit and Form 1099-K to its period. For a two-owner LLC or an S election, the date also splits the returns.

Example

These examples use round, illustrative figures in US dollars and assume the seller has no wages from a job.

A craft shop with $9,000 profit

A seller has $30,000 of marketplace sales and $9,000 of profit. As a sole proprietor or as a one-owner LLC, the $9,000 goes on Schedule C and self-employment tax is about $1,270 ($9,000 × 92.35% × 15.3%). The LLC adds the state's filing fee and any yearly report or tax. In California the annual LLC tax alone would be $800, almost a tenth of the profit.

A fulfillment seller with $90,000 profit

A marketplace seller using fulfillment warehouses earns $90,000 of profit. A one-owner LLC alone leaves self-employment tax at about $12,700. With an S corporation election and a salary of, say, $50,000 (what is reasonable depends on the owner's work), payroll tax would apply to the salary rather than to nearly all of the profit, but the LLC would add payroll filings, Form 1120-S and any state tax. Whether that nets out is the S election question.

A website store that forms an LLC in September

A seller runs a website store as a sole proprietor until August 31 and moves it into a one-owner LLC on September 1, with $12,000 of inventory at cost. The seller updates the store's legal name and payout bank on September 1 and keeps their own SSN on the tax information, so one Form 1099-K usually covers the year. All twelve months go on one Schedule C, and the $12,000 carries on as inventory in the LLC's books. If a partner had joined on September 1 instead, the LLC would report under its own EIN: January to August would go on the seller's Schedule C and September to December on Form 1065, and the seller could get one Form 1099-K for each part.

Different for you?

• Your profit is high enough to weigh an S corporation election: see when an S corporation election pays off and get business formation help before you elect.
• A partner is joining, or you sell with your spouse: see adding a member to your LLC and set up the LLC with business formation help.
• Your two-owner LLC never filed Form 1065: see late partnership return penalty relief and get help with the missing partnership returns.
• You only want a business name, not an entity: see DBA or LLC.
• You live outside the US: see a US company for marketplace or payment accounts from abroad and get business formation help before you form.
• You live in Canada: see selling on a marketplace as a sole proprietor or corporation in Canada.
• You store inventory in other states: see when you must collect sales tax and tracking sales by state, or get bookkeeping help.
• Your books need splitting at the switch date: see bookkeeping for a craft marketplace shop or bookkeeping for a marketplace seller, or get bookkeeping help.