Software & digital3 min read
Best LLC for a marketplace: facilitator duties and 1099-K
Building a marketplace means other people transact through your software. Two bodies of law care about that a great deal, and both of them are about what you do with the money.
The short answer
An LLC, or a Delaware C-corp if you are raising. Then answer the question that actually decides your compliance burden: does money flow through you, or past you?
Published
A marketplace is a software business with a financial-services problem attached. The entity is the same choice any software company makes; what is different is that you have inherited duties that exist because of your position between two other parties.
The short answer
An LLC while bootstrapping, a Delaware C-corp if institutional money is coming — the reasoning is in the SaaS guide. Then decide the payments architecture, because it determines everything below.
You might be a marketplace facilitator
Marketplace-facilitator laws were written to make Amazon and eBay collect sales tax on third-party sales instead of chasing thousands of small sellers. The definitions are broad, and they reach far smaller platforms than the ones that prompted them.
Broadly, a state may treat you as a facilitator where you both list other people's goods or services and are involved in collecting the payment. If you meet the definition and cross the state's threshold, the duty to collect and remit on your sellers' sales is yours — not theirs.
| Your architecture | Likely position |
|---|---|
| You take payment and pay out sellers net of your fee | Squarely the pattern facilitator laws describe. Assume you are in scope and check state by state. |
| Buyer pays the seller directly; you invoice the seller a fee | Much weaker case for facilitator status. You are a software vendor being paid for a service. |
| You list and route but a third party processes and settles | Depends on the state's definition and on the contractual roles. Get advice rather than a guess. |
Handling money brings reporting with it
A platform that settles payments to sellers can become a payment settlement entity for information-reporting purposes, which means issuing Forms 1099-K to sellers and reporting to the IRS. Even where a payment provider does this for you, someone has to, and you need to know which of you it is.
- Collect tax information from sellers at onboarding — a W-9 from US persons, the appropriate W-8 from foreign ones. Retrofitting this across an existing seller base is miserable.
- Know who files. Using a payment provider's connected-account product usually shifts the filing to them; confirm rather than assume.
- Payouts to foreign sellers raise withholding questions of their own.
- Holding funds between collection and payout is the fact that raises money-transmission questions — which is precisely why the mainstream payment providers built marketplace products with a licensed party in the middle.
Liability sits between your users
A marketplace is repeatedly asked to answer for something a user did. Your terms are the main control, and they need to do three things: disclaim responsibility for the underlying transaction, set out a dispute process that exists in practice, and reserve the right to remove users. A dispute mechanism you have written down is worth more than a limitation of liability you have not tested.
If you are not a US person
- No S-corp election — Section 1361 bars non-resident alien shareholders.
- Form 5472 with a pro-forma Form 1120 annually, $25,000 penalty for failure to file.
- Facilitator duties follow the sales, not the owner. A foreign-owned platform with US buyers and sellers can be in scope.
- Money-transmission questions apply regardless of where the company is formed.
When to revisit
| Trigger | What to reconsider |
|---|---|
| Taking payment on sellers' behalf | Facilitator status, and get advice before launch. |
| Crossing a state's marketplace threshold | Registration and collection in that state. |
| First foreign seller | Withholding and documentation. |
| Holding funds for any period | Money transmission — a licensed provider in the flow is the usual answer. |
| Raising institutional money | Delaware C-corp. |
Build the platform, not the paperwork
Founders 8 holds the entity, the filings and the deadlines while you work out the harder questions.
Build your workspaceFounders 8 tracks obligations and deadlines for your reference. It does not provide legal or tax advice — filings are prepared and reviewed by qualified partners.