If you're starting a new online retail company, choosing the right business structure for eCommerce is your first decision. Today we'll look at the competing options, pros and cons, and the tax considerations that come into play.
Your site layout and features can make a big difference to your bottom line - and if you're using a website popup or plugin to calculate sales or import taxes, it might impact your customers too.
Launching an Ecommerce Business as a Sole Proprietor
A sole proprietorship means you own and run your business as an individual person.
There are positives and negatives, but the biggest pitfall is that you bear 100% liability for business debts and will try to get short-term loans to run the business smoothly.
What does an eCommerce website cost? You'll usually need about $1,000 upfront as a minimum, plus $50 to $350 a month.
The good news is that there is next to no paperwork since you're not incorporating a company. However, you should examine if there are any local ordinances regarding setting up a sole proprietorship.
Creating a Partnership to Start an Online Retail Company
Our next option is to create a partnership, which is usually best if you're going into business with two or more people.
Partnerships are a bit more flexible than a company, and you can share responsibilities and liabilities between you, so it's lower risk than being a sole proprietor.
There are three primary structures:
- General Partnerships (GPs) - no registration or paperwork, although you might still need local permits to sell in your state. Drawing up a formal agreement is advisable so you don't hit any roadblocks later.
- Limited Partnerships (LPs) - you'll need to register for a Certificate of Limited Partnership, which costs from $300 to $500, depending on your state.
- Limited Liability Partnerships (LLPs) - the same certification rules apply, and you'll also need to register for an Employer Identification Number (EIN).
Your personal liability depends on your partnership agreement.
Still, this business structure is relatively straightforward, isn't expensive to set up, and means you pool your talent and resources with other co-founders.
Incorporating an Ecommerce Limited Liability Company
Our third and final option is to set up a Limited Liability Company (LLC).
It takes a bit more time and requires more paperwork, but it protects owners and directors, so they won't personally need to cover business debts if things don't work out.
You'll need to consider how eCommerce websites differ from other websites to lay out your goals, aims, investment requirements, and responsibilities to assign the work between the partners.
Advantages of doing business as an LLC include:
- The choice to pay tax individually through a tax return or to pay corporation tax (you won't be taxed twice!), e.g. LLC registered in Wisconsin can elect S-corporation taxation status.
- Owning the legal rights to your business name.
- Gaining customer credibility and confidence.
The downsides, while small, are that you'll need to maintain records, file financial statements, and arrange annual meetings.
If you're looking for a simple business structure with low risk, it's much easier to manage than a corporation.
Ultimately, the right business structure depends on your priorities, who you're setting up with, and how much you have to spend.
If you're unsure, it's worth evaluating the alternatives since upgrading a sole proprietorship to a partnership is much easier than the other way around!