Part 2: Entity Structure for E-Commerce Sellers

Why Entity Choice Matters More in E-Commerce Than in Most Businesses

In a conventional service business — a consultant, a graphic designer, a sole-practice attorney — entity structure matters primarily for liability protection and income tax efficiency. The business has one location, one owner, relatively predictable income, and limited contact with inventory, warehouses, or multi-state tax systems.

E-commerce compounds the stakes in several directions simultaneously.

First, there is the liability dimension. E-commerce businesses regularly deal with product liability — the risk that a product you sold causes harm to a customer. If you are selling physical goods under your own brand, importing products from overseas manufacturers, or selling any kind of consumable, supplement, electronic, or product with any meaningful injury potential, you are exposed to product liability claims. Operating without a properly maintained entity structure means those claims come directly against you personally. Your house, your personal bank accounts, your car — all reachable by a plaintiff’s attorney. A properly structured and maintained LLC or corporation creates a legal barrier between business liabilities and your personal assets. It is not impenetrable — we will discuss the requirements for maintaining that protection — but it is a fundamentally different risk position than operating as an unincorporated sole proprietor.

Second, there is the tax efficiency dimension. As we covered in Part 1, e-commerce sellers operating as sole proprietors or single-member LLCs taxed as sole proprietors pay self-employment tax on their entire net profit. At scale, this is a significant and avoidable burden. The S-Corp election — available to qualifying LLCs and corporations — allows sellers to split their business income into a salary component and a distribution component, with self-employment taxes applying only to the salary. At profit levels of $80,000 and above, this structure routinely saves sellers $5,000 to $20,000 or more per year in SE tax alone. That is a recurring annual saving that compounds over the life of the business — and it is only accessible if you have the right entity structure in place.

Third, there are the operational and platform considerations. Some wholesale suppliers and manufacturers will not open accounts with unincorporated sole proprietors. Amazon’s Brand Registry, which protects your trademark and gives you significantly more control over your listings, requires a registered trademark that is far more credibly tied to a legal entity than to an individual. Banks typically offer better business account terms, higher transaction limits, and credit facilities to properly formed entities. And as we will see when we get to the international seller section, non-US individuals operating through a US LLC or corporation have a fundamentally cleaner and more compliant US footprint than those operating without any US entity at all.

None of this means you need the most complex structure possible on day one. What it means is that the decision deserves genuine thought — not a default.

Sole Proprietor by Default — What Happens If You Do Nothing

If you start selling online and take no steps to form a business entity, the law treats you as a sole proprietor. There is no paperwork to sign, no filing to make, and no fee to pay. You simply exist as a self-employed individual conducting business in your own name.

For the purpose of federal income tax, your business income and expenses are reported on Schedule C of your personal Form 1040. Net profit from Schedule C flows directly to your personal return and is taxed at your individual income tax rates. On top of that, all net profit from Schedule C is subject to self-employment tax — 15.3% on the first $168,600 of net self-employment income (in 2024, with the Social Security wage base adjusted annually), and 2.9% on any amount above that threshold (the Medicare portion has no cap, and an additional 0.9% Medicare surtax applies above $200,000 for single filers).

Operationally, you conduct business under your own legal name, or under a trade name (a “doing business as” or DBA) registered with your county or state. A DBA does not create a separate legal entity. It is just a registered name. The debts, contracts, and liabilities of the business are your personal debts, contracts, and liabilities. There is no separation.

For a seller just starting out, testing a product idea with modest initial capital and limited downside, operating as a sole proprietor is not catastrophically wrong. The administrative overhead is minimal and the tax filing is simple. Many sellers start here legitimately.

The problem is staying here once the business becomes real. Once you are generating meaningful revenue, holding inventory, running advertising budgets, negotiating with suppliers, and building customer relationships, operating without a formal entity means:

You have no liability protection. Every product you sell, every contract you sign, every vendor you pay — all of it connects directly to you as an individual. If a customer is injured by your product, if a supplier sues for breach of contract, if Amazon claws back funds and the dispute escalates — you are personally on the hook.

You are paying the maximum possible self-employment tax. Every dollar of profit from a sole proprietorship is subject to SE tax. There is no mechanism within the sole proprietor structure to reduce this.

You may find it harder to open certain accounts, access certain platforms, or be taken seriously in B2B relationships that require a formal business entity.

And when you eventually form an entity — because almost every successful e-commerce seller eventually does — there will be a transition period in which contracts need to be reassigned, accounts updated, bank accounts migrated, and tax history recalibrated. This transition is manageable but involves friction and cost that could have been avoided by forming the entity earlier.

The practical guidance: if your e-commerce business is generating consistent revenue and you intend to continue building it, form an entity. The cost is a few hundred dollars and a few hours of paperwork. The protection and flexibility it creates is worth multiples of that investment.

LLC for E-Commerce Sellers — Protection, Flexibility, and Tax Treatment

The Limited Liability Company is the most common entity choice for e-commerce sellers, and for good reason. It offers a combination of legal protection, tax flexibility, and administrative simplicity that suits the needs of most sellers at most stages of growth.

Legal protection. An LLC creates a legal separation between the business and its owners (called “members”). Subject to the requirements discussed below, the debts and liabilities of the LLC are the debts and liabilities of the LLC — not of the individual members. If the LLC is sued, the plaintiff can pursue the LLC’s assets. They cannot, in most circumstances, reach the members’ personal assets. This is the “limited liability” that gives the entity its name.

The protection is real, but it requires maintenance. An LLC that is not properly maintained — where the owner treats the business bank account as a personal account, regularly pays personal expenses from business funds, fails to keep business records, signs contracts in their personal name rather than the LLC’s name, or does not consistently hold themselves out as acting on behalf of the LLC — can have its liability protection “pierced” by a court. Piercing the corporate veil, as it’s called, means a court finds that the LLC and the individual are effectively the same thing, and therefore the individual can be held liable. This is the single most important reason why forming an entity is necessary but not sufficient — you have to operate it correctly.

Tax flexibility. By default, a single-member LLC (one owner) is treated as a “disregarded entity” for federal income tax purposes. This means it is taxed exactly like a sole proprietorship — Schedule C, self-employment tax on all net profit, no separate entity-level tax return. The LLC exists as a legal entity, creating liability protection, but for tax purposes it is invisible. This is the default, and it is fine for sellers in their early stages.

The LLC’s flexibility comes from the ability to change this default tax treatment by election. A single-member LLC can elect to be taxed as an S-Corp or a C-Corp without changing anything about its legal structure. The LLC remains an LLC under state law. The tax treatment shifts at the federal level based on the election filed. We cover these elections in detail below. The key point here is that the LLC gives you the flexibility to start simply, under the disregarded entity default, and shift to a more tax-efficient structure when your revenue justifies it — without needing to dissolve and reform a different entity.

Administrative simplicity. LLCs are simpler to form and maintain than corporations. Formation typically requires filing Articles of Organization (or a Certificate of Formation, depending on the state) with the state, paying a filing fee, and — recommended but not always legally required — drafting an Operating Agreement. The Operating Agreement documents the ownership structure, the management of the LLC, the distribution of profits, and the rights of members. Even for a single-member LLC, having an Operating Agreement in place is good practice: it demonstrates that the LLC is a genuine legal entity with its own governance, which supports the liability protection and can be important if the LLC ever faces scrutiny.

Most states require LLCs to file an annual report and pay an annual fee to maintain good standing. The amounts vary considerably — in some states it is as low as $25 per year; in California, the minimum franchise tax is $800 per year, due regardless of whether the LLC generates any income. This California minimum tax is one reason some sellers choose to form in a different state, which we address in the state formation section below.

Single-Member LLC vs Multi-Member LLC — What Changes and What Doesn’t

When an LLC has a single owner, it is a single-member LLC. When it has two or more owners, it is a multi-member LLC. This distinction matters more than most sellers realise, in several specific ways.

Tax treatment. A single-member LLC is a disregarded entity by default — it files no separate federal tax return, and its income and expenses flow through to the owner’s personal Form 1040 on Schedule C. A multi-member LLC is treated as a partnership by default, which does require a separate federal tax return: Form 1065. The partnership files an informational return and issues Schedule K-1s to each member, who then report their share of income, deductions, and credits on their personal returns. The partnership itself pays no tax — the tax obligation passes through to the members — but the filing requirement and administrative complexity are meaningfully higher than for a single-member LLC.

Self-employment tax for multi-member LLCs. In a general partnership and most multi-member LLCs, each member’s distributive share of income is subject to self-employment tax, just as it is for a sole proprietor. There are some nuances — limited partners in a limited partnership may have a different treatment, and there has been ongoing IRS guidance and litigation about the SE tax treatment of LLC members — but the default position for a typical multi-member LLC where all members are active in the business is that all members owe SE tax on their allocable share of net income.

Operating Agreement importance. A multi-member LLC should always have a detailed Operating Agreement. This document governs how profits and losses are allocated among members (which need not be proportional to ownership percentage, within limits), how decisions are made, what happens if a member wants to exit, how disputes are resolved, and what happens to the LLC if a member dies or becomes incapacitated. Without an Operating Agreement, your state’s default LLC statutes govern all of these questions — and those defaults are rarely optimal for the specific circumstances of your business and your co-owners. Disputes between LLC members without an Operating Agreement can become deeply expensive.

Impact on S-Corp eligibility. An S-Corp election — which, as we cover below, is the most common tax efficiency move for profitable sellers — requires that the entity have no more than 100 shareholders, that all shareholders be US citizens or permanent residents, and that the entity have only one class of stock. A multi-member LLC electing S-Corp status must ensure all members are US persons and that the Operating Agreement does not create different economic rights for different members in ways that would be treated as a second class of stock. For multi-member LLCs owned partly by non-US persons, the S-Corp election is not available.

Bank accounts and platform accounts. Multi-member LLCs are treated as partnerships, not sole proprietorships, and this affects how you open bank accounts, how Amazon and other platforms categorise your tax status, and what documentation you need to provide. You will be asked for the LLC’s EIN (not your personal SSN), the partnership’s formation documents, and often the Operating Agreement.

The practical guidance for most e-commerce sellers starting out: form a single-member LLC in your name, operate under the disregarded entity default, and revisit the structure when your profit level justifies more sophisticated tax planning or when you bring on a co-owner.

C-Corp for E-Commerce — When It Makes Sense and When It Creates Unnecessary Complexity

A C-Corporation is a legal entity that, unlike an LLC or S-Corp, is taxed as a completely separate taxpayer. The corporation pays its own income tax — at the federal corporate rate of 21% — and then shareholders pay a second layer of tax when they receive distributions (typically as qualified dividends, taxed at preferential long-term capital gains rates of 0%, 15%, or 20% depending on the shareholder’s income level). This two-level taxation is the defining feature of a C-Corp and is the primary reason most small and mid-sized e-commerce sellers do not choose this structure.

For the typical profitable e-commerce seller who needs to extract the majority of their business income to live on, the C-Corp’s double taxation creates a higher combined tax burden than a pass-through structure (LLC, S-Corp, or partnership) would. The income is taxed once at the corporate level and again when taken out as a dividend. Pass-through entities avoid the entity-level tax entirely.

However, there are situations where a C-Corp structure either makes sense or becomes necessary for an e-commerce seller.

Retained earnings strategy. The 21% federal corporate rate is lower than the top individual income tax rates, which reach 37% federally. If you are in the top individual brackets and your e-commerce business generates more profit than you need to personally live on, leaving money inside the C-Corp and paying 21% corporate tax on it — rather than passing it through and paying 37% personal tax — can be advantageous. This strategy works when you have a genuine use for the retained capital (reinvestment, acquisition, building a war chest for expansion) rather than simply wanting to defer tax permanently. Accumulating earnings with no business purpose can trigger the Accumulated Earnings Tax, an IRS provision designed precisely to prevent this kind of tax deferral.

Venture capital and institutional investment. Venture capital funds typically cannot invest in S-Corps or pass-through entities because their investors include tax-exempt entities (pension funds, endowments) that have complications with Unrelated Business Taxable Income from flow-through entities. If you are raising institutional venture capital, you will almost certainly need to convert to a C-Corp. Delaware C-Corps are by far the standard expectation of institutional investors in the US. This is why most venture-backed startups are Delaware C-Corps even when the founders would have preferred a simpler structure.

Section 1202 Qualified Small Business Stock. This is one of the most powerful and least discussed provisions in the US tax code for entrepreneurs. Under Section 1202, shareholders of a qualifying C-Corp who hold their stock for at least five years can exclude up to 100% of their capital gains from federal tax when they sell — potentially up to $10 million in gain per shareholder, or 10 times their adjusted basis in the stock, whichever is greater. For e-commerce sellers building a brand with genuine exit value, the Section 1202 exclusion can eliminate what would otherwise be a multi-million dollar capital gains tax bill. We cover this in detail in Part 11 on exit planning, because the setup decisions need to be made well in advance of the exit. The key point here is that Section 1202 eligibility requires a C-Corp — not an LLC, not an S-Corp.

Non-US sellers. For a non-US individual operating an e-commerce business in the US, the tax analysis of C-Corp vs pass-through structure is quite different from the analysis for a US resident. Pass-through income from a US partnership or LLC flowing to a non-US person can create complicated US tax obligations, withholding requirements, and treaty interactions. A US C-Corp, by contrast, contains the US tax liability within the corporation — the non-US shareholder pays US tax only when they receive dividends (subject to withholding tax) or sell shares. For some non-US sellers, this structure can be simpler to manage. This is fact-pattern-specific advice that requires professional guidance — we raise it here to flag that the analysis for international sellers is different, not to suggest a C-Corp is automatically better.

For the vast majority of US-based e-commerce sellers who are not raising institutional capital and who need to extract most of their business income as personal income, the C-Corp creates unnecessary complexity and a higher total tax burden. Start with an LLC, and revisit the C-Corp question only if one of the above scenarios becomes relevant.

S-Corp Election for Profitable Sellers — The Salary/Distribution Split and SE Tax Savings

The S-Corp election is the most commonly discussed and most frequently implemented tax efficiency strategy for profitable small business owners, including e-commerce sellers. Understanding how it works — and when it makes financial sense — is one of the most practically valuable things in this entire guide.

What the S-Corp election does. An S-Corp is not a separate entity type. It is a tax classification. An LLC can elect to be taxed as an S-Corp by filing Form 2553 with the IRS. Once the election is in place, the LLC continues to exist as an LLC under state law. Nothing changes about its legal structure. But for federal income tax purposes, it is treated as an S-Corp.

The key tax consequence of S-Corp status: the business owner is now required to pay themselves a “reasonable salary” as an employee of their own LLC. This salary is run through payroll, with payroll taxes — both the employer and employee portions of FICA — withheld and remitted. After paying that salary and all other business expenses, any remaining profit can be taken as an “owner distribution.” And here is the critical point: owner distributions from an S-Corp are not subject to self-employment tax. They are not wages. They are a share of the business’s profit being distributed to an owner. They flow through to the owner’s personal return and are taxed at ordinary income tax rates — but they are exempt from the 15.3% SE tax that would apply if the entire amount were earned as a sole proprietor.

The mechanics of the saving. Suppose your e-commerce business generates $200,000 in net profit. As a sole proprietor or single-member LLC under the default disregarded entity treatment, the entire $200,000 is subject to self-employment tax. Calculating precisely: SE tax applies to 92.35% of net earnings, giving a taxable base of $184,700. SE tax at 15.3% on the first $168,600 = $25,796. SE tax at 2.9% on the remaining $16,100 = $467. Total SE tax: approximately $26,263.

Now suppose you have made the S-Corp election. Your tax advisor determines that a reasonable salary for your role — managing an e-commerce business at this revenue level — is $80,000. You pay yourself $80,000 as salary. Payroll taxes apply to the $80,000: the employer half ($6,120) is paid by the business, and the employee half ($6,120) is withheld from your salary. The remaining $120,000 of profit is distributed to you as an owner distribution — no SE tax or payroll tax on this amount. Total payroll tax on the $80,000 salary: approximately $12,240 (combined employer and employee).

The difference between $26,263 (sole proprietor SE tax) and $12,240 (S-Corp payroll tax on the salary portion) is approximately $14,000 in annual savings. On top of the payroll tax savings, the business can now deduct its share of employer payroll taxes as a business expense. The net saving varies by income level, but at $200,000 in profit it is real and recurring — the same saving materialises every year the business operates under S-Corp status.

The reasonable salary requirement. The IRS has always been clear that S-Corp owners who work in the business must pay themselves a reasonable salary — meaning a salary that reflects what the business would have to pay an arm’s-length employee to perform the same functions. The IRS’s concern is precisely the strategy described above: taking a very low salary and taking the rest as distributions to avoid payroll tax. Courts and the IRS have consistently upheld that unreasonably low salaries in S-Corps are problematic, and have reassessed distributions as wages in audit findings. The salary must be defensible. For a full-time e-commerce operator managing a $200,000-profit business, a salary in the range of $60,000–$90,000 is typically in a defensible range, though the right number depends on the specific functions you perform, comparable market salaries for those functions, and the guidance of a qualified advisor.

The compliance costs of S-Corp status. S-Corp status is not free. Once you make the election, you are required to run payroll — either through payroll software or a payroll service — file quarterly payroll tax returns (Form 941), make timely payroll tax deposits, and file an annual S-Corp tax return (Form 1120-S) in addition to your personal return. Each of these has a cost: the payroll service typically runs $50–$100 per month for a single-employee S-Corp, and professional accounting fees for an 1120-S are meaningfully higher than for a Schedule C. A reasonable estimate of the additional annual compliance cost for an S-Corp structure versus a sole proprietor: $2,000–$4,000 in professional fees and payroll costs, depending on your advisor and payroll service.

This compliance cost is the reason the S-Corp election does not make financial sense until profits reach a meaningful level. At $40,000 in net profit, the SE tax saving might be $4,000–$6,000, and the additional compliance cost is $3,000–$4,000. The net saving is marginal and may not justify the added complexity. At $80,000 in net profit, the math shifts materially. At $150,000 and above, the saving is unambiguous and the election is almost always worthwhile. The commonly cited crossover point is around $50,000–$80,000 in annual net profit, though the right threshold depends on your specific circumstances and the fees charged by your advisors.

Timing the election. Form 2553 must be filed within the first two months and fifteen days of the tax year you want the election to take effect, or at any time during the prior tax year. If you miss this deadline, the election takes effect in the following year. There are relief provisions for late elections in certain circumstances, but these are not guaranteed. The practical advice: if your business is approaching the profit level where the election makes sense, address it before the window closes for the current year.

How to Choose Your State of Formation: Delaware, Wyoming, Florida, and Why It’s Not Always Your Home State

The state in which you form your LLC or corporation is a meaningful decision, and one that is often made poorly based on internet folklore rather than actual analysis of your circumstances.

The starting point: unless you have a specific reason to form elsewhere, forming your LLC in the state where you live and operate your business is usually the simplest and cheapest approach. You will need to register as a “foreign entity” in any state where you have a physical business presence regardless of where you formed — and your home state counts as a state of physical presence. If you form in Delaware but live in Ohio, you will need to register the Delaware LLC as a foreign entity in Ohio, pay Ohio’s fees, file Ohio’s reports, and maintain a registered agent in both states. The total cost and administrative overhead is higher than if you had simply formed in Ohio to begin with.

That said, there are real reasons why certain states are popular formation choices, and some situations where forming outside your home state genuinely makes sense.

Delaware is the gold standard for corporations that expect to raise venture capital, go public, or engage in significant M&A activity. Delaware’s Court of Chancery is a specialised business court with centuries of corporate law precedent, predictable rulings, and deep expertise in complex corporate transactions. Major institutional investors and their counsel are familiar with Delaware corporate law and often prefer or require it. Delaware also has no state income tax on income earned outside Delaware, no state sales tax, and no requirement that officers or directors be Delaware residents.

For e-commerce sellers who are not raising institutional capital and who do not anticipate significant M&A activity, the Delaware advantages are largely irrelevant. A sole operator running an Amazon business does not need the Court of Chancery. Forming in Delaware and then registering as a foreign entity in your home state creates duplication of cost and administration for no practical benefit.

Wyoming has become a popular alternative to Delaware for LLC formation, particularly among online entrepreneurs. Wyoming was the first state to enact LLC legislation, has no state income tax, no franchise tax on LLCs, charges minimal annual fees (typically $60 or less), and has strong statutory charging order protections — meaning that a creditor who wins a judgement against an LLC member has limited ability to reach the LLC’s assets. Wyoming LLCs also allow for strong privacy: member names are not necessarily required to appear in public filings, and nominee management arrangements are permissible.

The practical caveat applies equally to Wyoming as to Delaware: if you live in California, Texas, or New York, you will still need to register your Wyoming LLC as a foreign entity in your home state, pay that state’s fees, and meet that state’s requirements. You cannot use a Wyoming formation to escape the tax or regulatory requirements of the state where you actually do business. The Wyoming LLC is a legal and privacy choice, not a tax arbitrage strategy.

Florida is popular for LLC formation among e-commerce sellers because Florida has no state income tax on individuals. A seller who moves to Florida and operates their business there genuinely pays no Florida income tax on their business profit. But the benefit is from the residence change, not the LLC formation. Forming a Florida LLC while living in New York does not reduce your New York income tax.

California deserves a special mention because it is the most expensive state in which to operate an LLC. California imposes its $800 annual minimum franchise tax on every LLC registered to do business in California — including foreign LLCs registered in California. If you live in California, there is no avoiding this by forming your LLC elsewhere: operating a business in California means you must register as a foreign entity and pay the franchise tax regardless. Some e-commerce sellers specifically structure their operations to avoid California registration, which is a complex fact-pattern analysis that requires professional guidance.

The practical guidance for most sellers: form your LLC in your home state unless your profit level, ownership structure, investor expectations, or specific privacy needs give you a concrete reason to do otherwise. Speak with a professional before making the decision — the internet is full of Wyoming and Delaware LLC promotion that does not account for the foreign registration requirements and duplicated costs.

Registered Agent Requirement — What It Is, Cost, and Why You Need One Even If You Work From Home

Every LLC and corporation registered in a US state is required to maintain a “registered agent” in that state. The registered agent is a person or company with a physical address in the state who is available during normal business hours to receive legal documents on behalf of the entity — service of process (lawsuit notifications), official government correspondence, and certain regulatory notices.

You can serve as your own registered agent if you have a physical address in the state of formation and are available during business hours to receive documents. Many home-based e-commerce sellers choose this option to avoid the cost of a professional registered agent service. The trade-off: your personal home address appears in public state records as the registered agent address, and you must be reliably reachable at that address during business hours. If you work from a coffee shop, travel frequently, or simply don’t want your home address on public record, a professional registered agent service is worth the cost.

Professional registered agent services typically charge $50–$150 per year per state. They maintain a physical address in the state, receive and scan documents on your behalf, and forward them to you promptly. If you are registered in multiple states — which, for a growing e-commerce business, you may be — you will need a registered agent in each state. Some professional services offer discounted multi-state packages.

If you fail to maintain a registered agent and the state cannot reach you through your registered address, you risk losing your LLC’s good standing. In some states, a corporation or LLC that loses good standing can have its registration administratively dissolved — which can affect your ability to enforce contracts, operate bank accounts in the entity’s name, and defend lawsuits.

When you are registered as a foreign entity in multiple states (because you have nexus or a physical presence there), you need a registered agent in each of those states as well. For a multi-state e-commerce operation, the registered agent costs across all relevant states can add up — but they remain one of the more straightforward and manageable compliance costs.

EIN Application — How to Get One and Why You Need It Before You Open a Business Bank Account

An Employer Identification Number (EIN) is a federal tax identification number assigned by the IRS to a business entity. It functions as the business equivalent of a Social Security Number — it identifies the entity for federal tax purposes, is required to open a business bank account, is used when filing business tax returns, and is often required by suppliers, platforms, and financial institutions before they will do business with you as an entity rather than as an individual.

Despite the name, you do not need employees to have an EIN. Every LLC (other than a single-member LLC owned by an individual that has not made any special tax elections and does not have employees) is generally required to have an EIN. And as a practical matter, every e-commerce seller operating through any form of entity should have one.

For US citizens and permanent residents, obtaining an EIN is free and relatively straightforward. The IRS offers an online application tool at IRS.gov that issues EINs immediately upon completion. The application asks for basic information about the entity — its legal name, state of formation, type of entity, the name and Social Security Number of the “responsible party” (typically the owner), and the primary purpose of the business. The entire process takes fifteen to twenty minutes, and the EIN is issued at the end of the online session.

For non-US individuals who do not have a Social Security Number or Individual Taxpayer Identification Number, the EIN application process is more complex. You cannot use the online tool. You must apply by fax or mail using Form SS-4, with the responsible party identified by their individual taxpayer identification number from their home country, or in some cases using a different procedure specific to foreign applicants. The IRS processes these applications by phone for those who have no SSN, which involves calling the IRS’s international line and working through the application verbally. Wait times can be long and the process requires patience. We cover EIN acquisition for international sellers in more detail in Part 8.

Once you have your EIN, use it — not your personal SSN — for all business-related identification. Open your business bank account with it. Provide it to Amazon, Shopify, and any other platforms that ask for tax identification. Give it to suppliers who request a W-9. Maintaining this separation between your personal tax identity and your business tax identity is part of operating the entity correctly and supports the liability protection it is designed to provide.

When to Revisit Your Entity Structure — The Revenue Thresholds Where Switching Makes Sense

Entity structure is not a once-and-done decision. As your business grows, the optimal structure changes — and ignoring this means leaving money on the table or carrying unnecessary risk.

The most common transition points for e-commerce sellers:

From sole proprietor to single-member LLC: This transition is worth making almost as soon as the business is generating consistent revenue and you are carrying any meaningful inventory or product liability risk. The cost is low (typically $50–$200 in state filing fees), the liability protection is immediate, and the tax treatment is unchanged from your current position. There is very little reason to delay this transition once you are operating a real business.

From single-member LLC (disregarded entity) to S-Corp election: As covered above, the crossover point where the SE tax savings outweigh the additional compliance costs is typically around $50,000–$80,000 in annual net profit. Below this level, the election adds cost and complexity without sufficient saving to justify it. Above this level — and especially above $100,000 in net profit — the S-Corp election is almost always financially beneficial.

From LLC to C-Corp: The triggers here are specific and usually externally driven: raising venture capital or institutional investment, pursuing a Section 1202 Qualified Small Business Stock strategy for a planned exit, or a business advisor identifying a specific retained earnings advantage at your profit level and personal tax situation. This is not a transition most e-commerce sellers need to make, but it is worth understanding so you can recognise when the conversation is relevant.

From single-state to multi-state registration: As your business grows and you cross nexus thresholds in additional states — whether through economic nexus from sales volume or physical nexus from FBA inventory — you need to register in those states not just for sales tax purposes but potentially for income tax purposes as well. Some states impose income tax nexus obligations that are triggered by the same activities that create sales tax nexus. This is not an entity structure change per se, but it is a compliance structure expansion that often accompanies growth, and it requires review at the same time you are reviewing your entity setup.

Pre-exit restructuring: If you are planning to sell the business within the next three to five years, your entity structure at the time of sale has significant tax consequences. An asset sale out of an S-Corp is taxed differently from an asset sale out of a C-Corp. A stock sale is only possible if the buyer is acquiring a corporate entity. Section 1202 eligibility depends on having held qualifying C-Corp stock for at least five years. These are decisions that need to be made well before the sale, not at the point of signing a letter of intent. Part 11 covers exit planning in detail.

Common Entity Mistakes E-Commerce Sellers Make — and How to Fix Them

Forming an LLC but operating like a sole proprietor. The most common entity mistake is forming an LLC on paper but continuing to operate as if the entity doesn’t exist. Personal and business finances mixed together. Contracts signed in your personal name. Business funds used to pay personal bills. The LLC provides no effective liability protection if you do not maintain the separation it requires. Fix: open a dedicated business bank account, run all business income and expenses through it, sign contracts in the LLC’s name, and keep personal and business finances entirely separate from the day you form.

Registering in the wrong state. Often this means registering in Delaware or Wyoming based on advice from an e-commerce forum without registering as a foreign entity in the home state, leaving the business legally operating without authorisation in the state where it actually does business. Fix: assess your actual state of operation and register accordingly. If you formed elsewhere, register as a foreign entity in your home state and maintain both registrations or consider dissolving the out-of-state entity and reforming in your home state.

Delaying the S-Corp election past the crossover point. Many sellers who would benefit from the S-Corp election continue operating under the disregarded entity default because they are not aware of the election or have never had the conversation with an advisor. Each year of delay is a year of overpaid SE tax. Fix: if your annual net profit is consistently above $80,000, have the conversation with your accountant this year, not next year.

Making the S-Corp election too early. The reverse is also a real mistake. Sellers who are told “you should do an S-Corp” without understanding the compliance costs elect S-Corp status at $30,000 or $40,000 in net profit and spend $3,000–$4,000 per year on payroll and accounting services to save $2,000 in SE tax. The net result is an annual loss from the election. Fix: run the numbers before making the election. The math is not complicated and any qualified accountant can model it for your specific income level within a short conversation.

Not maintaining a registered agent after forming. Sellers who form their own LLC, list their home address as the registered agent, and then move — or who form in one state and never address the registered agent requirement in states where they register as a foreign entity — can fall out of good standing without realising it. Fix: use a professional registered agent service. At $50–$150 per year per state, it is cheap insurance against an administrative dissolution.

Mixing up entity formation with compliance. Forming an LLC does not mean your business is “compliant.” It is one step in a larger picture that also includes EIN registration, sales tax registration in relevant states, income tax registration where required, payroll setup if you have the S-Corp election or employees, and the bookkeeping infrastructure to track all of it. Sellers who form an LLC and consider the compliance work done are in for a surprise. Fix: treat entity formation as the foundation, not the completion.

Leaving the entity dormant after stopping active operations. If you stop selling but leave an LLC open and registered, annual fees, registered agent costs, and minimum franchise taxes (particularly in California) continue to accrue. If you are not operating the business, dissolve the entity properly through the relevant state’s process and notify any states where you are registered as a foreign entity. Failing to do this leaves you personally responsible for ongoing fees and can create issues if the entity is ever revived.

The Foundation Everything Else Is Built On

Entity structure is not glamorous. It does not generate revenue, it does not make products better, and it does not bring more customers. But it determines the tax efficiency of every dollar your business earns, the legal protection you have when things go wrong, and the optionality you have when it comes time to sell or scale. Getting it right is one of the few decisions where a small amount of early attention creates compounding returns for the entire life of the business.

The right structure for your current position — and the right time to change it — depends on your revenue, your profit level, your home state, your ownership situation, and your growth trajectory. It is also one of the areas where advice from a generalist accountant who does not work regularly with e-commerce businesses can lead you astray. The nuances of multi-state registration, the interaction between FBA nexus and income tax registration obligations, the specific requirements for S-Corp reasonable compensation in an e-commerce context — these are questions where experience matters.

If you are unsure whether your current structure is optimal, or if you have never had a proper entity review, that conversation is worth having sooner rather than later.

Part 3: Sales Tax — The Compliance Minefield — continues next.