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You’ve drafted a detailed business plan, identified your unique selling proposition (USP), and defined your business model. It’s almost time to launch your e-commerce business! Before you open your virtual doors and begin taking orders, however, you’ll need to structure your business by incorporating or forming an LLC formation.
Why do businesses, whether they are e-commerce or traditional storefronts, need to incorporate as a legal entity?
The short answer is that the purpose for incorporating is to separate personal assets from those of the business. Incorporating is also depicted as a difficult, time-consuming process — and nothing could be further from the truth.
Incorporating is an easy, step-by-step process. Once you’ve done it, you can rest easy knowing that you have obtained personal asset protection, credibility and extra benefits for your business.
Now that you have an understanding of how incorporating works and what small business stand to gain from doing it, which entities would be best to incorporate your e-commerce business as?
These three entities tend to be fairly popular with e-commerce business owners, as well as a good fit for their companies.
- Sole proprietorship
- Limited liability company (LLC)
- General partnership
If your e-commerce business has little to no liabilities associated with it, you may consider incorporating as a sole proprietorship. A consultant, for example, would make a great fit for a sole proprietorship formation.
As a sole proprietor, the owner is in charge of the business. They get to exercise complete control over the company. Essentially, incorporating as a sole proprietor allows an owner to become the business. It’s also pretty easy to get started, with little paperwork to fill out and affordable filing fees.
However, there is one downside to incorporating as a sole proprietor. This entity does not provide entrepreneurs with liability protection. Liability protection ensures that personal assets are kept separate from professional assets.
What happens when you don’t have liability protection? The owner becomes personally liable for the business debts and any other unforeseen circumstances that may impact the company, like a lawsuit. If you feel confident that you’ll be fine without liability protection, you may continue to incorporate as a sole proprietor. However, if you feel like you may need that protection later on, you may decide to form an LLC for your e-commerce business.
Limited liability company (LLC)
It’s important to note up front that of the three entities mentioned in this article, LLCs are more expensive to create than a sole proprietorship or partnership.
However, LLCs are popular entities for e-commerce business to incorporate as for several reasons. An LLC provides liability protection, ensuring that personal and professional assets are kept separate from day one. When you form an LLC, you receive more flexibility in operating and maintaining the business than you would under a more structured entity like a corporation.
LLCs also tend to be popular with e-commerce business owners because of their tax savings. As a sole proprietor, the IRS requires you to report all income on your personal income tax return since the business is not taxed as a separate entity. An LLC, on the other hand, may choose its tax structure because it does not have a specific tax category yet.
LLCs usually choose to be taxed as an S Corporation election. This allows LLCs to be taxed as a pass-through tax structure and avoid double taxation. Additionally, an LLC receives FICA tax savings and standard write-offs during tax season.
Want to run an e-commerce business with your best friend or a close family member? You may consider incorporating as a general partnership together.
There are several different types of partnership formations. Depending on the nature of your business, you may opt for other partnerships like joint venture, silent and limited liability partnerships (LLPs). However, the most common type of partnership is a general partnership. This is an agreement between two (or more) partners running a business together. Under a partnership formation, all profits, liabilities and management duties are divided equally.
General partnerships are fairly easy for e-commerce businesses to establish. They are also a bit more affordable than partnerships like LLPs. The only snag is that general partnerships are largely considered to be unincorporated.
If the business incurred debt, the partners would need to use their own personal assets to repay that debt. This is because partners do not have a limit on their personal liability for business’ debts. Some entrepreneurs may decide that a general partnership is not the best fit for their business.
If that’s the case, then they may consider forming one of the other three types of partnerships instead — or switching to forming an LLC as their entity of choice.
As you can see, incorporating is not a difficult process. And once you’ve done it, you can start reaping extra benefits for your business.