eCommerce businesses often start out small, but growth often comes quickly for successful businesses. Eventually, the time comes for many online vendors to form an entity for their eCommerce business. However, choosing the right entity requires some careful consideration. We’re going to run down the best business structure for online retail businesses to help you figure it out.
The Best Business Structure for Online Retail
Most eCommerce businesses start out as sole proprietorships. However, However, there are other structures to consider such as limited liability corporations, S-corporations, and C-corporations.
Sole Proprietorship or Partnership
Sole proprietorships and partnerships are the most simple business structures for new businesses, and they’re a popular choice for startups.
Most businesses start out as sole proprietorships. Businesses with more than one owner are considered partnerships, but you’ll have to draw up a partnership agreement to make it official.
Many people choose this business structure because it is so quick and simple to create. Forming a sole proprietorship is simple and straightforward. In addition, it allows you to deduct business expenses.
However, this simple structure also carries some drawbacks. Sole proprietors are directly responsible for their business’s debts and liabilities. As a result, a lawsuit plaintiff could come after your personal assets.
Sole proprietors work well for many young businesses, but most successful companies will often outgrow this structure.
Limited Liability Company (LLC)
Limited liability companies are one of the most common entity types for small businesses. The LLC structure is simple and generally inexpensive to form, though the price varies by state. However, they’re flexible entities, and you can form them with a single member. So, LLCs are a natural choice for many maturing businesses. Most states allow you to create an LLC through your state Attorney General’s website, and there are many professional services available that will
LLCs also place a liability shield between your personal and business assets. If you’re ever sued or your business fails, your LLC will protect your personal assets against legal action.
Taxes are also relatively simple with an LLC. As pass-through entities, any business income flows directly through the LLC onto its owners’ individual tax returns. You don’t have to file any additional tax returns for your business like you would with more complicated business structures.
LLCs are also flexible. You can form them with single or multiple members, and they’re suitable for a wide variety of business purposes. LLC compliance requirements are also less stringent than corporations, and they make your business look more professional.
Although not commonly used, S-Corps are also a viable option for eCommerce startups. S-Corps also provide liability protection and pass-through income, but they can offer some advantages over LLCs in certain cases.
An S-corporation is a special type of corporate structure allowed under Subchapter S of the Internal Revenue Code. S-Corps combine elements of both LLC and corporate structures. As opposed to a traditional corporation, S-corp income and losses pass through to their shareholders’ tax returns. However, unlike LLCs, they must adhere to corporate regulatory rules and satisfy compliance requirements.
S-Corps are beneficial for larger small businesses that want to avoid double taxation at the corporate level. As a pass-through entity, any losses or gains are taxed at the individual level, so the S-corp doesn’t pay corporate taxes. This structure also allows ownership more income flexibility, allowing them to declare their earnings as either salary or dividends. This distinction allows for more sophisticated tax-saving strategies.
The S-corp structure is available for domestically-incorporated businesses with 100 shareholders or fewer. Furthermore, all shareholders must be individuals, specific trusts and estates, or certain types of tax-exempt organizations. Partnerships, corporations, and non-resident aliens cannot be S-corp shareholders.
An S-corp could be a good choice for growing eCommerce businesses that want corporate tax flexibility without paying double taxation. However, the additional compliance requirements typically incur additional costs.
C-corporations are typically used for larger businesses, and it’s the most common entity type for public companies. It’s a good structure for large, sophisticated businesses with more than 100 shareholders. C-corps come with substantial regulatory requirements, and they’re subject to double-taxation. However, they offer perhaps the strongest liability shield and carry noteworthy tax benefits.
A C-corp is its own separate legal entity. As such, it must pay federal corporate income taxes on its earnings, and shareholders also pay taxes on any income from the company. Every dollar distributed to shareholders is taxed at both the corporate and individual level.
C-corps also have substantial compliance requirements. The corporation must adhere to strict corporate bilaws, including electing a board of directors, keeping corporate minutes of regular meetings, and more.
A C-corporation structure is usually not the best option for smaller eCommerce businesses. The tax and compliance requirements tend to outweigh any potential benefits. However, it could be a good option for a large, mature eCommerce company that’s exploring a potential sale or public offering.
Final Verdict: What’s the Best Business Structure for Online Retail?
Ever business is different, and there’s no one-size-fits-all answer to this questions. However, a limited liability company is usually an excellent entity choice for growing eCommerce businesses. LLCs provide liability protection and pass-through income without substantial compliance requirements or tax complications. You can form an LLC with as few as one person, but it’s also a good choice for businesses with multiple owners.
Get eCommerce Tax Help Now
Tax Hack Accounting Group specializes in small business taxes for online businesses. Our tax experts can assist with all of your eCommerce tax needs. Click here to sign up for a free consultation with one of our Tax Hack Pros now.