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Sole Proprietorship vs LLC for e-commerce business? Which is best in my case?

Marion, OH |

I am starting an e-commerce business. I will be selling products from dropshippers and wholesalers on both eBay and my own personal site. None of the products are ones I personally make, and I will not be using any type of credit to establish the business. This is purely money straight from a checking account. Which type of ownership would be best to file with the Ohio Secretary of State? I won't be adding any other employees, unless I occasionally ask my mother or boyfriend to post something for me, however neither wish to be added as an employee of this business.

Attorney Answers 6


  1. You are most at risk if operating as a Sole Proprietor. Personal Liability attaches. But if operating as a Limited Liability Company, your liability risk is much smaller. I'd speak with a Business Law attorney licensed to practice in Ohio - as you want to 'start it right' from the very beginning. Good Luck in your new business!!


  2. These days setting up a proper liability shield is very accessible and relatively inexpensive. As a sole prop there is no legal disctinction between you and the business. This would mean that you are personally liable or all debts and business obligations.

    Setting up an LLC is a much better option and may offer added benefits as well such as tax deductions.

    I will link you to a helpful guide below that discusses entity types and most of us here, including myself, offer a free phone consult so you should discuss your plans with a lawyer in private.

    Best regards,
    Frank
    Natoli-Lapin, LLC
    (see Disclaimer)

    The law firm of Natoli-Lapin, LLC (Home of Lantern Legal Services) offers our flat-rate legal services in the areas of business law and intellectual property to entrepreneurs, small-to-medium size businesses, independent inventors and artists across the nation and abroad. Feel free to call for a free phone consultation; your inquiries are always welcome: CONTACT: 866-871-8655 Support@LanternLegal.com DISCLAIMER: this is not intended to be specific legal advice and should not be relied upon as such. No attorney-client relationship is formed on the basis of this posting.


  3. My colleagues have already addressed your corporate form question.

    I write only to warn you that selling products that you do not make yourself REQUIRES that you first determine that those products do not infringe anyone's already-existing trademark or patent rights. Specifically be cautioned that buying products from an overseas supplier at a price significantly lower price than sold by U.S.-based suppliers raises the PRESUMPTION that the products you're buying are counterfeit. This is true even if you're simply acting as the intermediary between your online buyers and your dropshipping suppliers. How do you determine if the products you're offering for sale are counterfeit? You work with your own intellectual property attorney. Big-name brand manufacturers monitor eBay and other ecommerce websites and routinely and immediately take legal action when they believe someone [like you] is selling counterfeits of their products. It is very, very expensive to extricate yourself from such a situation.

    The above is general information ONLY and is not legal advice, does not form an attorney-client relationship, and should NOT be relied upon to take or refrain from taking any action. I am not your attorney. You should seek the advice of competent counsel before taking any action related to your inquiry.


  4. You should protect yourself by forming an LLC or corporation---which can shield you and your personal assets from liability if the business does not go well.

    But with respect---this is the tip of the iceberg of the legal issues you need to address. Starting a business like this is a serious undertaking, and you need to lay the proper legal foundation on many issues. First, you have an absolute obligation to assure that any goods that you sell are authentic goods from legitimate sources---ignorance or good intentions will not protect you from civil and criminal prosecution if you deal in counterfeit goods, If you find goods at prices that seem too good to be true, that should be a red flag that the goods are probably counterfeit---especially when dealing with suppliers from China and other foreign countries.

    Second, you also need to make sure that any goods that you sell do not violate patents, Patent infringement, like trademark and copyright infringement for counterfeit goods, is a strict liability offense. Ignorance of the law or good intentions is no excuse.

    Third, you need to procure insurance to protect you from liability in the event any of the goods that you sell cause injury to customers or third parties.

    Fourth, anyone involved in e-commerce must stake steps to comply with significant number of federal and state laws, requiring that you develop terms of use, privacy policies, intellectual proprerty policies and depending on the products that you sell, many others. Also, you will have to collect sales taxes report these collections to customers in at least 8 states including New York that require those in e-commerce to collect sales taxes. And you will have to deal with the fact that your customer base may extend outside of the United States---the internet has global reach and this creates a host of legal issues.

    Also, you need to make sure that the web-site that you operate and the content that you post thereon does not violate patents, trademarks and copyrights owned by others. For example, you should not assume that you are entitled to post photographs of the products that you wish to sell without obtaining a license from the owner of the copyright in the photograph. And the e-commerce web-site/platform that you use is probably covered by several patents---you may need counsel to prepare a patent clearance analysis to make sure that you are free to operate this web-site in the manner proposed without violating patent rights. E-commerce operators such as Amazon and E-bay own many patents and they are not shy about asserting them against competitors who step on their toes.

    In short, you should not even think about operating this e-commerce business until you have an adequate budget to lay the proper legal foundation. This cannot be done for a few hundred or even a few thousand dollars----don't make the mistake of thinking you can do without legal counsel---that is almost always financially disastrous.


  5. As the other attorneys on here have explained, going as a sole proprietorship is usually a bad idea because it provides you with no asset protection. That means that if someone would sue you over a sale, they could go after your personal assets - house, vehicles, etc. Having an entity like an LLC can at least provide you with some protection to try to prevent that from happening.

    You need to actually sit down or at least talk to a business attorney to make sure you make the right decision about what type of entity would be best. He or she can also advise you on the other legal issues you need to be aware of when opening a business (such as vendor's licenses and sales taxes).

    Good luck.

    Bradley Miller acts as outside general counsel for small business and entrepreneurs. He particularly enjoys setting up new businesses and advising existing ones on contracts and risk management. If you have questions about an answer provided here, you may contact him directly. The answers provided on Avvo are meant as general legal information and are not to be taken as specific legal advice for your situation. No attorney-client relationship is established by the answering of a question on Avvo.


  6. Products from drop shippers and wholesalers for eBay? And you are considering sole proprietorship. Uh-Oh, danger ahead! Get to a business lawyer pronto. Also, you should check with an IP lawyer to determine if your dropshippers and wholesalers are selling authentic merchandise. Get caught infringing as a sole proprietor and you will likely be needing a bankruptcy attorney not a business or patent attorney. I don't blame your boyfriend and Mom for not wanting to be a part of this. Perhaps if you set up an LLC or Sub-S and got a patent attorney to check out your sources and right to use then your boyfriend and Mom might be more willing to get involved or become employees.

    By the way, even a sole proprietorship has some filings to make. You really should not "just open your doors" as one colleague says you can. Fictitious name filings, business licenses, FEIN, trademark & servicemark protection, etc. need to be addressed. A business attorney can help at minimal cost to get you set up right. For trademarks and patent clearances you would be better seeing an IP attorney, as the patent law in particular has undergone major changes recently and trademark and copyright enforcement are stronger now with computerized tracking and enhanced law enforcement communications and monitoring techniques. Technology is making infringement more risky, not less.

    I am not your lawyer and you are not my client. Free advice here is without recourse and any reliance thereupon is at your sole risk. This is done without compensation as a free public service. I am licensed in IL, MO, TX and I am a Reg. Pat. Atty. so advice in any other jurisdiction is strictly general advice and should be confirmed with an attorney licensed in that jurisdiction.

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