You’ve decided to launch your e-commerce business. Congratulations! Now it’s time to choose the business entity (or legal structure) for your business, which can be overwhelming. You have to choose between a sole proprietorship, a partnership, a corporation, an LLC—the list goes on.
This is an especially important decision because the entity you choose will impact the following for your business and personal life:
- Your personal liability
- Your tax implications
- Rules of ownership
- Various administrative complexities
So with those four considerations in mind, how do you know which structure is best for your situation and business goals? Below, we discuss each of these implications in more detail for e-commerce entrepreneurs to consider when choosing a business structure.
Your personal liability is the level of responsibility you’re held to if one of your customers were to sue you. Without the proper business structure, you could be held personally and financially liable—meaning your personal finances and assets could be at risk—if you were sued. Obviously, this is a risk most business owners wish to avoid.
A general rule of thumb is that simpler business structures offer less liability protection than more complex business structures. However, you should take into account whether or not the products and/or services you’re selling are likely to result in a lawsuit.
Should I Form an LLC for my E-commerce Business?
As your business grows in scope and complexity, it’s always possible to transition into a more complex structure, such as an LLC or S corporation, to provide more liability protection over your personal assets.
For many e-commerce business owners, there may be less risk of liability than for entrepreneurs who provide complex or highly regulated services, such as CPAs or lawyers. Many e-commerce businesses sell prepackaged services or products, so it may be okay to begin with a simpler business structure such as a sole proprietorship or general partnership.
Business entities are taxed differently, so you also need to consider the tax implications before choosing the entity for your e-commerce business. If your business is small, a sole proprietorship or general partnership may be the right choice. The profits from small businesses are generally paid directly to the business owner(s) and can be taxed as income on individual tax returns.
However, if you have employees or a more complex type of e-commerce business, It may be beneficial to file as an LLC or a corporation. And as your business grows more profitable, these types of entities can actually save you tax dollars. Because each individual’s tax situation is different, it’s best to speak with a tax professional before making a decision.
Type of Ownership
If you’re the sole owner of your e-commerce business, you can structure your business as a sole proprietorship, which may indeed be the best and simplest choice for many e-commerce entrepreneurs. (However, even sole owners may need to consider other options such as an LLC or corporation depending on personal liability and tax obligations.)
If you have business partners, however, the choices in front of you may be more complex. For small businesses with less risk of personal liability, a general partnership may be appropriate. For more complex businesses or multiple owners who will act in different decision-making capacities, a more complex business structure may be necessary.
Finally, structuring a business requires paperwork to be filled out and fees to be paid. Simpler business entities—like sole proprietorships and general partnerships—are relatively painless and inexpensive to set up and renew each year. More complex businesses may require more documentation and more expensive fees.
We Can Help You Choose the Best Entity for Your E-commerce Business
Without getting to know you and your business, we can’t make a recommendation for the right business entity for your particular e-commerce business. But as financial advisors who specialize in serving e-commerce business owners (and e-commerce business owners ourselves), we’re uniquely positioned to help you review your options and determine the best decision for your situation. Please reach out to us by calling (615) 219-9802 or simply schedule a free 30-minute introductory appointment here.