Should I Start an LLC for My Marketplace Website?

Starting a limited liability company (LLC) for your marketplace website business can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a marketplace website business, lawsuits can arise from things like selling products that infringe on another company’s copyright, delivering faulty goods to clients, or data breaches that leak a customer’s financial information.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your marketplace website business seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

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Do I Need an LLC for a Marketplace Website?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should start an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Marketplace Website

By starting an LLC for your marketplace website, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Marketplace websites will benefit from liability protection because of the risk of product liability and trademark infringement.

Example 1: A customer claims that a sneaker vendor delivered defective goods amounting to $10,000 to him after placing an order on your website. The vendor, in return, states that the products were delivered in optimum condition. Your business may be liable for compensation if he sues you, but the limited liability will keep your personal assets safe from legal consequences.

Example 2: A customer sues your marketplace website for charges related to identity theft. According to him, a malware issue on your site caused his payment details to be assessed by fraudsters. He proceeds to sue you for the corresponding losses from his account. In such a case, your personal assets will be protected from any damages for which the business is found to be responsible.

Example 3: A gym equipment company suddenly sends your business a cease-and-desist letter. They claim that some products placed by a vendor on your website infringe on their trademarked equipment. A negligent employee fails to report the arrival of this letter until two weeks have passed, and a lawsuit is filed. If found liable, only the business assets will be affected.

Example 4: You are sued by another company that claims your website is selling counterfeit products of theirs.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Marketplace Website

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a marketplace website owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Marketplace websites rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

As an ecommerce-based company, business insurance protects your marketplace website’s assets from lawsuits stemming from issues such as trademark infringement and delivery of defective goods.

Common Situations Business Insurance May Cover for a Marketplace Website

Example 1: While touring your place of business, a potential investor trips over an exposed cable, breaks a wrist in the resulting fall, and decides to sue your business. General liability insurance would cover your legal defense costs and any required settlement.

Example 2: A competitor sues your business for damages, claiming you stole his company’s logo. While you don’t think your logo looks like his, you realize the importance of protecting your business in court. General liability insurance would pay for your legal defense and any required settlement.

Example 3: As one of your employees takes a visitor on a tour of your business, the visitor slips on some wet flooring in the restroom. The fall breaks the visitor’s wrist, and she demands your business pay for her medical treatment. General liability insurance would cover her medical expenses.

Other Types of Coverage Marketplace Websites Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all marketplace website businesses should obtain:

Professional Liability Insurance

While you strive to ensure your marketplace website satisfies each user, there’s always a chance someone might decide you made a mistake or your advice harmed them. If a site user sues your business for negligence, professional liability insurance would cover your legal fees and any required settlement.

Commercial Property Insurance

You made a major investment in the equipment, supplies, and real estate needed to establish your marketplace website business. In the event of a fire, theft, or natural disaster, commercial property insurance would cover the cost of repairing or replacing your business-related property. This includes structural damage to your building and the business materials stored there.

Workers’ Compensation Insurance

If you have any employees, most states will require you to carry workers’ compensation insurance for your part-time and full-time workers. This coverage protects your employees if they become injured at work or fall ill after a work-related accident. It not only covers an employee’s medical bills and lost wages if they need time to recover but also any disability or death benefits stemming from a workplace accident.

Commercial Umbrella Insurance

While your general liability insurance policy covers most claims, some accidents or lawsuits may be so catastrophic that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for any legal fees and awarded damages that exceed your primary policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance and product liability insurance.

Read our Marketplace Website Business Insurance article for more info.

The means by which you build your marketplace website determines the cost of opening up such a business. While building from scratch can cost $100,000 and more, a cheaper option is to use a template provided by a marketplace platform service. This service may demand monthly bills ranging from $30 to $2,000.

Visit our How to Start a Marketplace Website Business guide to learn more about the costs of starting and maintaining this business.

Payroll and website hosting fees (or monthly subscription fees if a platform service is used) are the primary ongoing expenses.

Learn more about running a marketplace website.

A marketplace website earns a commission for each transaction the site hosts.

Learn more about starting a marketplace website.

Marketplace websites help vendors and customers find each other online. For this service, a marketplace website collects a commission on each sale. In this regard, marketplace websites are different from ecommerce sites, which sell products and services directly to customers.

The profits of a marketplace website depend on the volume of transactions it conducts and how much money is exchanged.

Learn more about starting a marketplace website.