The LLC question comes up constantly in reseller groups. Some people insist you need one from day one. Others say it's unnecessary overhead. The truth, as usual, is somewhere in the middle and depends entirely on your specific situation.
An LLC (Limited Liability Company) is a business structure that separates your personal assets from your business liabilities. If someone sues your business, they generally can't come after your personal savings, home, or car. That protection sounds valuable, but for most small-scale resellers, the risk being protected against is minimal.
What an LLC Actually Does (And Doesn't Do)
The primary benefit of an LLC is liability protection. If a buyer claims your item harmed them somehow and wins a lawsuit, they could only collect from business assets, not personal ones. This matters more when you're selling products that could genuinely hurt someone—electronics that might malfunction, items for children, or products with safety implications.
For most clothing and household goods resellers, the lawsuit risk is extremely low. Someone buying a vintage jacket isn't likely to sue over it. The legal scenarios that LLC protection prevents are rare in this industry.
An LLC does not change how you pay taxes as a single-member business. By default, a single-member LLC is a "disregarded entity"—you report business income on your personal tax return just like a sole proprietorship. You still pay self-employment tax. The LLC protects you from liability, not from taxes.
What an LLC does provide is credibility and separation. Banks take you more seriously when opening business accounts. Some wholesale suppliers only work with registered businesses. You can build business credit separate from personal credit. And psychologically, having a formal entity makes you treat the business more seriously.
When an LLC Makes Sense
Consider forming an LLC when your business reaches a certain scale or complexity. If you're doing over $30,000-$50,000 in annual gross sales, the formality starts making more sense. At this volume, you're clearly running a business, not selling off personal items occasionally.
If you're selling categories with higher liability risk—electronics, exercise equipment, automotive parts, children's items—protection becomes more valuable. If something you sold malfunctions and causes injury, even frivolous lawsuits cost money to defend.
Good Reasons to Get an LLC
You're doing significant volume ($30K+ gross annually). You sell higher-liability categories. You want to establish business credit. You plan to bring on partners or investors. You want to psychologically separate business and personal finances. You need an LLC for wholesale accounts or certain platform features.
Some resellers form LLCs for the tax election option. An LLC can elect to be taxed as an S-Corp, which can save money on self-employment tax at higher income levels (typically $40,000+ in profit). This requires proper payroll and more complex accounting, so it's not worthwhile until you're making real money. The tax guide covers this in more detail.
When to Wait
If you're just starting out, testing whether reselling is for you, or doing under $10,000 in annual sales, an LLC is probably premature. You're adding cost and paperwork without meaningful benefit.
LLC formation costs vary by state—anywhere from $50 to $500 for filing fees. Many states also require annual reports or franchise taxes, which can be $50-$800 per year regardless of whether you make money. California's notorious $800 annual franchise tax makes LLCs expensive for small businesses in that state.
You can operate as a sole proprietorship while building your business, then form an LLC later when it makes financial sense. There's no requirement to have an LLC from day one. Many successful resellers operated for years before formalizing their structure.
The liability protection argument also weakens when you consider that you can accomplish similar separation without an LLC. Keeping a separate business bank account, using a business credit card, and maintaining proper records creates functional separation. Good business insurance can cover liability risks more affordably than LLC formation and maintenance.
The Practical Steps If You Decide to Form One
Forming an LLC is straightforward in most states. You file Articles of Organization with your state's Secretary of State office, pay the filing fee, and you're done. You don't need a lawyer for a simple single-member LLC, though complex situations benefit from professional guidance.
After formation, open a dedicated business bank account using your LLC's EIN (Employer Identification Number, which you get free from the IRS). Keep all business transactions in this account—never mix personal and business funds, or you risk "piercing the corporate veil" and losing your liability protection.
You'll also want to establish an Operating Agreement, even as a single member. This document outlines how the business operates and is required by some banks and vendors. Templates are widely available online.
Alternatives to Consider
Before forming an LLC, consider whether simpler options meet your needs. A DBA (Doing Business As) lets you operate under a business name without forming a separate entity. It costs $10-$50 in most jurisdictions and gives you a professional name for bank accounts and marketing.
Business liability insurance typically costs $300-$500 per year and covers most realistic risk scenarios. This is often better protection than an LLC for small resellers because it actually pays claims, whereas an LLC just protects personal assets (which may be minimal anyway when you're starting out).
The Bottom Line
Don't form an LLC because someone on Reddit said you need one. Form an LLC when the benefits outweigh the costs for your specific situation. That threshold is typically around $30,000+ in annual sales, selling in higher-risk categories, or needing the structure for business banking, credit, or wholesale relationships.
Until then, operate as a sole proprietorship, keep meticulous records, separate your finances, and consider business insurance. You can always formalize later as your business grows. Focus your energy on scaling the business first—paperwork can follow success.
Next Steps for Your Business
Make sure you're handling the fundamentals: tracking your COGS properly and understanding your tax obligations. Then explore shipping strategies to boost your margins.