After you've had your Shopify store for a while and made some sales, you will be asked to submit your business papers and legitimize your business. That means obtaining either a sole proprietorship or LLC.
A sole proprietorship is a prevalent form of business used by most small businesses. It does not have the status of a legal partnership, but it also doesn't require as much paperwork to set up or maintain. The benefits and responsibilities of running your new business are yours alone, and you will have complete control over the decisions made for its future.
The downside, of course, is that you will be 100% responsible for your business. That means if something goes wrong (your business gets sued, unable to pay debts, etc.), your personal assets can be affected.
The taxes for a sole proprietorship is filed with Form 1040 of your personal tax return.
Setting up a sole proprietorship is a free and relatively straightforward process:
Go to the IRS website and key in "EIN" on the search bar.
Scroll down the search results and select "Apply for an EIN".
Review the information on the next page and ensure that you are within the IRS business hours before clicking the "Apply Online Now" button.
Complete the process and provide all the requested information. IRS will confirm everything you've submitted and then provide you with an employer identification number, registration certificate, sales, use taxes, and fees. These are the documents that you'll need to legitimize your business with Shopify.
If you are outside the US, you will have to follow the process for your country's business registration.
LLC (Limited Liability Company)
An LLC is a separate legal entity from its owners; thus, it provides the same limited liability as a corporation. In addition, it offers both tax benefits and management flexibility for business owners; managers of an LLC can be specified in the articles of organization or operating agreement, or they can be chosen on an ad hoc basis.
LLC taxation is handled just like a sole proprietorship — the income passes through to the owner's tax return. The difference, of course, is that an LLC shields the owner from business-related lawsuits and debts.
To create an LLC, you'll need to file articles of organization and follow your state's rules. Fees and compliance requirements vary by state. Once the paperwork is filed with your Secretary of State/Department of Commerce and an Employer Identification Number is obtained, your LLC is ready to do business.
We recommend using a legal service like Rocket Lawyer and Northwest Registered Agent. While not necessary, these services will make it easy for you to create your LLC documents and get a registered agent onboard (required in some states).