LLC vs. S-Corp: What’s Best for Etsy and Shopify Sellers?

LLC Explained

For many Etsy and Shopify sellers, starting out as a sole proprietor may seem easiest.

But once your business grows, forming an LLC (Limited Liability Company) can provide personal liability protection.

This means your personal assets—like your home or savings—are protected if your business is sued.

LLCs are also flexible when it comes to taxes.

By default, an LLC is a pass-through entity, so profits are reported on your personal tax return, avoiding double taxation.

An S-Corp is not a business structure but a tax classification granted by the IRS.

You can elect S-Corp status if your business is an LLC or a C-Corporation.

The main appeal of S-Corps is tax savings.

Owners can pay themselves a “reasonable salary” and take additional profits as distributions, which are not subject to self-employment tax.

This setup can significantly reduce your tax burden if your store is generating consistent profit.

While both offer limited liability protection, there are key differences that affect online sellers:

Taxation: LLC owners pay self-employment tax on all profits, while S-Corp owners only pay it on salaries.
Structure: LLCs are more flexible and require fewer formalities.
Profit Distribution: S-Corps allow distributions taxed at a lower rate.
Management: LLCs can have one or multiple members with flexible management structures; S-Corps require more formalities like board meetings and corporate bylaws.

If you're just starting or have modest income, an LLC offers flexibility and protection without a lot of paperwork.

But once your profits exceed around $50,000 annually, switching to an S-Corp may offer tax advantages.

You'll need to file IRS Form 2553 and start treating yourself as an employee, running payroll and withholding taxes.

This added responsibility comes with the reward of potentially saving thousands on self-employment taxes.

Also, think about how you plan to scale—do you want to bring on investors or partners?

If so, choosing the right entity from the beginning matters.

For Etsy and Shopify sellers, both LLCs and S-Corps can be great choices depending on where you are in your business journey.

Start with an LLC for simplicity and protection.

As you grow, consult a tax advisor to see if S-Corp election makes financial sense.

The right decision today can set you up for smoother scaling tomorrow.

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