When starting an eCommerce business, you might be excited about choosing your branding elements or building your eCommerce website, but you’re probably overlooking something. I’m talking about your business structure.
*Updated 8/17/2024
Choosing the proper business structure for your eCommerce business affects several things. It influences your daily operations and impacts taxes, personal liability, and the ability to raise capital.
Shortcuts:
Getting it right from the start can help you maximize your eCommerce business's potential, while the wrong choice could lead to complications.
So, what are your options? Below, we explore the main types of business structures available for eCommerce entrepreneurs and help you understand the pros and cons of each.
Picking the right business structure for your eCommerce venture isn't a one-size-fits-all deal. Here are the crucial factors you need to weigh:
Remember, your business structure isn't set in stone. As your eCommerce business evolves, you can change your structure to fit your new reality.
The key is to choose a structure that supports your current needs while aligning with your future vision.
A sole proprietorship is the simplest and most common structure for new eCommerce businesses. With this structure, you and your business are one and the same.
You are entitled to all profits but are also responsible for all debts, losses, and liabilities. Sole proprietorships work particularly well for entrepreneurs who are just starting out for two main reasons:
Unfortunately, since there’s no separation between you and the business, sole proprietorship puts your personal assets on the line. Your personal savings and property could be at risk if your business has debt or legal troubles.
Additionally, banks and investors often view sole proprietorships as less credible, making it harder to secure short-term loans or attract investment when you want to grow your business.
Sole proprietorships also face challenges in establishing credibility with suppliers and customers compared to more formal business structures.
A sole proprietorship is ideal for those one-person shows where you're testing the market or running a very small operation.
A partnership is a business structure where two or more individuals own a business and share its responsibilities and profits. There are three types of partnerships, each with its characteristics and implications.
Partnerships are great for growing your eCommerce venture quickly since they allow the partners to pool resources, skills, and capital.
As explored in the GovDocfiling guide, partnerships are a bit more flexible than a company.
Additionally, a partnership is less complicated to set up and run than a corporation, giving you more flexibility in operating.
On the flip side, in a general partnership, you're on the hook for your partner's business decisions. If they make a costly mistake, it could affect you, too.
All partners are jointly and severally liable for the business's debts and obligations.
There’s also the potential for disagreements and conflicts between partners, mainly if there is a lack of clear communication or differing visions for the business.
Partnerships are ideal for businesses started by two or more individuals who trust each other and have a shared vision.
However, a well-drafted partnership agreement is crucial for outlining roles, responsibilities, and conflict resolution strategies.
An LLC combines the tax benefits and flexibility of a partnership with the limited liability protection of a corporation.
Due to its versatility and protective benefits, this structure is popular among medium-sized eCommerce businesses.
One unique aspect of an LLC is that it is a separate legal entity from its owners. The eCommerce business can own property, enter contracts, and be held liable, while the owners enjoy limited personal liability.
Here are some reasons you should consider setting up your e-commerce business as an LLC:
Setting up an LLC involves more paperwork than starting up as a sole proprietor. While not as complex as corporations, LLCs also have more administrative requirements, as you'll need to keep your personal and business finances separate and maintain proper records.
LLCs are the sweet spot for many eCommerce businesses. They're perfect for medium-sized operations that want liability protection without the complexity of a corporation.
Suppose you plan to grow your eCommerce business by mimicking the scalability of SaaS companies, marketplace platforms, or subscription models.
An LLC can offer the right protection and tax flexibility balance in that case. If you need help, you can consult with LLC.org.
You can act as your LLC's registered agent, but many businesses prefer to hire a professional registered
agent service for privacy and convenience.
Try Shift4Shop to launch your eCommerce business.
Choosing the right business structure for your eCommerce venture is like picking the perfect pair of shoes for a long hike.
It must fit just right, support your goals, and help you navigate the terrain ahead. Whether you opt for the simplicity of a sole proprietorship, a partnership's combined responsibility, or an LLC's flexibility, your choice will shape your business's future.
Remember, there's no one-size-fits-all solution. Your ideal structure depends on your unique circumstances, aspirations, and risk tolerance.
Before you make your final decision, it's worth chatting with a good lawyer or tax advisor who can help you navigate the nuances and ensure you're setting yourself up for success.
Author Bio
Shanice Jones is a techy nerd and copywriter from Chicago. For the last five years, she has helped over twenty startups build B2C and B2B content strategies that have allowed them to scale their businesses and help users around the world.