LLC vs Sole Proprietor for Resellers: Which Is Right?

February 19, 2026 · 15 min read

One of the most common questions resellers ask when they start making real money is: "Should I form an LLC?" The answer depends on your revenue, risk tolerance, future plans, and which state you live in. This guide breaks down the real differences — not the generic advice you'll find everywhere, but practical guidance specifically for eBay, Whatnot, Poshmark, and marketplace sellers.

Quick Answer

If you're making under $20K/year and selling low-risk items (clothing, books, household goods), a sole proprietorship is fine. If you're making $20K+/year, selling higher-risk items, or want to look professional for wholesale accounts, an LLC is worth the cost.

What Is a Sole Proprietorship?

A sole proprietorship isn't something you "file for." It's the default business structure. The moment you sell something for profit, you're a sole proprietor. There's no legal separation between you and your business.

What this means practically:

• You report business income on Schedule C of your personal tax return
• You ARE the business — there's no legal entity
• Your personal assets (car, savings, home) are at risk if someone sues "your business"
• Setup cost: $0 (or $10-50 for a DBA/fictitious business name if you want to operate under a business name)
• Annual cost: $0 (no state filing fees)

What Is an LLC?

A Limited Liability Company (LLC) is a legal entity that separates your personal assets from your business. It creates a "corporate veil" between you (the member) and the business.

What this means practically:

• If someone sues your business, they generally can't come after your personal assets
• You still report income on Schedule C (single-member LLC) unless you elect S-corp status
• Setup cost: $50-500 depending on state (filing fee for Articles of Organization)
• Annual cost: $0-800+ depending on state (annual report fees, franchise tax)
• You get an EIN (Employer Identification Number) from the IRS — free

Side-by-Side Comparison

The Real Reasons Resellers Form LLCs

1. Liability Protection

This is the #1 reason. As a reseller, your liability risks include:

• Product liability: You sell an electronic item that catches fire. A counterfeit item that injures someone. A toy that fails safety standards. The buyer sues.
• Buyer disputes: A buyer claims you sold a fake designer item. They escalate beyond the platform.
• Injury claims: Someone gets hurt at a local meetup for a sale.

With a sole proprietorship, a lawsuit targets YOU personally. Your savings, your car, your house — all at risk. With an LLC, the lawsuit targets the business entity. Your personal assets are protected (as long as you maintain the corporate veil).

Reality check: Most resellers will never get sued. But if you sell electronics, supplements, children's items, or high-value goods (luxury items where authenticity is questioned), the risk is higher.

2. Tax Benefits (S-Corp Election)

Once you're making $50K+ in profit, you can elect to have your LLC taxed as an S-Corporation. This can save you thousands in self-employment tax. Here's how:

• As a sole proprietor or single-member LLC, you pay 15.3% self-employment tax on ALL profit
• As an S-corp, you pay yourself a "reasonable salary" and take remaining profit as distributions — distributions aren't subject to self-employment tax
• Example: $80K profit. As sole proprietor: ~$12,240 in SE tax. As S-corp with $40K salary: ~$6,120 in SE tax. Savings: ~$6,120/year.

The S-corp election requires additional payroll paperwork and costs, so it typically only makes sense above $50K in profit. Talk to a CPA before making this election.

3. Wholesale Accounts & Credibility

Many wholesale suppliers, liquidation companies, and brand partnerships require you to have a registered business entity. An LLC with an EIN gives you:

• Access to wholesale pricing
• A business bank account for cleaner finances
• Professional appearance for partnerships and sponsorships
• Easier time getting a resale certificate

4. Business Credit

An LLC with an EIN can build business credit separately from your personal credit. This matters for:

• Business credit cards with higher limits
• Business lines of credit for inventory purchasing
• Separating personal and business financial histories

State-by-State LLC Costs (2026)

LLC filing fees vary dramatically by state. Here are the key ones for resellers:

Important: Always form your LLC in the state where you live/operate. Forming in Wyoming or Delaware when you live in California doesn't save you money — you'll need to register as a "foreign LLC" in your home state AND pay your home state's fees anyway.

When to Stick with Sole Proprietorship

• You're just getting started and testing the waters
• Annual revenue is under $20K
• You sell low-risk items (clothing, books, household goods)
• You're in a high-cost LLC state (California's $800/year minimum is hard to justify early on)
• You only sell on marketplaces (platforms have their own buyer protection)

When to Form an LLC

• Annual revenue exceeds $20K (or profit exceeds $10K)
• You sell electronics, luxury goods, supplements, or children's items
• You want wholesale accounts
• You sell on your own website (no marketplace protection)
• You do in-person sales (flea markets, meetups)
• You want to build business credit
• You plan to grow this into a serious business
• Your state has affordable LLC costs

How to Form an LLC (Step by Step)

1. Choose your state: File in the state where you live and operate.
2. Choose a name: Must be unique in your state. Check your state's business name database. Must include "LLC" or "Limited Liability Company."
3. File Articles of Organization: Online through your Secretary of State's website. Takes 10-30 minutes.
4. Get an EIN: Free from the IRS website (irs.gov). Takes 5 minutes online.
5. Write an Operating Agreement: Not required in every state but highly recommended. This document outlines how your LLC operates. Single-member templates are available free online.
6. Open a business bank account: Bring your Articles of Organization and EIN. Keep all business income and expenses through this account.
7. Get a resale certificate: Use your EIN to apply for a sales tax permit and resale certificate in your state.

Total time: 1-3 hours. Total cost: Your state's filing fee + $0 for EIN. You do NOT need to pay LegalZoom, Incfile, or any other service — it's easy to do yourself.

Maintaining the Corporate Veil

An LLC only protects you if you treat it as a separate entity. If you mix personal and business finances, a court can "pierce the corporate veil" and hold you personally liable. To maintain protection:

• Keep separate bank accounts. Never pay personal bills from your business account or vice versa.
• Use your LLC name on all business contracts and listings.
• File annual reports on time.
• Keep records. Meeting minutes (even as a single-member), financial records, receipts.
• Don't commingle funds. Pay yourself a draw or salary from the business account to your personal account.

Common Mistakes Resellers Make

1. Forming an LLC in Delaware or Wyoming when they live elsewhere. You'll pay double fees — your home state will still require registration.
2. Paying $500+ for LLC formation services. It's a simple form. Do it yourself.
3. Not maintaining separation. Using the business account for groceries destroys your liability protection.
4. Thinking an LLC eliminates all liability. You're still personally liable for fraud, negligence, and personal guarantees.
5. Forming an LLC in California too early. That $800/year minimum franchise tax applies even if you make $0. Wait until you're profitable.

FAQ

Do I need an LLC to sell on eBay/Whatnot/Poshmark?

No. All major marketplaces allow individual (sole proprietor) sellers. An LLC is optional but recommended as you grow.

Can I use my personal name or do I need a business name?

As a sole proprietor, you can operate under your own name. If you want a business name (like "Flip City Resale"), file a DBA (Doing Business As) with your county — usually $10-50.

When does the S-corp election make sense?

Generally when net profit exceeds $50,000/year. Below that, the additional payroll costs and complexity outweigh the tax savings. Always consult a CPA for your specific situation.

Can I switch from sole proprietor to LLC later?

Yes, and this is exactly what most resellers do. Start as sole proprietor, prove the business model, then form an LLC when revenue justifies the cost.

Do I need a lawyer to form an LLC?

No. Most states have online filing that takes 15-30 minutes. A lawyer is only necessary if you have partners (multi-member LLC) or complex business structures.