Launching an e-commerce business can feel overwhelming. Along with choosing a domain and web design, you’re also left with choosing a merchant account and shopping cart then dealing with inventory issues. While accounting and legal liability may be the last things on your mind, it pays to consider incorporating or forming an LLC early on.
Why? There are several reasons. Taking the step of incorporating lends credibility to your new business and establishes your authenticity to visitors. This is especially important for new ecommerce businesses considering the growing unease consumers have about shopping on unfamiliar sites. Incorporating or forming an LLC also establishes a separate business entity to protect your personal assets and you may get better tax treatment.
There are a few choices when it comes to choosing a business entity for your e-commerce business. Here’s an overview of each.
The sole proprietorship is the most basic type of business and it’s the entity you create automatically when you start a business with no partner. With a sole proprietorship, all losses and profits are reported on your personal income tax return and you are considered self-employed. The main drawback is there is no legal distinction between you and your business which makes you liable for all of your business debts. If your business is sued, you risk losing your home, car, or retirement savings.
A corporation is created with you incorporate your business and file with the state. A corporation creates a legal separate entity although there are drawbacks to forming a corporation for your ecommerce business. Corporations have very strict ongoing formalities and the cost is generally higher. Corporations are also subject to double taxation, which means your business income is taxed at the corporate level and again when it’s distributed.
Limited Liability Company (LLC)
An LLC is the preferred business entity for most small businesses and start-ups for several reasons. Forming an LLC is generally very affordable and there are minimal requirements. You can choose a member- or manager-managed business structure and your LLC can have one member (owner) or several. An LLC is a pass-through tax entity, which means the IRS does not consider it a separate entity for tax purposes.
The biggest benefit of forming an LLC is limited liability protection. This means as an owner you will not be personally responsible for business liabilities and debts. Another advantage to forming a limited liability company is you can always convert it to an S Corp in the future as your business grows. An S Corporation has more ongoing formalities than an LLC but you may save money on tax deductions and self-employment taxes.
Regardless of whether you choose an LLC or a corporation, it’s important to take the next step and protect yourself when you start an ecommerce business. No business is free of risk. What if customers’ data is compromised or a product you sell causes an injury? If your business is sued and you don’t have an LLC or corporation, you risk losing your personal savings and property. Because choosing a business entity is an important decision with long-reaching consequences, it’s a good idea to discuss it with an attorney and a business services company to choose the right business structure for your needs.