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choosing a business structure for eCommerce

Choosing your Business Structure for eCommerce

Choosing your business structure is one of the first steps you will be doing when you decide to open your eCommerce business. With a number of options out there it can start to get confusing on which option is right for you and your business. There are benefits and drawbacks to each of the 4 main business structures and depending on your future plans for the company. Choosing the right business structure at the start will make things easier down the road.

Sole Proprietorship

Let’s face it most of us will probably start off as a sole proprietorship until the company starts making some money. If you are just setting up a business that is not making many sales or just testing the waters of eCommerce. Then the risk you are taking setting up a sole proprietorship is limited. Also, this format is pretty much free to set up or low cost. You will need a DBA which is about $30 depending on where you live. ( You will need a DBA if want to open a business account at most banks.)

Overview of Sole Proprietorship

Sole Proprietorship is an easy to form business structures in fact if you are selling under your own name then you are already a sole proprietorship. You do not need to register your name unless you are doing business under a different name then you will need a doing business as (DBA). Ie if I started selling under Drew Kalinski I wont need a DBA but if I sell under Amztut then I will need a DBA for my business.

All business assets and liabilities are owned by you and are not separate from your company or vice versa and your assets are the same as your companies. Which is the negative side about being a sole proprietor. If your company gets sued you are liable to pay anything that might be owed. Which can put your personal assets at risk due to no separation from you and the company.

Who does Sole Propiertorship suit

If you are just starting out and don’t have a large amount of funds set up a sole proprietorship is the most cost-effective business structure. Once things get going I would recommend looking into an LLC or Corporation.

Partnership

The Partnership works similar to a sole proprietorship, the only difference is you have a partner. So taxes, funds, etc are distributed between you and your partners depending on how you set it up( Does your partner take 50/50 or 70/30, etc.) Liability and Assets fall both on you and your partner just like a sole proprietorship. There is also a tax benefit about setting up a partnership compared to a sole proprietorship. At tax, time partners can use a K-1 form, which indicates the share of partnership, income, deductions and tax credits which can be applied to personal taxes.

When starting a partnership make sure you a have a legal document (partnership agreement) drawn up dictating the percentage owned etc. While setting up a company with a best friend might be great and you never know what might happen down the road. It is a good idea to have something drawn up so you both know your responsibilities and the share in the company.

Who does Partnership Suit.

Well anyone going into business with a partner, this also can include family as well as friends. With some tax benefits and ease to set up partnerships are great for startups.

Limited Liability Company (LLC)

LLC is the most common out of all the business structures for eCommerce. Unlike Sole proprietorship, LLC separates personal and professional assets. Your assets will be covered by limited liability while offering more flexibility compared to a corporation. Making this the hybrid of business structures suitable for all forms of business, not just eCommerce.

Forming an LLC does cost money, and depending on your state and local government dictates that price you will need to pay. So always check with local government or use a 3rd party service to form an LLC.

(Please note if you are setting up an LLC in California there is an $800 franchise tax per year)

Who does LLC suit

LLC is the perfect match for pretty much any company, and generally, is the next step after sole proprietorship. It gives you the ability to separate personal and professional assets, which is perfect for high-risk companies and for anyone who wants to look after personal assets.

Corporation

Corporations keep your personal and professional assets separate just like an LLC. On the other hand, corporations are less flexible than an LLC. As the structure is set up so you are able to issue shares of the company to investors. With corporations, there is a stricter set of rules. All hierarchy, funds, and invests must all be documented. Plus business and agendas must have minutes etc so you will need an accountant to help look after everything.

There are a few different types of Corporations each with there own set of benefits. For eCommerce most will pick either C or S corporations.

  • C corporations are owned by there shareholders can have an issue with double taxation, once on profits other on dividends.
  • S corporations It works similar to c corp but it avoids the double taxation but has a limited amount of shareholders.
  • B corporations are forprofit organizations that make a positive impact.
  • Closed corporations, Are run by a few shareholders but aren’t publicly traded.
  • Nonprofit corporations For non-profit organizations, with tax exemptions.

who does corporations suit

Due to the fact you are able to give out shares in your company, this is more for the serious minding looking to get funded. also, there is more tax work involved. Corporations aren’t used as much in the low and medium level companies selling online.

Factors to Consider when Choosing a Business Structure for Ecommerce

Now that we have an understanding of the 4 different types of business structures. Now let’s take a look at what you should factor in when making your decision on which business structure to choose.

Cost

With each business formate, there is going to be some sort of cost associated with setting up your business. While setting up a partnership is generally free, setting up a corporation, on the other hand, can be costly. Especially if you include the cost of account keeping and paper work that goes along with being incorporated.

Legal Liability

This is important depending on the type of business structure you are setting up. Will detect the type of liability you are personally accountable for. While setting up sole proprietorship or partnership you will be accountable for the liability of the company. If you choose an LLC or Corporation then the company is liable and personal assets are separate.

Tax Options

Death and taxes are the two certainties in life, and in business, you are going to be paying them in some sort of way. While C corp gets double-taxed compared to S corp or having a little tax break while forming a Partnership should be on your mind when thinking about which entities your business is going to be using.

Future Needs

Are you just testing the waters of eCommerce or do you have a business plan which you want to gain investors? Depending on your needs it might be fine to go ahead a start an LLC or a Corporation without starting as a sole proprietorship.

Final Thoughts

Just remember that when planning on choosing the business structure that your company will be running on. You should consider the costs involved, the tax implications you might face and the future needs of your company. Try to have everything planned out to the best of your ability. Know exactly what business type you want to form. and know the associated cost and liability you might face.

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