💰 How to start a legit DTC business

G’day Sellouts!

Imagine this…

You’ve nailed your DTC business idea.

You’ve done your research.

You’ve found your gap in the market.

You’ve validated the product.

Now you’re itching to launch your brand.

But here’s where most new DTC brands hit a wall: red tape.

Once the fun parts of starting a brand are over, all those back-end tasks like setting up bank accounts, configuring accounting software, filing paperwork, and registering your business cause roadblocks in getting your business off the ground.

Yet they’re absolutely crucial if you want to grow a successful brand the right way.

Depending on who you speak to, this unsexy part of getting started can be confusing and full of jargon.

So today we’re going to break it down quick and painless.

Here’s a summary of the foundations you need to get right before the fun part: growing your brand.

But first, the news!

Warning: It’s very easy to get caught up in the following processes.

Please don’t.

While these steps are super critical, your top priority should be nailing your idea and executing it well.

Establishing the Foundations

Getting set up correctly comes down to four main requirements:

1. Setting up your business entity

2. Set up business bank accounts

3. Managing your accounting

4. Tracking revenue, expenses and sales tax obligations

Now to ask yourself…

What Kind of Business Am I?

In the US, there's three main business structures you might use:

Limited Liability Company (LLC): Perfect for solo founders or small teams. An LLC isn't taxed separately, so any income it makes is taxed as your personal earnings. This is probably sufficient for at least your first year of operation, and you can always change it later.

S-Corp: Great for US residents making around $80k+ in profit each year. You’ll often save on self-employment taxes because only your “reasonable salary” is subject to payroll taxes, while additional distributions are generally not.

The downside is you must actually pay yourself that reasonable salary, just like any employer would (and you’ll owe payroll taxes on it). The upside is that any remaining profit can be distributed as dividends, which usually aren’t hit with self-employment taxes. You’ll still owe income tax on these distributions, but you avoid extra payroll taxes. 

C-Corp: Typically chosen by larger, venture-funded startups or companies planning to go public, a C-Corp pays corporate income tax on its profits. Then, when those profits are distributed as dividends, shareholders (you) pay tax again. This is often referred to as “double taxation.”

For most early-stage DTC brands, this structure is overkill. By the time you’re big enough to consider a C-Corp, you’ll likely have legal and accounting advisors to guide you.

One key point: each U.S. state has its own approach to taxing and regulating businesses. Some, such as Delaware, are far more “tax-friendly” than others. Before you decide on your company structure, it’s worth comparing how each state handles corporate income taxes, franchise taxes, and legal requirements. Doing a little research up front can save you a lot of money (and headaches) down the road.

Setting Up Your Entity

Setting up a business in the US can be nightmare fuel.

It isn't hard in theory, but there's a lot of important forms and you can quickly find yourself overwhelmed.

As a business owner, I always save my focus for growing my business and use tools to manage the paperwork.

You can hire any number of registered agents to file your paperwork for you, but I use Doola: 

They handle:

• All state paperwork

• Registered agent service (fancy address that keeps your personal address off your public documents)

• Tax ID setup

• Operating agreement

• Compliance reminders

Doola is an offical partner of The Sellout – Get 10% off using the code SELLOUT10 when you sign up.

Their team is based in the US and make the process of navigating business structures super easy. If you’re not sure where to start, you can connect with their team for a free consultation.

Establishing a Bank Account

Once your company is registered, you’re eligible to apply for an Employer Identification Number (EIN) from the IRS. Think of it as your business Social Security number.

It never expires, and you’ll use it for everything from taxes to payroll.

Your options:

1. DIY at irs.gov (free)

2. Use an accountant or third party service like Doola (worth the $$)

After you have your EIN, you can open a business bank account.

You might be inclined to use the same bank you use personally, but digital-first banks like Mercury can be a great option.

Their setup process is quick (around 15 minutes), and they integrate smoothly with accounting platforms and tools like Slack for automating processes.

Banking for businesses with over $300k in cash assets:

• Bank accounts are federally insured up to $250k

• Remember the Silicon Valley Bank scare in 2023? Make sure your money is insured.

• Tools like Mercury automatically split your cash up among a bunch of banks to get up to $5M in FDIC insurance

• You can also just manually open accounts at multiple banks and get $250k insured from each

Set Up Your Accounting Software:

Once you’re ready to start selling, you’ll want an accounting system in place from Day One. Otherwise, you’ll be scrambling when it’s time to file taxes.

For ecommerce accounting there are three main platforms I recommend:

1. Quickbooks: The Industry standard for accounting in the USA.

2. Xero: A digital first accounting platform that directly integrates your bank accounts making reconciliation super efficient.

3. Doola: The self described ‘Business in a Box’. They’re bringing out new features specific for ecommerce brands and provide an option to completely outsource book keeping.

When you’re starting out, any of these platforms are great. I highly recommend working with an accountant when you start to bring in revenue to understand how to correctly record revenue and expenses.

The e-commerce Dilemma.

One thing that new ecomm founders miss is that every sale you make is a complicated invoice that needs to be entered into your accounting system.

Just like you’d pay a restaurant for the cost of your meal, the tax and the tip, a customer pays you for the product, the sales tax, and the shipping fees. Each of these payments need to be categorised in your accounting software into separate ‘buckets’.

Furthermore, if you're selling in multiple states, you're dealing with 50 different tax authorities. Talk about a headache!

Thankfully, platforms like A2X exist. The tool will help:

• Map sales tax by state automatically

• Tell you exactly what you owe

• Sync with your accounting platforms

Once you’ve set up your accounting platform, you can set up A2X to automatically capture payments from Shopify and send that data directly to the correct category.

Trust me, you need a tool to manage this very early on in your ecomm journey.

Set up for Success

Starting a business can feel like drinking from a fire hose but by focusing on these essential steps, choosing the right business structure, setting up a bank account, and getting your accounting dialed in, you’ll save yourself a ton of stress later on.

Whether you’re an LLC, S-Corp, or C-Corp, tools like Doola, Mercury, QuickBooks (or Xero), and A2X can do the heavy lifting and keep you compliant.

The goal is to set everything up once so you can spend your time selling, not shuffling paperwork. As you get a greater understanding of what’s required you can build in automations to handle most of these back end tasks.

With the right foundation in place, you’re free to go all-in on making your DTC vision a success.

Until next week, keep selling out

— Luke

P.S. I'm not a lawyer or an accountant, I'm a digital marketer. Nothing here is legal, tax or accounting advice – always do your research and consult a professional. The Sellout is an affiliate of Doola and Mercury.

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