incorporation

Which Entity Should E-commerce Businesses Choose for Incorporation?

Should an e-commerce business file for incorporation? The short answer is yes.

It is possible to run an e-commerce business as an unregistered entity. This is a default business formation known as a sole proprietorship. Entrepreneurs can start and run businesses structured as sole proprietorships particularly if the business is one with limited growth potential and low overhead expenses. Over time, however, they may choose to form an LLC or incorporate as another registered entity. Doing so often means making a decision that better accommodates the growing business and its needs.

Which entity should an e-commerce business incorporate as? Here are some of the most popular options:

  • Sole Proprietorship
  • Limited Liability Company (LLC)
  • S Corporation

3 Dangers of an Unincorporated Business (and How Incorporation Can Resolve These Problems)

Sole proprietorship

Ideal fit: Online merchants or e-commerce storefronts that operate as low-risk ventures or as a hobby.

incorporation
Shutterstock

Small businesses start off as sole proprietorships: unincorporated businesses that are not considered to be legal entities. The structure of a sole proprietorship has no barriers to entry. Little to no paperwork is necessary to start the business. There are no ongoing maintenance requirements. Essentially, as soon as you begin acting as a business you are a sole proprietorship. The owner is able to exercise full control over the company.

Which types of e-commerce businesses can, or should, be sole proprietorships? The answer is very small businesses. We’re talking so small they are technically considered to be hobbies. A few businesses may include photography, writing, exercise instruction, and tutoring. The business may have a small customer base, but again it must be as low-risk as possible.

Most businesses do not stay this small forever. Gradually, a hobby will expand its offerings and increase its customer base. Once the hobby begins to earn a profit and you report this income to the IRS, the hobby is no longer considered a hobby. It is now a sole proprietorship because it engages in business activity.

From here on out, entrepreneurs may choose to remain a sole proprietor or form a registered business. If the business continues to expand and isn’t limited in growth, its best bet will be to incorporate. This ensures the business, and its owner, receives limited liability protection. Having this type of legal distinction keeps professional and personal assets separate. It also takes a load off the merchant’s shoulders in terms of responsibilities. A sole proprietor is responsible for all aspects of the business and any liabilities. Incorporating allows sole proprietors to treat the business as a separate legal entity and lessen the responsibility load.


5 Startup Responsibilities You Can’t Afford to Ignore

S Corporation

Ideal fit: E-commerce businesses and startups that would like to receive asset protection and save on taxes.

We cheated a little bit by mentioning an S Corporation because an S Corp is technically not a legal entity. Rather, an e-commerce business may elect S Corp status for tax purposes. Doing so allows the business to receive pass-through taxation. Profits pass through the company level and the business owner can avoid double taxation. Business owners may also put themselves on payroll as an S Corporation and pay themselves a reasonable salary to save on FICA taxes. You’ll also receive limited liability protection as an S Corp.

The only type of e-commerce business that isn’t well suited for an S Corporation is a high-earning company. These types of businesses may be better suited to incorporate as a corporation.

Limited Liability Company (LLC)

Ideal fit: Online merchants or e-commerce storefronts with serious plans to grow their offerings and business.

Many eCommerce business owners or merchants may have plans to expand their business beyond its online presence. For example, they may wish to open a brick-and-mortar storefront. An in-person storefront will allow them to sell offerings in-person in addition to keeping their online presence up and running. Their best bet is to form a limited liability company (LLC).

Forming an LLC allows entrepreneurs to form a credible, flexible business. An LLC can quickly build credibility with consumers and become a respected brand. The entity receives limited liability protection for its professional and personal assets. Owners of the LLC, known as members, may choose an LLC structure that best suits their needs in terms of exercising control over the business. (Think structures like member-managed that allow all members to equally run the LLC.) The flexible nature of an LLC also allows the entity to determine how it would like to be taxed, too.

These business expansion plans may grow over time. Perhaps one day the e-commerce business will decide it wants to expand globally or offer an IPO. If that’s the case, the owner will change the LLC entity formation to a corporation. But that’s later down the line — when and if the e-commerce business decides to take on the world!


Sign Up: Receive the StartupNation newsletter!

Total
1
Shares
Previous Article
essential software

Essential Software Programs Every Small Business Needs

Next Article
best SEO practices

Best SEO Practices for Startups Explained by OtterPR's Scott Bartnick

Related Posts
virtual assistant
Read More

How Virtual Assistants Can Benefit Startup Leaders

According to venture capitalist Bill Trenchard of First Round Capital, the average startup founder "works about 300 days a year, 14 hours a day." He should know. Trenchard cofounded and led three companies and, as a VC, advises hundreds of startups. "Looking at the schedule of a typical CEO, a full 70 percent of that...
succession planning
Read More

Your Business Legacy: Why Succession Planning Is a Crucial Step in Estate Planning

Running your own business is a mammoth task and a considerable investment. Statistics have consistently shown that small business owners have to work longer and harder than the average employee. So, after dedicating so much time and energy to building up a company, it’s crucial to protect it should the worst happen. Almost all of...
supply chain
Read More

How to Keep Vendors and Clients Happy During Supply Chain Hiccups

Supply chain breakdowns are happening due to global disruptions, rising costs and increased consumer expectations. Businesses can't always stop supply chain hiccups, but they can learn from them and limit their impact on vendors and clients. How a business responds to a supply chain issue can have far-flung effects. A company that is proactive and...
Read More

How to Support Employee Mental Health and Avoid Startup Burnout

When it comes to finding the right job — and staying there — candidates are looking for a lot, especially in a virtual setting. Gone are the days where foosball tables and free snacks constituted benefits. Of course, we still love them, but there has to be more that matters. People are primarily looking to...